(1) What is the role expected of NTT in order to enrich the profit of the nation and users and breathe life into Japan's info-communications industry?

(2) In relation to the above-mentioned role expected of NTT, is it therefore appropriate to revise NTT's current management structure? Also, what are the relevant considerations involved in such an exercise?

(3) In the case of a complete restructuring, precisely what format should it take?

1-1 Implementation of Lowered Rates and Diversified New Services

(1) Lower rates

1. As discussed thus far, NTT has been attempting to reduce its long- distance call rates. However, viewed in comparison with other countries, Japanese rates are undeniably higher. Further reduction of all communications charges is therefore anticipated, as the era is arriving in which we will be able to make the most of info- communications as part of our daily life and socioeconomic activities.

2. The monopoly of NTT's local communications network means that most info-communications carriers have no other option but to rely on the network. Therefore, the level of costs here controls the level of costs across the entire info-communications service spectrum. Herein lies the need for further cost cutting.

3. Given the above, a major role is expected of NTT in terms of achieving a low-cost structure within Japan's info-communications industry.

(2) Diversified services

1. NTT has been working towards diversifying its services as it progresses with full digitization. But compared with the US and elsewhere, it should be pointed out that the diversification of services in Japan is still inadequate.

2. It is desirable in the multimedia age of the future that the nation and users should be able to freely select the types of service they themselves need.

3. It is expected that NTT will develop new services actively based on a prompt and well-oiled decision-making process.

4. With these in mind, it is conceivably necessary to examine whether or not the current exceptionally massive management structure as for a Japan's private company is a desirable platform for realizing diversified services.

1-2 Preparing Conditions for Fair and Effective Competition

1. In order to more smoothly promote the lowering of rates and diversification of services mentioned in 1-1 above, it is necessary to encourage competition in terms of giving incentives.

2. NTT has been working towards establishing conditions for fair and effective competition, such as the introduction of an independent division system. But there are still problems. For example, cross- subsidization is always possible between the internal NTT long- distance communications division and local communications division. Also, the subscriber information obtained by the local communications division can be put to use for the purposes of intensifying competence of the long-distance communications division.
   There are also other problems. For example, compared to NTT, the long-distance NCCs need to dial an extra four numbers. Also, the NCCs do not receive the same fair treatment for connection to the signal network as NTT's own divisions.

3. NTT is expected to play a greater role in the future as an core telecommunications operator in securing fair and effective competition.

4. It must be noted that the issue of fair and effective competition may arise unavoidably as NTT runs the long-distance telecommunications business and local telecommunications business as one integrated business field.

1-3 Smoothing Interconnection

1. NTT has traditionally endeavored to establish smooth interconnections. However, NTT has generally had difficulties in negotiations with other telecommunications carriers on the issue of interconnection.

2. It is essential to facilitate interconnection to promote competition and introduce a new range of services at an early stage. NTT is expected to establish interconnections with other carriers at all switching stations with a reasonable rates and within a reasonable time frame.

3. To ensure the smooth interconnections, it goes without saying that it is essential to take measures, as explained previously, such as setting out clear interconnection rules. However, it must be noted that one major cause for traditionally difficult negotiations on interconnection issues is NTT's operational structure, which integrates long-distance and local communications services; two service aspects whose interests conflict with each other.

1-4 Strengthening the International Competitiveness of the Info- Communications Industry

(1) Entering into markets abroad

1. Compared with major western telecommunications carriers, NTT has little experience in entering into markets abroad. Given the reality that the telecommunications carriers in developed countries are going to enter the developing country and other markets, NTT and other Japanese telecommunications carriers are expected to tie up with manufacturers and trading companies to move into offshore markets.

2. To enter into markets abroad, it is necessary to prepare environments in many aspects such as constructing multilateral competitiveness in the domestic market, creating close tie-ups among telecommunications carriers, manufacturers and trading companies, and providing government assistance.

3. In this environment, NTT's success in overseas markets will depend on whether it can supply the inexpensive yet high-quality communications systems required by other nations with a more dynamic management.
   As a result , if NTT actively moves into overseas markets, the international competitiveness of the over all info-communications industry in Japan will also be enhanced.

4. Furthermore, as mentioned before, in Chapter 3 2. (5) B. "Entering overseas markets", NTT has to date barely attempted to enter overseas markets. Meanwhile, western telecommunications carriers smaller than NTT have been actively moving into overseas markets. Given these facts, the size of the carrier is not a factor directly affecting the success of business development in overseas markets.

5. When expanding into overseas markets, rather than size, other factors come into play, such as the following: low price, superior services and function, unique ideas, quick management decision- making process, R&D capacity and reliability. This leads us to believe that it is essential that NTT itself first become exposed to a severe competitive environment in Japan. In this sense, the direction of domestic competitive policies will affect the direction of NTT's business development in overseas markets.

(2) Alliances with foreign carriers

1. In the global telecommunications field, to meet the global telecommunications requirements of companies, and particularly multinationals, telecommunications carriers around the world are tending to cross national borders to tie up with other carriers.

2. More specifically, as mentioned before in Chapter 2 2. (7) (ii) "Alliance with overseas carriers," the world has seen three major telecommunications groups formed. Among Japanese carriers, KDD is a member of World Partners, while NTT has tentatively joined the group for a limited period.

3. Such situations lead us to believe that NTT is not playing a leading role in global business tie-ups at present. But NTT is thus expected to take bolder action in the future along this line.

4. However, if NTT, with its local communications network with some 60 million subscribers, belongs to a certain group, the issue of fair and effective competition will arise between those carriers in the NTT group and carriers belonging to other groups. NTT thus will need to look at measures to ensure fair and effective competition if it is to become more aggressive in participating in global alliances.

1-5 Links with the Development of Content Businesses

1. The content business is expected to continue to grow in Japan.

   ]

2. Therefore, NTT should play a leading role in two aspects.

3. First, to ensure that the content business continues to grow, it is vital to reduce the telecommunications costs of content production and distribution. This necessitates a drastic cut in charges for NTT services.

4. Furthermore, if NTT displays its potential to tie up with content businesses or becoming involved in content business itself, it should then contribute to the development of Japanese content businesses.
   However, when NTT becomes involved in the content businesses, it will be necessary to ensure that conditions for fair and effective competition are maintained between general content businesses and NTT, which is also involved in telecommunications.

1-6 Enhancement of Research and Development Capabilities

1. One of the changes that is taking place in the environment surrounding research and development is the shift to multimedia. It is essential for the research and development in the multimedia era to response quickly to the diversification and advancement of needs, advancement in technologies, and expansion and greater complexity in the scope of technologies.

2. Another change is the globalization of operations. The world has been trying to establish de facto standards for the global market. It has become increasingly important for R&D to keep up with these global trends.

3. To ensure continued stimulus for Japanese R&D activities in the future in this rapidly changing environment, it is important for a large number of independent organizations to promote dynamic competition through more multilateral and mobile tie-ups, while carrying out the following:
   1. Developing human resources
   2. Bolstering cooperation among industry, academic and public sectors
   3. Enhancing government efforts in basic and advanced technical development

4. NTT is expected to be promoting dynamic competition in R&D in the midst of significant environmental changes, including the advent of multimedia and the globalization of operations, and contribute to improving the R&D capacity of the entire nation.

1-7 Contributing to the Establishment of Info-Communications Infrastructure

1. Building info-communications infrastructure such as installing fiber optics means building the foundation of the multimedia industry itself, which is one of the future growth fields. Building info- communications infrastructure is also essential for supporting information activities concerning national life and industrial and economic circles, as well as for providing solutions to the problems presently confronting Japan, such as sustainable economic growth and the creation of employment opportunities.

2. It is therefore vital that NTT engage in competition with other telecommunications carriers and CATV businesses and play a leading role in building info-communications infrastructure to ensure that the entire nation will benefit from the early establishment of balanced info-communications infrastructure free of regional disparities. Here the government must adhere to the principle of encouraging the private sector to play principal roles in building info-communications infrastructure.

2-1 The Reason Why Restructuring is Necessary

(1) Promotion of competition through elimination of bottleneck monopoly

1. As mentioned above, to prevent the negative factors that result from the so-called "bottleneck monopoly," structural as well as non structural measures are needed to encourage competition to take full effect.

2. More specifically, the competitiveness of NTT's competitive division must be promoted by making distinctions between NTT's monopolistic sector and its competitive sector. NTT's exercise of its monopoly through the bottleneck must be prevented by what we call "yardstick competition" among restructured NTT subsidiaries and by direct competition. It is also essential that we solve the problems connected to NTT's bottleneck monopoly.
   This should give NTT a greater incentive to be more efficient.

(2) Implementation of lower rates and various services for the nation and users

Restructuring NTT, and as a result creating powerful competitive units, will encourage direct and indirect competition among new NTT subsidiaries as well as competition with other telecommunications carriers. This will expedite competition in the total market, and will help reduce telephone charges and diversify communications services.

(3) Creating strong competitors for improved international competitiveness

1. In the multimedia age, creativity based on diverse thinking will form an integral part of competition. Creating powerful competitive units by restructuring NTT will produce both alliances and competition among NCCs, CATV and content businesses. This will lay the foundations for business development that boasts strong originality, and should ultimately enhance our international competitiveness, including our efforts to establish de facto international standards.

2. If new NTT corporations can strengthen tie ups with manufacturers and trading companies as powerful competitive units, and at the same time compete among themselves, then Japan's competitive edge in overseas markets will be enhanced.

3. Furthermore, if the long-distance communications business is separated from the monopolistic local communications business, the long-distance telecommunications carrier (Long-Distance NTT) will become more flexible, and will also be able to participate in the international communications market. This will have the ultimate effect of enabling NTT to quickly tie up with other carriers, in a swift and omni-derectional manner, to provide international telecommunications services. We are today seeing an increasing number of opportunities worldwide for such tie ups.

4. As explained above, restructuring NTT is an essential part of improving the competitiveness of the Japanese telecommunications industry in the world market. Such a goal will be achieved through the creation of powerful, mobile management units resulting from restructuring.

(4) Problems to be tackled if NTT is not restructured

Without the restructuring of NTT, the effects above mentioned in (1)- (3) cannot be expected and the following problems will need to be dealt with.

1. The continued existence of a bottleneck monopoly will cause the following problems:
   1. There will be no extra incentive for NTT to improve management efficiency.
   2. The development of fair and effective competition will remain limited.
   3. As a result, there will be no increase in incentive to provide consumers with better services and reduce rates.

2. Policies for promoting competition which rely solely on such non- structural measures as issuing administrative orders are limited in terms of effectiveness, and the time and costs required for regulation may become extensive.

3. More specifically, while NTT faces a reasonable degree of competition in the long-distance communications markets in regions like Tokyo, Nagoya and Osaka, it still retains a more than 90% share of the overall communications market in Japan. This is an impediment to the business dynamism associated with competition.

4. Restriction on the business of the NTT is inevitable if it is to enter such competitive markets as international communications while maintaining its existing company structure, because the issues relating to fair and effective competition that we currently see in the long- distance communications market will appear in other markets as well.

5. Change in the corporate management environment is likely to be even more rapid in the future. However, if NTT remains in its present form as a giant management organization, this will run counter to its own objectives, namely to take full advantage of its management resources, establish more mobile management and enjoy the "economies of speed".
   (Reference)

   Number of employees of major companies in the private sector (Fiscal 1994)

   NTT JR East Japan Hitachi, Ltd. Toshiba Toyota Motor

   194,721 79,709 76,679 73,463 69,748

2-2 Matters to be Considered if NTT is Restructures

(1) Ensuring a universal service

The future provision of info-communication services such as telephones (an indispensable in our daily lives and socioeconomic activities) must be ensured, without lowering existing standards, as well as the provision of welfare services assisted by telecommunications.
If NTT is to be restructured, full consideration must be given to the financial basis of the resulting new firms, in order to ensure the supply of such services.
As the question of ensuring universal services is closely connected to advancing regional competition, we will need to look at setting up a new mechanism (such as the creation of universal service funds) which take regional competition into consideration.

(2) Safeguarding communications in disasters and emergencies

In the future, info-communications services will tend to be provided by the greater number of competitors and there will be greater promotion of interconnection among telecommunications carriers. Therefore, to ensure that the communications system works properly during natural disasters and other emergencies, we will need to establish a system (for example, as above mentioned, setting up the Central Security and Reliability Center) that enables effective cooperation among many telecommunications carriers, including NCCs.
If NTT is to be restructured, similar consideration must be given to ensure, accurate communication at times of emergency through the cooperation of multiple carriers.

(3) Guaranteeing convenience for users

Following the restructuring of NTT, if several carriers start supplying the services as NTT currently does, it will be necessary for the carriers resulting from restructuring to create a framework so that their networks can be interconnected smoothly and their customer inquiry sections can be coordinated.
We must also take appropriate measures to ensure that the same conditions exist for interconnection and coordination of the customer inquiry sections between new NTT corporations and other telecommunications carriers.

(4) Ensuring the continued integration of network after the restructuring

1. There are some arguments that the restructuring of NTT would diminish the economies of integration (in terms of the security of interconnections, the calculation of costs, and the responsibility for maintenance and care, etc.) as the network infrastructure, which had been managed and operated en bloc, would be run by several companies.

2. Nonetheless, the benefit of an integrated network can continue to be provided following the restructuring of NTT, as shown in the example of international communication network formed by the interconnection of carriers in different countries.

3. The advantages of diversified decisions by various carriers should be fully considered in view of the national economy, as management decisions are likely to be highly significant in the development of info-communications in the future.

3-1 The Status of the Management Structure of NTT

Taking measures such as those listed below will be essential for ensuring that NTT is managed properly.

Restructuring NTT
1. Reorganize NTT into a long-distance communications company and two regional communications companies

   Long-distance communications company

2. Long-distance communications company must be fully privatized.

3. The long-distance communications company must be allowed to enter international communications, CATV, content and other new businesses as well as regional communications.
   The long-distance communications company must also take over current shares of NTT Data Communications Systems Corp., NTT Mobile Communications Network Inc., and NTT Personal Communications Networks.

   Regional communications companies

4. Regional communications companies will be treated as special companies in order to secure provision of telephone services nationwide. Ultimately however, they will be completely privatized depending on the competitive situation of the regional communications market.

5. Regional communications companies should be allowed to come into each other business and enter the telephone, CATV, content and other businesses outside their operational areas.

6. As it is possible that regional communications companies may exercise a monopolistic power in their operational areas respectively, entry into long-distance communications (communications inside the area or one dispatched from the area), international communications, CATV, content and other businesses will be restricted for the present.

   Ensuring the rights of the shareholders and creditors

7. The above measures will be implemented by making sure that the rights of the shareholders and creditors are safe guarded.

   Timing for restructuring

8. Restructuring is scheduled for fiscal 1998.

3-2 The Form of NTT in the New Market

After it is restructured, NTT will adopt the following systems:

(1) Basic principles

The restructuring of NTT is to be carried out on the basis of the following principles:

1. The system will be geared to liberalization, in order to fully develop the latent potential of NTT.

2. The system shall promote fair and effective competition by multiple entities.

3. The aim will be to create yardstick competition among the companies resulting from the restructuring of NTT and direct competition by cross market entry.

4. In order to ensure fair and effective competition, the scope of business undertaken by companies resulting from the restructuring will be as flexible as possible. This would make it possible to make the most of the current NTT managerial resources such as manpower and raise the morale of the employees, which would in turn contribute to the development of Japan's info-communications.

5. The new system will contribute to the enhancement of Japan's international competitiveness by encouraging companies resulting from the restructuring to expand their businesses abroad, and by dealing with international communication needs in a diversified way.

6. The new system will enhance R&D in Japan by creating various R&D frameworks while also maintaining the existing R&D strengths of NTT.

7. By creating a dynamism in the Japanese info-communications industry on the basis of the above recommendations, the new structure will aim to benefit the interests of the nation and users, such as by providing lower rates and diverse services.

(2) Long-distance communications company (hereinafter referred to as "Long-Distance NTT")

Formation of a new company
1. Long-Distance NTT will in principle be composed of the current long-distance communications division (in charge of inter-prefectural communications) and be separated from existing NTT.

   Reduction of rates / improvement and diversification of services

2. The elimination of links between the Long-Distance NTT and NTT's monopolistic regional network will result in a much higher level of fair and effective competition in the long-distance communications market, for example this provides a solution to the problem of four-digit numbers, and the management efficiency of Long-Distance NTT will be improved. As a result, long-distance rates will be lowered and services will be improved and diversified.

   Entry into new businesses

3. Long-Distance NTT can undertake, for instance, such operations as international communications, regional communications, mobile communications, CATV, content, etc.

   Taking over of shares of major subsidiaries

4. Long-Distance NTT will take over the current shares of NTT Data Communications Systems, NTT Mobile Communications Networks, and NTT Personal Communications Networks.
   Moreover, by this measure, conditions for fair and effective competition will be perfected in both data and mobile communications by the separation of those subsidiaries from the monopolistic, local communication networks.

   Moving into regional markets

5. Long-Distance NTT will also move into regional telecommunications markets, where it will compete with regional NTT companies.

   Complete privatization

6. Like long-distance NCCs, Long-Distance NTT will be completely privatized.

   Operations in overseas markets, participation in global alliances, and dynamic management

7. Long-Distance NTT will promote dynamic management appropriate to the scale of management and operations. Additionally, it will aggressively undertake operations in overseas markets and forge alliances with global operators as a means of consolidating its international competitive position.

(3) Regional communications companies (hereinafter referred to as "Regional NTTs")

Formation of new companies
1. Regional NTTs will be formed based on the current regional communications division of present NTT. East NTT will comprise Hokkaido, Tohoku, Kanto, Tokyo and Shin-etsu while West NTT will consist of Tokai, Hokuriku, Kansai, Chugoku, Shikoku and Kyushu.

   Ensuring area-wide telephone services

2. Regional NTTs will continue to be under an obligation to provide area-wide "regional telephone" services within the existing operation areas at the time of restructuring.

   Promotion of reciprocal market entry

3. Regional NTTs will be allowed to enter each others' markets.

   Yardstick competition and direct competition

4. Yardstick competition will emerge among Regional NTTs, and direct competition will intensify with the entry of Long-Distance NTT and other NCCs into the regional communications and cross entry between Regional NTTs.

   The form of direct entry

5. Direct competition by local telecommunication carriers entering different local markets may take place in the following areas:
   1. Bypass businesses
   2. CATV businesses
   3. Content businesses
   4. Others

   Rate reduction and diversification of services and smooth construction of new infrastructure

6. With promotion of above competition, management efficiency will increase, rates will fall, and services will be diversified in the regional communications.
   Under the two regional operator system there may be some difference in the level of rate reductions and diversification of services but it is hardly conceivable that we shall see a worsening of the situation. Furthermore, in addition to the maintaining the level of telephone services, it is expected that such infrastructure as optical fiber will develop smoothly.

   Operations in overseas markets

7. Like Long-Distance NTT, Regional NTTs will form tie-ups with manufacturers, trading firms and other concerns in order to compete with each other and launch operations in overseas markets.

   Corporate management scale and mobile management

8. By dividing the local section into two firms, it is hoped that the resulting scale of management will be improved, management will be undertaken dynamically and the international competitiveness of the businesses will be enhanced.

   Steps to reduce overconcentration in the Tokyo area

9. The birth of West NTT will help to reduce overconcentration in the Tokyo area.

   Restrictions on expansion within existing operation areas

10. Since there is likelihood that a monopoly situation will develop, entry into long-distance communications (communications inside the area or one dispatched from the area), international communications, CATV, content and other fields within its area will be restricted for the time being. However, when the danger of a monopoly situation wanes, entry will be allowed through an increase in regional competition.
    To that end, the report on the progress made in the local telecommunications in terms of competition should be updated annually.

    Full-scale privatization in the future

11. As for Regional NTTs, regulations above will be eased gradually depending on the progress made by competition in the regional communications market. The ultimate aim is to implement complete privatization.

(4) The Relationship between Long-Distance NTT and Regional NTTs

1. As explained above, NTT will be reorganized into one Long- Distance NTT and two Regional NTTs. When restructuring NTT, given that policies to enhance cross market entry between the firms resulting from the restructuring will be adopted, the restructuring does not mean to fix the scope of business of each firm.

2. Rather, promoting reciprocal entry into each others' fields among these new entities and thus creating new competitive units in the existing market will enhance the overall market efficiency and ensure that the market is vigorous.

3. It is essential that these new providers are formed into independent business entities, each equipped with decision-making organs to ensure that they compete with each other to move into each other's markets. Given this condition, these companies must not have the same capital structures.

4. This means that new entities will not be allowed to merge again.

5. The issue of these new business entities continuing to share the name NTT after restructuring while on the other hand competing as a result of reciprocal market entry will require extensive examination by the time NTT is restructured, in connection to issues of competition and user convenience.

3-3 Deregulation in Connection with Reorganized Companies

(1) Deregulation in connection to Long-Distance NTT

Full-scale privatization and liberalization of operations
1. Concerning Long-Distance NTT, the provisions of the special corporation law must be abolished so that Long-Distance NTT can be fully privatized, in the same manner as Long-Distance NCCs.

   Relaxation of rate regulation

2. Long-Distance NTT is expected not only to engage in domestic long-distance communications but also to enter the international telecommunications and mobile communications markets, the latter handed over by NTT. Deregulation of telephone charges in these areas should be promoted as follows:
   1. Separating long-distance communications from the monopolistic regional telecommunications network will prevent conditions for unfair competition, such as the cross-subsidization between NTT's long-distance and regional telecommunications operations. Therefore, to promote the more flexible and mobile setting of rates, the deregulation of the current authorization system for long- distance communication rates offered by Long-Distance NTT will be considered, involving a move from the existing approval system to an incentive regulation.
   2. The possibility of deregulating rates for mobile and international communication services provided by Long-Distance NTT from the existing approval system to a prior notification system will be examined.

   Regulation of interconnection

3. Separating long-distance communications from monopolistic regional telecommunications will ensure that Long-Distance NTT will be free of the existing integration with regional telecommunications networks. This will also eliminate concerns of a possible exercise of the NTT's regional monopoly. Therefore, deregulating the existing authorization system concerning interconnection agreements will be considered, in order to establish a prior notification system if tariff system is introduced to interconnection conditions.

(2) How regulations on Regional NTTs should work

Easing of regulations stipulated in the current NTT Law
1. The info-communications reform this time, including the restructuring of NTT, is expected to spur competition in the regional communications market. In accordance with the development of competition, the relaxation of foreign investment regulations and other regulations stipulated in the current NTT Law will be studied.

   Liberalization in the scope of extra-territorial businesses

2. Regional NTTs must assume the obligations to guarantee universal telephone services within conventional territories. At the same time, the scope of businesses set out in the existing NTT Law must be expanded to allow Regional NTTs to move into new business fields, such as content and CATV (including communications) businesses in other territories.

   Introducing regulations on rates to promote competition in regional telecommunications field

3. For a certain period of time, it would be reasonable to maintain the existing rate authorization system in regional telecommunications field, considering that NTT's local monopoly is likely to continue.
   In that case, the introduction of incentive regulations, including yardstick, should be considered, with a view to introduce indirect competition among Regional NTTs carriers.

   Guaranteeing interconnection

4. In order to facilitate interconnection, Regional NTTs will:
   1. be obliged to interconnect, by law, with other carriers.
   2. be obliged to introduce tariff system to stipulate interconnection rates and other conditions, applicable to all carriers.
   3. calculate interconnection accounts and sales accounts separately on the basis of accounting rules established by the Government.
   4. introduce "number portability" schemes and presubscription system.

(3) Sale of government-held shares

1. The obligatory government share holding will be discontinued for Long-Distance NTT. After restructuring, government-held shares in Long-Distance NTT will be sold off quickly on schedule.

2. As for Regional NTTs, government holdings will be retained for the time being. Efforts will be made to sell off 5.1 million shares as early as possible in accordance with the schedule.

3-4 How NTT Research Institute should be Run

(1) Status of research institutes

1. At present, NTT research capacity comprises 13 research laboratories which are classified into three general research laboratory groups.

2. NTT research laboratories have been reorganized in the past as the nature of NTT operations and services has changed and technological reforms occurred. It is essential to continue to flexibly review these laboratories.

3. Research and development capacity is the source of business development, and an incentive to commercialize is a source of stimulation for R&D activities. Therefore, both Long-Distance NTT and Regional NTTs should adopt measures to ensure that their R&D capacity can be used in their business development.

(2) Regional NTTs

1. As Regional NTTs hold a monopoly on networks for subscriber access, they must engage in R&D activities with the following objectives: technical development to advance optical networks for subscriber access and technical development to establish diversified, advanced network functions which can meet technical demands arising from the provision of services by long-distance communications, mobile communications and other communications providers. Furthermore, as Regional NTTs will take over a large part of NTT's assets and sales bases, they should take over a large part of its current research and development capability, except for R&D concerned with long-distance communications.

2. As for the succession of current NTT's research institution to the Regional NTTs, divisions that are either basic or common to all companies will be taken over in their entirety by East NTT for instance, and the cost burden shared by all Regional NTTs. However, divisions which are closely connected with service competition will be taken over by the companies concerned.

3. Regional NTTs will continue to be responsible for conducting research and development stipulated in the current NTT Law.

(3) Long-Distance NTT

1. A fully privatized Long-Distance NTT will be exposed to severe competition with long-distance NCCs, and this should provide an incentive to establish an R&D capacity which is directly linked to commercialization and which enables the provision of efficient services.

2. As in the case of NTT Mobile Communications Inc., which took over the mobile communications R&D section when it was broken off from NTT, the R&D section specializing in long-distance communications technologies can be separated and run independently of existing NTT research laboratories.

3-5 Time of Implementation of Restructuring

It is expected that restructuring of NTT will be implemented promptly after completion of the digitalization in fiscal 1997, because basic digital network will be completed and so restructuring costs will be minimized.
Thus we should restructure NTT by the end of fiscal 1998.

3-6 How Other Businesses should be Run (including satellite communications, maintenance and terminal equipment sales)

(1) Satellite communications business

NTT's satellite communications business is presently part of the longdistance communications division. Following NTT's restructuring, it will therefore become part of Long-Distance NTT. This will ensure a complete separation from NTT's regional telecommunications network, eliminating the concern that NTT will run both monopolistic and competitive businesses.
To ensure fair and effective conditions for competition, it is necessary to continue to take measures to separate revenues from satellite communications business from those generated by land communications services.

(2) Repair and maintenance business

Technical reforms produced more sophisticated equipment and systems, which has caused consumers to place greater expectations on the security and reliability of communications. This means that NTT's repair and maintenance business must become more effective and advanced.
Therefore, NTT must ensure that it provides more efficient and advanced repair and maintenance business through such measures as the systematic rationalization of staff by reorganizing manned maintenance centers which carry out decentralized maintenance work for exchanges and radio transmission facilities into approximately one in each prefecture.
As repair and maintenance business for local exchanges and transmission facilities comprises the core of the network and has a direct effect on the provision of services to users, precaution should prevail when separating such business.

(3) Sales of terminal equipment

NTT's terminal equipment sales operations presently belong to the local communications division, and therefore will belong to Regional NTTs after NTT's restructuring.
In July 1990, NTT implemented its own organizational reforms to separate the regional terminal equipment division from the general telecommunications operations division. However, in NTT's terminal equipment sales operations, examples are still being seen of NTT taking advantage of its beneficial status as a type I telecommunications carrier in selling terminal equipment.
Under these circumstances, a study must be made on measures to ensure fair and effective competition relating to NTT's sales of terminal equipment.

(4) Other businesses

NTT's packet communications, image communications and telegraphic businesses are run independently of long-distance and local communications businesses. An examination on where these divisions will belong after the restructuring will be included in the preparation of the draft of the restructuring plan.

3-7 Other Forms of Restructuring

Examinations were held on other ways to restructure NTT, such as those listed below, apart from the split of NTT into a long-distance communications company and regional telecommunications companies (which refers to the method of reorganization under which NTT will be split into Long-Distance NTT and several Regional NTTs). All these methods ensure improvement over the existing system, which is currently run by one entity. However, they present more problems in comparison to the method which splits NTT into one long-distance communications carrier and several regional communications carriers.

(1) Separation of long-distance communications and regional telecommunications businesses

This refers to a method which reorganizes NTT into one long-distance communications company and one regional telecommunications company.

1. This will eliminate the structure where the interests of two businesses conflict with each other because of the integrated management of long-distance and local telecommunications business. It will also facilitate interconnection and prevent cross-subsidization within one business entity and the abuse of information.

2. When the long-distance communications business moves into the global communications market, business alliances in the international communications market will become more diverse.

   However,

3. While dividing the regional business into several regional carriers guarantees the effects of increased competition in the regional telecommunications field through yardstick competition and reciprocal market entry, the fact that there is only one regional telecommunications carriers nullifies the effects.

4. The fact that there is only one regional telecommunications carrier means that it will be more difficult to ensure that rationalization incentives work.

5. The regional telecommunications carrier experiences virtually no change in terms of scale and mobility of corporate management.

6. The situation concerning the decentralization and centralization of functions in Tokyo will remain unchanged.

(2) Splitting NTT into several entities by region

This refers to a method where NTT will be split into several companies by region.

1. The resultant yardstick competition and reciprocal market entry will promote competition in the regional telecommunications field.

2. The progress in regional competition will provide an incentive to rationalize management and cut local rates.

   However,

3. It does not correct the structure where the interests of two businesses conflict with each other because of the integrated management of long-distance and local telecommunications businesses. It gives rise to concerns that the monopoly of regional telecommunications operations may be exercised in long-distance communications field competition. The method therefore does not solve the problems relating to interconnection, cross-subsidization, abuse of information and four-digit numbers problem.

4. Supposing that the companies resulting from restructuring are allowed to move into the international communications field, this gives rise to fears that the unfair competition conditions found in the long-distance communications market may appear in the international communications market. Therefore, there will be limits to the extent to which these new entities can be allowed to move into the international communications market.

5. This method also gives rise to fears that there may be a disparity in rates, depending on where the call originates from, in relation to long- distance communications among several regional carriers.

(3) Separating subscriber lines from other lines and splitting subscriber lines into several entities by region

This refers to a method where NTT will be reorganized into several regional companies specializing in operating subscriber lines and one communications company specializing in operating all the other lines.

1. This will eliminate the structure where the interests of two businesses conflict with each other because of the integrated management of the subscriber line and other line operations.

   However,

2. Companies specializing in operating subscriber lines will end up being facility construction or management companies which do not provide communications services. Therefore, these companies will find it difficult to associate themselves with multimedia developments in the future, resulting in a failure to revitalize the info- communications business as a whole.

3. Companies specializing in running subscriber lines will exercise a monopoly, making it difficult for rationalization incentives to work effectively and making it hard to reduce rates.

3-8 Number of Regional Companies

(1) The number of regional companies should be large for the following reasons: (i) Promote competition; (ii) Establish providers of diversified services to meet local needs; (iii) Proper management scale; and (iv) Decentralize national functions.

(2) On the other hand, when it comes to the number of regional companies, the following must be taken into consideration:

1. Carriers resulting from restructuring should have a stable financial foundation to enable them to stimulate the info-communications market.
2. Those companies must ensure that there are no regional disparities in rates and service quality as well as in constructing infrastructure.

(3) In financial terms, the following must be taken into consideration (See Reference No. 16 for further details):

1. According to the divisional profit and loss results for fiscal 1994, the regional communications divisions which posted a profit were the divisions for the Tokyo, Kanto, Kansai and Tokai regions. Therefore, it will be appropriate to reorganize NTT based around these four divisions.

2. With (i) kept in mind, if the aim is to reorganize NTT during fiscal 1998, one possible scenario is to set up two or three regional companies, based on the following information:
   1. Trends in divisional profit and loss between fiscal 1992 the year when disclosure began and fiscal 1994.
   2. Financial outlook of companies resulting from the restructuring formulated based on NTT's financial trends, starting from 1989.

(4) From these perspectives, and based on an overall assessment of a balanced scale for each company assets and sales created through the restructuring, it is appropriate to establish two regional companies when NTT is reorganized in 1998.

[Reference]
Financial outlook for companies created out of the restructuring in fiscal 1999 (trial calculation) Model: NTT split into one long-distance and two regionalˇˇ telecommunications carriers.
Long-Distance NTT

NTT East:

Hokkaido, Tohoku, Kanto, Tokyo, Shin-etsu

NTT West:

Tokai, Hokuriku, Kansai, Chugoku, Shikoku, Kyushu

1. yen shows in units of 100 million
2. The total number of employees will decrease from the 194,721 recorded at the end of fiscal 1994 to 178,424 at the end of fiscal 1999. However, this drop does not include the number of temporarily transferred employees to NTT's subsidiaries.

3-9 Restructuring Costs

(1) If NTT is restructured and split into several carriers, the so-called "restructuring costs" will crop up: for instance, the Long-Distance NTT will find it necessary to establish afresh a system for checking whether a long-distance caller has a contractual relationship with itself (check- function for subscriber information), similar to the long-distance NCCs.

(2) NTT estimates restructuring costs at 450 billion yen (260 billion yen for capital investment and 190 billion yen for expenditures) based on the assumption that NTT will be split into two, a long-distance communications entity and regional communications entity, with the latter being further split into two companies: NTT East and NTT West.

(3) However, it must be noted that the restructuring costs calculated by NTT are based on the following conditions:

1. Although capital investment is normally recorded as a depreciation cost over several years, the entire amount has been recorded as an expense in the first fiscal year.

2. Facilities which could be shared by companies created out of the restructuring will not be shared for the time being.

3. Costs incurred to prepare new businesses, which can be written off over several years (for example, advertising and public relations expenses required for restructuring) will be written off in the first fiscal year.

(4) If another set of conditions, such as outline below, were to be introduced the restructuring costs would change.

1. Capital investment would not be recorded as an expense in the first fiscal year, but recorded as a depreciation cost over several years.

2. When separating mobile communications businesses, the salary accounting system and other systems were shared by NTT, the parent company, for a while. As this example suggests, new companies created out of the restructuring would share facilities where they can, for the time being.

3. As for expenses required to prepare for the start up of new operations, such as advertising and public relations expenses, these would be recorded over five years under the heading operation start up expenses, as set out in commercial law.

(6) These restructuring costs are expected to be met by revenues obtained from the revitalization of the market and the moves into new markets such as international communications, CATV and content. Furthermore, costs should decline through the promotion of rationalization.

(7) While restructuring costs would be incurred in the short term, the benefits of such restructuring would remain. This fact must be taken into account.

3-10 Measures for Ensuring the Rights of Shareholders and Creditors of NTT

(1) Basic concept

1. NTT has at present more than 1.6 million shareholders and many creditors.

2. Therefore, when restructuring NTT, the rights of these existing shareholders and creditors must be guaranteed.

(2) Legal framework of restructuring

1. As NTT would be obliged to comply the restructuring of itself by Japanese government for the benefit of the public, it is preferable that the restructuring of NTT be carried out through enactment of laws based on government initiatives.

2. Given the fact that NTT is a joint-stock company, taking special measures such as spot issues of shares would be required even when restructuring moves ahead based on the procedures set out in commercial law.

3. Furthermore, as NTT is a special corporation, overall revision of its management style must follow the revision of NTT Law, the legal basis for which NTT is operated.

4. Based on the circumstances explained above, legislative measures would be needed to restructure NTT.

5. Under these legislative measures, NTT would be obliged to restructure in line with the policies set out by the government, and undertake to abide by the procedures set out in commercial law. This kind of legal framework is conceivable.

(3) Measures for ensuring the rights of shareholders

1. There are two possible ways of eliminating the cross-holding of shares among new companies
   1. NTT, the existing company, would sell shares in the new companies and deliver cash to the present NTT shareholders. (cash issue)
   2. NTT would not sell shares in the new companies, but rather issue shares in the new companies for the present NTT shareholders (spot issue).

2. With respect to cash issues there is a possibility that sale of large blocks of NTT shares would create confusion in the stock market and result in a drops the price of such shares. This method would not be an adequate response to the shareholders demand for acquisition of shares.
   The most appropriate step is thought to be adoption of a spot issue method to eliminate the cross-holding of shares.

3. As commercial law does not cover provisions pertaining to stock issues other than a company's own issues, it would be necessary to draw up provisions that permit the spot issue of new company shares.

4. The stock issues would be made by the existing company to the shareholders as payment equivalent to the value of lost capital.

5. Incidentally, a free issue of 0.02 shares for each share held was made by NTT in September 1995. It would be much better to resort to cash issue for such share fractions.

   (Reference)
   Based on the assumption that NTT will be split into a long- distance communications company and two regional communications companies, NTT shareholders would acquire shares in the following manner.

   1. Two shares would be issued for each NTT share (which effectively means that a shareholder would hold a total of three shares, one share in each of the three new companies.)
   2. More specifically, if a shareholder holds one NTT share at present, this share would be converted as follows: (Hereafter, we assume that the company replacing the present NTT would be NTT East.)
      1. One share in present NTT would be converted into one share in East NTT.
      2. One share in West NTT would be issued to each NTT shareholders. (If the capital of West NTT is the same as that of present NTT, namely 795.6 billion yen, this share would have a par value of 50,000 yen. )
      3. One share in Long-Distance NTT would be issued to each NTT shareholders. (As the capital of Long-Distance NTT is expected to be smaller than that of the present NTT, this share would be a no-par value share.)

(4) Measures for ensuring the rights of creditors

1. The finances of each new company could be made equitable by having each company shoulder an appropriate amount of liabilities when taking over NTT's assets.

2. Among such liabilities, debts would be taken over by the new companies with the approval of respective creditors (such as banks). However, it would be extremely difficult to obtain the approval of the myriad of individual debenture holders.

3. Therefore, it would be reasonable to secure the rights of debenture holders by making the new companies succeed to the debentures on the basis of the following legislative measures, referring to the steps taken when Japan National Railways was privatized.
   1. The restructured companies should jointly stand surety for debentures.
   2. As NTT's debentures are secured ones, the three new companies would each use their total assets as security for the debentures taken over from NTT.

4. As for the default clause for debentures (i.e., non-fulfillment of obligation), as long as the rights of debenture holders are guaranteed by the aforementioned measures, it is unlikely that problems would arise.

(5) The issue and listing of shares

1. To eliminate the cross-holding of shares, it would be better for the shares of new companies to be issued to shareholders as soon as possible.

2. However, because unlisted stocks cannot be converted into cash or circulated, the listing of the issued shares would be vital.

3. In general, stock exchange assesses the value of stocks before they are listed. However, the following measures would need to be taken for such assessment, because the restructuring of NTT is to be implemented to achieve policy goals deemed to be in the public interest, and NTT shares are already listed on the stock exchange.
   1. To ensure that the listing and issue of shares could be implemented at the same time as, or close to, the company's establishment, special provisions would have to be introduced relating to the length of time a company must have been in existence before being listed.
   2. If the number of shares in the companies resulting from restructuring was to be set at the same number as NTT's existing 15.91 million shares to ensure that there would be no share factions, which does not allow voting rights, this would create too many shares. Therefore, special provisions would have to be introduced when criteria such as net worth per share or profit per share are not met.

(6) The tax burden resulting from the restructuring

1. It has been pointed out that under the existing tax system, the tax burden on NTT and shareholders might become new due to taxes on capital gains imposed upon transferring assets to the new company and on deemed dividends for NTT shareholders to whom new company shares are to be issued.

   (Reference)
   NTT calculated the principle tax burden to be applied in a situation where East NTT replaces the core NTT business and Long-Distance NTT and West NTT were established as new companies. According to this calculation, a tax burden of some 1.8 trillion yen would be incurred, comprising tax on profits resulting from the transfer of assets with unrealized gains such as land (approximately 1.35 trillion yen), and a special tax on profits resulting from the transfer of land (approximately 160 billion yen).

2. However, NTT is to be restructured through legislation in accordance with policy goals deemed in the public good. Therefore, the Government should actively provide assistance to facilitate the restructuring process, as provided for in the law.
   Accordingly, tax-exemption and other necessary measures should also be taken regarding the tax burden arising from restructuring NTT.