US calls on Japan to lower phone rates, boost Net access

Just last November, catchy ads for livedoor.com started appearing in Tokyo's trendy cafes and fashion magazines.

Eight months later, Japan's first free Internet service provider claims 450,000 subscribers - a number the company says it took AOL Japan four years to reach.

But fledgling success stories like livedoor.com could be soaring further if local Japanese phone rates weren't twice the international average - a factor, argues the US government, keeping Japan from breaking into the world's emerging e-economy.

Besides concerns about Japan's tepid economic turnaround, an old-fashioned trade battle is in play: America's fight against what it sees as protectionism, and Japan's resistance to what it views as a bit too much meddling. Analysts say that on a more fundamental level, Washington is lobbying for US companies to have a chance to compete in the lucrative telecom market.

The US criticism plunged trade officials into intense talks during the past week in an attempt to resolve the dispute over US demands that Japan's main telephone carrier, NTT (Nippon Telegraph and Telephone), immediately drop the rates it charges rivals to use its local lines by 41 percent. Japan has balked, saying that such steep cuts will drain profits. It has instead offered to cut fees by 22.5 percent over three years, down from the original four percent. But Washington sees both as too little, too late.

If not solved this week, the debate over how much it ought to cost to pick up the phone or go online could sour Japan-US relations ahead of the July 21, G-8 summit in Okinawa. At a time when Japanese Prime Minister Yoshiro Mori has pledged to make information technology the focus of the agenda, American officials say it will be hard for Japan to take the lead abroad when its high rates are cramping the Internet's takeoff at home.

As the US sees it, they are only asking for what Japan agreed to in principle in a 1997 World Trade Organization deal to liberalize telecom industries. The US trade representative has threatened to file a complaint with the WTO by the end of July if Japan doesn't agree to a rate cut.

On the record, Japanese officials say that such major cuts in rates charged by NTT - a 53 percent government-owned company which controls 94 percent of Japan's telephone lines - will drastically drain revenue and threaten jobs in an economy that has just begun to emerge from a recession. Off the record, some say it has been difficult to get so many interests to surrender profits to the will of the free market.

"NTT is politically too strong," says an official at the Ministry of Post and Telecommunications. "There is still not a consensus on how to control the giant."

Inside the Net-savvy headquarters of livedoor.com, overlooking Tokyo's stylish Omotesando neighborhood, a new breed of giants is germinating. Winning top rankings in Internet magazine polls for favorite ISP, livedoor exudes success. Company executives say there's no question that more customers would come knocking if it didn't cost so much to use the phone - putting Internet access for most here in the neighborhood of $100 a month.

"The lower the rates, the longer the user would stay online," says Christopher Phelan, vice president of operations for Exodus Communications KK, which owns Global On-Line, a livedoor rival.

That said, the reason for low Japanese Internet usage rates is far more complex. PCs are still not a household staple, but mobile phones are. Industry leaders are trying to push digital "i-mode" mobile phones with Internet access as Japan's answer to America's Web dominance.

"There's been a huge focus on trying to portray this phone charge issue as a single factor that has kept Japan from charging ahead in the e-commerce lane," says Yosuke Itoh, the chief technology officer of livedoor Inc. Rates in Europe, he points out, are often equally high in comparison to the US. "There isn't a critical mass of content providers in Japanese cyberspace to make consumers want to spend more time out there, and that is a far more important factor."

He, like others here, sees the telecom battle mostly as the product of lobbying by US long distance carriers who want to provide competitive rates.

"The US is trying to prove ... that NTT is closed to foreigners, and that the government is being protectionist," says Kate Lye, with UBS Warburg, an investment firm. "But this is also about wanting to sell telecom equipment that companies like Motorola are having trouble selling."

Although NTT would experience some short-term losses with slashing rates, in the long term, it will only open more doors. Adds Lye: "By letting in new competitors, you actually stimulate a lot more growth in the market, and NTT will benefit from that."

(c) Copyright 2000. The Christian Science Publishing Society

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