Just a coincidence?: Accord reached amid NTT/Verio scrutiny

After events that had conspiracy theorists salivating, U.S. and Japanese regulators agreed to substantially cut the interconnection rates that critics have long blamed for the lack of competition in Japan.

Last week's accord calls for NTT - a former state-owned monopoly that owns 90% of Japan's telecom lines - to cut the interconnection rates for its local lines by 20% and the interconnection rates for regional lines by 50% by 2002. The deal will be reviewed in two years, when further cuts are expected.

"This important agreement... will level the playing field for America's cutting-edge technologies and increase the number of Japanese consumers connected to the Internet," said President Bill Clinton.

Prior to the negotiations, U.S. officials sought an immediate 41% decrease in NTT's interconnection fees, while Japanese officials offered to cut the rates by 22.5% over a four-year period. U.S. Trade representative Charlene Barshefsky said the rate cuts are equivalent to an overall 35% cut for the first two years, according to reports.

Among those supporting the agreement was AT&T Chairman C. Michael Armstrong, who also is chairman of the U.S.-Japan Business Council.

"The agreement makes the substantial and prompt changes needed to create a more competitive telecommunications market in Japan," Armstrong said in a statement. "Lower interconnection rates can lead to lower local and long-distance rates for Japanese consumers and businesses and to lower international rates for customers worldwide who call Japan."

Despite such plaudits, some observers question whether the agreement will foster a competitive telecom environment.

"There was very significant progress but not as much as the U.S. wanted," said Scott Cleland, an analyst for The Precursor Group.

The foundation for the dispute has existed for years. Japan's interconnection rates are two to five times greater than rates charged by other G-8 countries, said Lael Brainard, U.S. deputy national economic adviser. Critics said the fees effectively prevented competition from entering the market.

Meanwhile, Japanese officials expressed fears that lowering interconnection rates - especially in the abrupt manner initially requested by the U.S. - would result in lost NTT revenue and massive layoffs.

Although Barshefsky had threatened to take the case before the World Trade Organization, the debate became particularly heated in May. At that time, NTT Communications - NTT's international arm - bid $5.5 billion cash for Verio, a Colorado-based ISP. Soon after the bid was announced, a group of Republican congressmen asked the Clinton administration to review the case because the Japan market was closed.

And the congressmen did not try to veil their motives for the request - to give Barshefsky leverage in trade talk with Japan.

More leverage came when the FBI expressed concern that an NTT purchase of Verio could compromise its e-mail surveillance program (see story on page 8). Whether this national security issue was a legitimate law enforcement concern or a politically motivated maneuver to gain leverage in trade talks likely will be a source of speculation for some time.

"My opinion is it [the status of U.S.-Japan trade talks] wouldn't have made a wit of difference to the FBI," said Mitchell Brecher, a shareholder in the law firm of Greenberg Traurig LLP and a former FCC attorney. "But the fact that the FBI had those concerns changed the way others looked at it."

Indeed, the FBI news seemed to spur action in Japan. Within Japan, top government officials began expressing a desire to cut the interconnection rates more rapidly.

But a chasm between the parties still existed when a U.S. contingent traveled to Japan to conduct preliminary discussions. After Barshefsky abruptly denounced an offer to cut interconnection rates by 22.5% over three years, a Japanese official reportedly demanded that the U.S. waive regulatory review of foreign companies entering into the U.S. market.

Soon after Barshefsky arrived in Tokyo, however, the agreement was reached. Barshefsky reportedly said the NTT/Verio deal did not influence the accord, but Dataquest analyst Ron Cowles believes the agreement will result in the FBI issues being dropped so that Verio can be bought.

"This will not open up the market," Cowles said. "This may close down the [U.S.] government initiative outside the FCC [regarding the NTT/Verio deal]; after all, Japan can say they did what was asked. The next time this will come up again is if NTT tries to buy a U.S. carrier - not a Web hosting company but an actual carrier. Then, all bets are off."