The structure of the telecommunications industry in Japan has been changing revolutionarily. The changes are observed in five phases: (1) development of competition into the local call market, (2) diffusion of broadband Internet and development of inter-platform competition, (3) rapid growth of cellular services and Internet access via cellular, (4) decline of POTS (plain old telephone service), and (5) structural changes from vertical integration to layered structure and development of media convergence. These changes require total review of the regulatory framework that was formed in the POTS era. In this chapter, I propose to review: (a) essential facilities regulation, (b) a universal service system, and (c) a flat-rate pricing system of the Internet to solve problems that are likely to distort the new industry structure and would stress the importance of a regulatory system that is competition, technology, and content neutral.
Key Terms in this Chapter
POTS (Plain Old Telephone Service): Traditional public telephone service is called POTS when compared to the Internet.
Inter-Platform Competition: When carriers compete with each other using various platform technologies such as metallic cable, optical fiber, wireless LAN, or cable modem, it is called inter-platform competition.
Essential Facilities: Incumbent carriers’ facilities that are essential for the new entrant. When it is neither practical nor reasonable to copy the incumbent carriers’ facilities, they must allow new entrants to access the facilities on rational conditions. Incumbent carriers’ local network facilities are regarded as essential facilities, and such obligations as unbundling and charging based on TERLIC are imposed.
Layered Structure: When the industry structure is divided according to the division of layers, it is called layered structure. In the case of the Internet, the industry is divided into physical, network, and content layers.
Intra-Platform Competition: When new entrants compete with incumbents by leasing facilities from incumbents, the competition develops on a single platform like metallic cable. This type of competition is called intra-platform competition.
Facilities-Based Competition: When new entrants build their own network to compete with incumbents, it is called facilities-based competition.
Tragedy of the Commons: As the use of the commons is rivalrous but it is hard to exclude use by members of the community, it is likely to be over-consumed and finally be ruined. This kind of negative externality is called the tragedy of the commons. The Internet is a kind of commons facing the same kind of risk.
Vertical Integration: When a firm is operating in both upstream and downstream markets, it is regarded as vertically integrated. In the case of the traditional telephone industry, physical, network, and content layers are closely associated, and it is regarded as a typical pattern of vertical integration.
Service-Based Competition: When new entrants compete with incumbents by leasing such facilities as local access networks from incumbents, it is called service-based competition.