Down to the Wire

Thomas Bleha

From Foreign Affairs, May/June 2005

Summary:  Once a leader in Internet innovation, the United States has fallen far behind Japan and other Asian states in deploying broadband and the latest mobile-phone technology. This lag will cost it dearly. By outdoing the United States, Japan and its neighbors are positioning themselves to be the first states to reap the benefits of the broadband era: economic growth, increased productivity, and a better quality of life.

Thomas Bleha, the recipient of an Abe Fellowship, is completing a book on the race for Internet leadership. Previously, he was a Foreign Service officer in Japan for eight years.

The government quickly removed many regulatory obstacles. But because cable providers were mostly mom-and-pop operations in rural areas, officials realized that they would also have to create a highly competitive private-sector environment. So the telecommunications ministry came up with one of the most competitive regimes in the world: it compelled regional telephone companies to grant outside competitors access to all their residential telephone lines in exchange for a modest fee (about $2 per line a month). The antitrust authorities also ensured that these companies did not create obstacles for their competitors, helping provide a level playing field.

The results were extraordinary. Yahoo! BB, created by Masayoshi Son's venture-capital firm Softbank, and several other companies soon entered the DSL market. Yahoo! BB began offering high-speed service five times faster than current U.S. broadband for $22 a month. After aggressive marketing forced its competitors to meet Yahoo! BB's price, high-speed DSL subscriptions skyrocketed. By the end of 2002, such access was available to many more than the 30 million Japanese households the government had targeted. Within another five months, a greater percentage of homes in Japan than in the United States had access to broadband.

Thanks to the government's competitive framework, the speed of the DSL service offered also rose dramatically, from 8 megabits per second in 2001 to 12, 26, and 40 megabits today. (The typical U.S. broadband connection, whether DSL or cable, is still only 1.5 megabits per second or slower.) Meanwhile, the price of monthly subscriptions remained stable, even for 26-megabit access speeds, at about $22 per month -- by far the lowest price in the world. By September 2004, 15.3 million Japanese subscribed to high-speed broadband. Moreover, for an additional $5 per month, users of Yahoo! BB can also have Internet telephone service. One in every 25 telephone calls in Japan is now made over the Internet, and the number keeps growing.

Meeting the e-Japan strategy's second goal -- making ultra-high-speed access (up to 100 megabits per second) available to ten million Japanese households -- proved more difficult. Such connections permit real-time video telephoning and video conferencing, telecommuting, and rich multimedia options such as digital high-definition television, interactive games, and five-minute movie downloads (instead of the short, jerky video streaming that Americans are used to). But data cannot be transmitted at such speeds through existing phone lines, and new fiber-optic cable had to be laid throughout Japan. Having decided that those lines, too, should be open to competition, the Japanese authorities set out to devise significant incentives to persuade Japanese companies to invest in new ultra-high-speed cable, especially in rural areas.

The government used tax breaks, debt guaranties, and partial subsidies. It allowed companies willing to lay fiber to depreciate about one-third of the cost on first-year taxes, and it guaranteed their debt liabilities. These measures were sufficient to ensure that new fiber was laid in cities and large towns, but in rural areas, municipal subsidies were also needed. Towns and villages willing to set up their own ultra-high-speed fiber networks received a government subsidy covering approximately one-third of their costs, so long as those networks, too, were open to outside access.

These incentives created the right environment for the rapid deployment of fiber networks. Again, other companies decided to compete with regional telephone companies. The first, Usen, a nationwide distributor of background music with its own fiber network, was later joined by electric power companies. The resulting competition quickly drove the price of an ultrafast fiber connection down to $30 to $45 per month.

By the end of 2002, ultrafast fiber connections were available to more than ten million households in Tokyo and Osaka; a primary goal of the e-Japan strategy had been met. But the program -- and the government's tax incentives - had also called for fiber lines to run directly to homes and offices, and those connections proved economic only in densely populated cities. In less settled areas, the government agreed to provide tax incentives for fiber taken only as far as neighborhoods, leaving it to individual users to decide how to connect. Some have chosen -- and paid for -- a direct fiber connection; others have opted for a cheaper but slower wireless connection. By mid-2004, ultra-high-speed broadband was available to more than 80 percent of Japan's citizens. With more than two million subscribers, it can be said to have gone mainstream.

Fiber deployment is still moving quickly, and by the end of the year, ultra-high-speed access will be available to virtually all Japanese either directly or in their neighborhood. The program has been so successful that the Japanese government has already set its sights higher: in mid-2003, it decided to move beyond promoting access to ultra-high-speed broadband to encouraging its use.

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