Hello, I'm Atsuhiko Nakata. Let's get to the lessons! Extreme political economy. I came back with an episode called "Government VS Major Mobile Carriers: How confusing!" Major mobile carriers versus the government. They're very influential. As people started voicing out that cell phone bills should be cheaper there seemed to be news that politicians began to do something about it. I bet a lot of you are wondering if there's been any progress since the news because it's been long already and there seems to be no change in the bills yet. However, we don't really know much about cell phone bills. I believe most of you would visit a retail phone shop and simply say "Just get me a cheap one with unlimited data." when the clerk asks which plan you want to get. Some of you might just say "I want a good plan. Can't I go for a 2-year contract?" "I'm not so sure. Please do it the way you want." But why "Government VS Major Network Carriers"? There were a lot of events going on but I didn't think they would go forward with it. However, there was a furious battle between the two. Why did it seem like there was no progress since the announcement up to this day? That involves the dark side of the Japanese economy and the constraints of the industry. It's interesting. This book explains to you about it. "Government VS Major Network Carriers: 1,000 Days of Battle for the Reduction of Cell Phone Bills" A battle lasting 1,000 days is really long. Why is it called a battle? It's really fascinating. Let me first tell you the background information regarding the announcement about lowering the cell phone bills. It was an announcement that mentioned 40% and shocked the industry. The announcement was made by Suga, our current prime minister. This was maintained for a long while in Abe's regime. He announced it out of the blue in the August of 2018. He said that network carriers must reduce the cell phone bills by 40%. 40%, you see. 40% is basically a sale price. It's like a bargain sale. So how can you reduce it that much? I'll tell you why. There are three major network carriers called Docomo, au, and SoftBank. Their profit rate is 20%. How big is that? This is a really high rate considering that they're part of an industry needed by all people, and thus deemed a business of public infrastructure. That's a huge amount of profit. How much profit is that, then? Basically, the leader of the country pointed out that the industry is gaining too much profit so they should greatly reduce the price. That's because there are only three major network carriers. He specifically pointed out Docomo, au, and SoftBank saying that they should reduce their profit. This must have shocked the whole industry. Everyone doubted that such remark would change the major network carriers. However, something huge happened. Let me explain this first. I'll help you know how big their profit is. We had the COVID-19 pandemic, right? What change did that bring to the large network carriers? All infrastructure industry got affected. An example would be JAL. It's a Japanese airline. Japan Airlines saw a loss of 93.7 billion yen. That's a bad situation. It's been like that from April to June. JR East, the car industry which is the center of Japan, the manufacturing industry, and all the other industries also saw red figures due to COVID-19. Amidst all the red figures, the three major network carriers saw a profit of 280 billion yen. You may wonder what made them see that much profit when you didn't even change your phone. We wouldn't think about changing our phones because we can't go out due to the pandemic anyway. Then what increased their profit? We don't change our phones often. So there must have been a decrease in cell phone sales. Despite that, they saw a lot of profit because of the fixed monthly fee. How much cell phone bill do you pay a month? If you're using one of the three major network carriers, it must be 7,000 yen on average. 7,000 yen. How many phones are distributed today? 100 million and 8 thousand. That means one person owns one phone. Basically, nearly everyone has it. The three network carriers are monopolizing by getting 7,000 yen per person. This is called oligopoly. It's called monopoly when done by a single firm, and oligopoly when there are three firms. The three firms share the monthly fee of 7,000 yen of all the Japanese citizens. They have a similar amount of profit. So the three firms take up about 90% of the sales in the industry. They continue to get the monthly fees so they did not get affected. Everyone uses their service. That's why Suga remarked that this is a problem that must be solved. Not everything is going on well. This is the thrilling and fascinating part of this book. The pattern of this book is interesting. It's really fun because it's similar to Naoki Hanzawa's decent financial fiction. First of all, the author criticizes the dark side and restraints of this industry. There are three restraints. The biggest one is the three major network carriers. The oligopoly that I mentioned earlier. If there is an oligopoly, the principle of competition can no longer be applied. Even the other countries need at least four firms. If there are four firms, they compete with each other with the price and settles on a reasonable fee for consumers. But with only three firms, that rarely happens. It was only recent that there were just three network carriers left. Did you know that there were more network carriers in the past? There were a lot. There were various network carriers here and there. But those firms gradually got integrated, leaving only three firms. This happened because they needed the plant and equipment investment. They need to set antennas all around Japan. This isn't an industry that one can easily enter. It's possible that you quit your job tomorrow and open a cafe. There are industries with high and low entry barriers. Cafes or takoyaki stores have a relatively low entry barrier. You can get the equipment needed and start a snack cart business the next day. But in order to start a network carrier business, you need a lot of capital. You must think of it as your last battle. You need a lot of money in order to make antennas all around Japan. How much do you think Docomo spent to become the firm that it is today? More than 1 trillion yen, you see. Over 1 trillion yen. It's not just billions. They accumulated more than 1 trillion yen for their capital over a decade and finally got their investment. So it's really difficult for new firms to enter the industry. Now that there are only three major network carriers, it went to the Nash equilibrium state which is tackled in behavioral economics. Nash equilibrium is also known as the game theory. I would make a move when the opponent doesn't because that would benefit me. Everyone might use my service if I reduce the price. But there are only three firms. Most people considered the quality of network connection when choosing a network carrier back in the days. We used to talk about whether Docomo or au had good connection. I miss those times. But these days, most network carriers provide a good network connection. au, Docomo, and SoftBank are all the same. We no longer talk about which network carriers have a better network connection. They all have a similar quality. They all have similar prices as well. You'd think that if one of them reduces the price, all consumers would use that firm's service. But it didn't work that way. The three firms settle on the most stable monthly fee and share the pie within themselves. This is called the Nash equilibrium. It's also a part of oligopoly. So the government decided to break this system. The Ministry of Internal Affairs and Communications is in charge of generalizing mobile network businesses. So the Ministry of Internal Affairs and Communications and the government waited for the fourth network carrier. You all know the fourth network carrier. It's Rakuten. Mikitani founded Rakuten. Rakuten announced that they'd enter the network carrier industry in the December of 2017. People felt uneasy whether that was a good idea for them. Rakuten has a strong economic bloc in the e-commerce business, like Rakuten Point. There's also Rakuten Pay. Although they knew the situation of the market, didn't you feel worried if they'd be okay? It wasn't certain whether Rakuten could compete against Docomo, au, and SoftBank, the three major firms. But Makitani had a change of winning. One of them was the crowd. There are technological innovations going on in controlling data via crowd. When it comes to technological innovations regarding data, it is easier for a firm without previous equipment to change it into a whole new technology at once. This also means that it would be hard for them to give up the system built with 1 trillion yen in order to use a whole new system. There are a lot of crowd data services being improved, making it possible to lower the price. Hence, it can lead to a whole new innovation. Another thing is that the government might support this process. The government is waiting for the fourth firm. It became certain that they want a fourth firm because as of today, we can only divide the 4G frequency band to the three firms, but the government allowed them to divide it as well to the fourth company. They definitely would welcome a fourth firm. With a fourth firm, the prices will decrease and the people would be satisfied. Of course, when Suga made that remark, people thought it was only an election pledge. Some people criticized that a politician shouldn't interfere about the service prices of businesses but we definitely can't let it be this way anymore. Things are going bad because there aren't enough competition. They're infrastructure firms that are profiting by themselves in the pandemic. They're infrastructure firms. People realized that it is weird to see them gaining high profits despite the fact that all citizens need the service, Mikitani thus thought that he can enter the industry with the technological innovation and the government's support. It was a huge risk. Rakuten's announcement caused a commotion. But it wasn't pushed through. Everyone believed that creating a crowd service would be too much of a pressure but they were doing fine on this part. However, they had to build a base station. They had no technique in building a base station so they had to extend the building period way further. Another problem was the roaming. Before they build their base stations, the network will be disconnected once people are out of Rakuten's range. So when the people are outside Rakuten's area, they'll be using the area of the three major firms. This is called roaming. Rakuten initially wanted to use the areas of Docomo. But Docomo wouldn't like that because Rakuten would become the fourth company. Moreover, Rakuten made a huge request, asking for all of Docomo's areas. Docomo didn't find the need to help them to that extent and declined their proposal. This wasted Rakuten's time. But KDDI, au agreed. Rakuten didn't know what to do after Docomo refused but au knew that helping Rakuten can be beneficial rather than to stick to Docomo. That's because Docomo is the leading firm. au wanted to collaborate with Rakuten in order to win against Docomo. But due to the lack of knowledge regarding how to build base stations and the difficulties in roaming negotiations, Rakuten announced once more in the October of 2019 that they'll enter the network service industry. So the government provided them a route accordingly. They announced that there would be changes starting October, but the date was extended once more. Plus, Rakuten was still relying on roaming so it wasn't in the optimal state either. Things that Rakuten announced did not go as expected and the three major network carriers felt reassured. They thought Rakuten would be of a threat but things weren't going well for Rakuten. This fortified the oligopoly system. It was a huge mistake. In the end, Rakuten announced that it would be better to expect four major firms after the spring of 2021 when everything would be prepared. Then they stopped going forward with the plans. They failed to enter the industry. The delay of Rakuten's business became a restraint. Then what were Docomo, SoftBank, and au doing? Docomo was actually working hard to overcome the threat. After the remark of Suga, the Chief Cabinet Secretary, Docomo announced that they'll reduce the price. Sawada, the leader of all of Docomo's holding companies, handles things without delay. He thought that the market would change according to what the government wants, so Docomo announced first that they will lessen the price. But everyone was afraid of this. Because he's the boss of Docomo's holding company, the boss of Docomo had to follow as well. He told them to reduce the price of the plans. He expected that if they reduce the price by 20%~30% according to what the government wants, the market would change. Plus, Rakuten was going to join back then. He said that Rakuten might take away all the customers will cheap plans. Risking the pride of Docomo, NTT said they'll lower the price first. But why did everyone fear this? They will lose a lot of profit if they reduce the price by 1,000 yen a month. They currently have about 50 million contracts. 1,000 yen less a month would be 12,000 yen per person a year. If you multiply 12,000 yen with 50 million, they're giving up on 600 billion yen. Docomo's profit is 900 billion yen. That means they will lose over a half of their profit if they reduce the prices by 1,000 yen. This was their business model. [Next episode – Docomo's Mistake and SoftBank's Clever Scheme]
"Please do so, Rakuten!" "Sorry, I think we'll have a delay!" "What are you doing!" "Please do so, Docomo!" "Sorry, we failed!" "What are you doing!" "What's SoftBank doing? They shouldn't do that!" "Don't you think that's overboard?" The expected new student is late, the top student trips, and the disorderly student is behaving recklessly. A web community, PROGRESS. [Atsuhiko Nakata's online community PROGRESS, 3,700 members, 980 yen a month]
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