No Reason to Gush Over Japan's Telecom Model

No Reason to Gush Over Japan's Telecom Model
October 1, 2007

Randolph J. May

Randolph J. May is President of The Free State Foundation in Potomac, Md. (read full bio)

I am old enough to remember the so-called "Japanese miracle" of the 1980s, and the subsequent bust, with a decade of recession and then little or no economic growth.

Before the crash, it was all the rage to marvel at "keiretsu," the interlinked networks of Japan's big businesses, and to suggest that perhaps America was falling behind because we lacked Japan's "smart industrial policies," which featured a lifetime guaranteed employment system and close collaboration among government and private enterprises.

Recent reports, including the August 29 article "Japan's Warp Speed Ride to the Internet Future" in The Washington Post, are all about how the U.S. trails Japan in broadband service. According to the article, "Japan has the world's fastest Internet connections, delivering more data at lower cost than anywhere else."

This may well be true, and the United States should never be complacent about its technological prowess and economic progress, related as they are. But some words of caution are in order in the face of yet another "we-are-behind" broadside.

It was Japan that changed its economic system in the 1990s to become more free market-oriented like ours. While I am not an expert on Japan's telecom laws and policies, I am not convinced the U.S. should shift gears to emulate Japan's communications policies.

There is much that already has been written comparing the U.S. broadband experience with other countries, and I don't want to rehash all that here. But here are the cautionary notes that occurred to me as I read the Washington Post piece.

'Geography and Demographics'

The article notes Japan's success in expanding broadband penetration and increasing bit rates "is partly a matter of geography and demographics: Japan is relatively small, highly urbanized, and densely populated." Even though the U.S. is not small, highly urbanized, and densely populated--all characteristics that make the dispersion of broadband a much less costly proposition--it is doing very well in getting broadband to consumers. About 50 percent of U.S. homes have a broadband connection, and penetration continues to grow.

Among the homes that have an Internet connection at all--some people just don't want one, even if they can afford one--fully 70 percent have high-speed service. Beyond that, 70 percent of Americans access broadband at home or at work, according to the most recent broadband report from the Pew Internet and American Life Project. The U.S. is doing well by any reasonable standard that does not simply ignore its geographical and demographic differences with Japan and many countries in Europe.

That we are doing well is in no small measure attributable to the adoption several years ago of a policy by the Federal Communications Commission (FCC) of a "minimally regulated environment" for broadband. Alas, since then, and even now, that deregulatory policy has been subject to never-ending, vigorous counterattack by those net neutrality, open access, and unbundling advocates who are convinced the nation's communications infrastructure should always be operated under a public utility-like common carrier regime--which brings me to my next cautionary note.

Dependent on Price Controls

The Post article acknowledges that an important reason for Japan's super-fast broadband speeds is that, on average, the country has shorter and newer copper loops than those used for telco-provided digital subscriber line (DSL) service in the U.S. But it also credits "Japanese-style competition through regulation."

The essence of this "competition by regulation" approach seems akin to the forced network unbundling approach this country abandoned four years ago. It became increasingly evident that a policy directed towards supporting newly created "competitors," wholly dependent as they were on government-mandated and price-controlled access to the incumbents' copper loops, was inhibiting investment in new broadband facilities by incumbents and new entrants alike.

I don't think keiretsu is the way to organize the American economy, and I don't think "Japanese-style competition through regulation" constitutes sound regulatory policy in any sustainable sense, which brings me to the final cautionary note.

Addicted to Speed

At the end, the article says the growing speed addiction is having the ironic effect of "returning near-monopoly power in fiber to NTT, which owns and controls most new fiber lines to homes." NTT is the incumbent former state-owned telephone company. A Japanese professor of telecommunications economics is quoted to the effect that, "NTT is becoming dominant again in the fiber broadband kingdom."

So it appears that at the end of the "competition through regulation" regime that "opened up" DSL lines to entrants, Japan may be left with a near-monopoly provider of the next-generation broadband facilities.

I think America's (thus far) deregulatory broadband regime, which has served to stimulate investment by facilities-based broadband competitors, will serve America's consumers better in the long run than will "competition by regulation" policies that discourage investment. I doubt Verizon would be investing $23 billion in building a new fiber-to-the-home network, or the cable companies would have invested more than $100 billion in upgrading their networks to handle digital broadband, if the U.S. had maintained a Japanese-style regulatory regime.

Even though our deregulatory posture is working to stimulate investment and promote competition by facilities-based competitors, America should not become complacent about its broadband standing. With our country's continental expanse that includes large areas with pockets of small population, there may be a justification, for example, for using narrowly targeted, time-limited tax incentives to expand broadband infrastructure in rural areas.

But that is far different than committing seppuku, or even keiretsu, over a Japanese-style "competition through regulation" regime that is pointing towards a monopolistic environment down the road.


Randolph J. May (rmay@freestatefoundation.org) is president of the Free State Foundation.

Randolph J. May

Randolph J. May is President of The Free State Foundation in Potomac, Md. (read full bio)