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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** DA 97-571 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In Re Application of ) ) IDC America, Inc. ) File No. I-T-C-96-685 ) Application pursuant to Section 214 ) of the Communications Act of 1934, ) as amended, to Provide Non-interconnected ) International Private Line Service Between ) the United States and Japan ) ORDER, AUTHORIZATION AND CERTIFICATE Adopted: March 17, 1997 Released: March 21, 1997 By the Chief, Telecommunications Division: I. INTRODUCTION 1. In this Order we grant IDC America, Inc. ("IDC-America") authority, pursuant to Section 214 of the Communications Act of 1934, as amended, to resell non-interconnected international private lines between the United States and Japan. Pursuant to the Foreign Carrier Entry Order, we find that authorizing IDC-America to resell this service serves the public interest by increasing competition in the U.S. international services market and providing consumers with more price competition and service choices. II. BACKGROUND 2. IDC-America is a Delaware corporation and a wholly-owned subsidiary of IDC- Japan. IDC-Japan is a Japanese corporation providing international facilities-based (Type I) telecommunications services in Japan. On December 20, 1996, IDC-America filed an application to obtain Section 214 authority to provide non-interconnected international private lines as a non-dominant carrier to Japan. The application was placed on public notice on January 3, 1997; no comments were received. III. DISCUSSION 3. Because a foreign carrier owns greater than 25 percent of the capital stock of IDC-America, the Commission's Foreign Carrier Entry Order requires us to review its application for service to Japan under the framework established in that order. The Commission in the Foreign Carrier Entry Order stated that carriers seeking to provide international services to countries in which they have an affiliate with market power must demonstrate that the affiliated market offers effective competitive opportunities ("ECO") for U.S. carriers seeking to offer like services. If an applicant's foreign affiliate does not have market power in the destination market, we do not conduct an ECO analysis. The Commission also stated in the Foreign Carrier Entry Order that it will continue to consider other public interest factors that may weigh in favor of, or against, granting the application. A. MARKET POWER 4. In the Foreign Carrier Entry Order, the Commission found that applications from foreign carriers that hold market power raise the greatest potential for anticompetitive conduct, particularly where U.S. carriers are not allowed to compete effectively in those markets. The Foreign Carrier Entry Order defines market power as "the ability of the carrier to act anticompetitively against unaffiliated U.S. carriers through control of bottleneck services or facilities on the foreign end." Bottleneck services or facilities are "those that are necessary for the provision of international services, including inter-city or local access facilities on the foreign end." Our concern with IDC-America's application is thus whether its affiliate, IDC- Japan, possesses sufficient bottleneck control to discriminate against U.S. carriers providing non-interconnected private line service between the United States and Japan. Such discrimination could distort competition in the U.S. market among IDC-America and other international private line carriers. 5. IDC-America seeks to provide non-interconnected international private line service between the United States and Japan. The record indicates that IDC-America does not have a resale (Special Type II) affiliate in Japan that resells international private lines. Therefore, we find that IDC-Japan does not have market power as an international private line reseller in Japan. 6. We must examine the underlying facilities-based market also, however, because IDC-Japan operates as a facilities-based international private line carrier, and resellers ultimately depend on the underlying facilities to provide their resale service. Thus, we must determine whether IDC-America's affiliate, IDC-Japan, has market power in the underlying facilities-based market that could enable IDC-Japan to act anticompetitively against U.S. carriers seeking to provide non-interconnected international private line resale service to Japan. 7. Our market power analysis focuses on traditional antitrust principles:(1) IDC- Japan's market share; (2) the supply elasticity of the market; (3) the demand elasticity of IDC-Japan's customers; and (4) IDC-Japan's cost structure, size and resources. 8. Within the underlying facilities-based market, we examine first the domestic market for terminating private lines at the Japanese destination, as an international private line carrier operating in the United States ultimately relies on a facilities-based carrier in Japan to reach the Japanese end user. A carrier controlling bottleneck facilities and services in the domestic market for terminating private lines could discriminate in favor of an affiliate competing in the non-interconnected international private line resale market by offering its affiliate superior technical quality, faster provisioning or preferential rates. Second, we examine the facilities-based international private line market. If a carrier were to exercise market power in the facilities-based international private line market, it could similarly discriminate in favor of an affiliated international private line reseller by offering the reseller preferential rates or conditions of service. For instance, if IDC-Japan has market power in this market, it could discriminate in favor of IDC-America by provisioning international private lines faster than other carriers; giving higher quality international private lines and better service; and offering better rates (e.g., volume discounts) not available to competing carriers. 1. Domestic Market for Terminating International Private Lines 9. While the Japanese Ministry of Posts and Telecommunications ("MPT") permits IDC-Japan to provide domestic services, IDC-Japan states that it does not provide them. Instead, IDC-Japan leases facilities from Type I domestic carriers under tariff pursuant to nondiscriminatory terms, rates and conditions to originate and terminate its international private line traffic in Japan. Based on the record, we find that IDC-Japan does not have market power in the domestic market for terminating private lines. 2. International Facilities Market 10. IDC-America indicates that for the fiscal year that ended in March 1996, IDC- Japan had 16.6 percent of the Japanese market for international private lines (as measured by the number of circuits) and 18.7 percent of the international private line revenues. 11. IDC-America implies that there is sufficient supply elasticity by stating that the Commission has already recognized the ample supply of unsold, or sold but unused capacity on undersea fiber optic cables between the United States and Japan. And, IDC-America indicates that there are three facilities-based (Type I) international carriers (IDC-Japan, ITJ- Japan and KDD-Japan) and contends that there will be additional facilities-based providers of international private lines in the near future, such as the facilities-based (Type I) satellite providers in Japan. 12. IDC-America asserts that because the Commission found that demand elasticity was high for international private lines in Japan in the KDD America Order, there is no reason to reach a different conclusion with respect to IDC-America's application. IDC-America contends that the subscribers of international private lines are sophisticated users of telecommunications services and if IDC-Japan raised its prices above the rate charged by the other international private line carriers, customers would switch to another carrier. 13. As for IDC-Japan's size, cost structure and resources, for fiscal year ending in March 1996, IDC-Japan's total sales revenue for all international telecommunication services with all countries was 52 billion yen (approximately $510 million), which amounted to fifteen percent of the Japanese telecommunications market. IDC-America states that IDC-Japan is the second largest international Type I carrier but it is well behind the largest international facilities-based carrier, KDD-Japan, in terms of market share in total revenues and number of circuits. IDC-America contends that IDC-Japan cannot use its relatively small size, cost structure and resources to act in an anticompetitive manner. 14. Finally, IDC-America argues that grant of its application serves the public interest by promoting additional competition in the U.S. communications market. 15. Although we have concerns about the Japanese telecommunications market, we conclude that IDC-Japan does not have market power in the facilities-based international private line market. Our concerns, as discussed in the KDD-America and the ITJ-America Orders, are that: (1) the supply of international private lines in Japan is somewhat restricted, (2) MPT restricts entry into the international private line market based on demand, (3) Japan's 33 1/3 percent foreign ownership cap on international private line facilities-based providers prevents U.S. carriers from gaining control of such facilities, which could restrain an incumbent's anticompetitive behavior, and (4) international private line prices for the Japanese half-circuit are significantly higher than for the corresponding U.S.-half, which suggests that the Japanese facilities-based international private line market lacks vigorous competition. We note that Japan committed to lift its foreign entry and foreign ownership restrictions in the World Trade Organization basic telecommunications negotiations effective January 1998, although it maintains a 20 percent foreign investment restriction for KDD-Japan and NTT. 16. We conclude, however, that IDC-America's affiliate, IDC-Japan, does not have market power in the facilities-based international private line market. IDC-Japan only has 16.6 percent of the number of international private line circuits and 18.7 percent of the international private line revenues. Furthermore, there is no information in the record that IDC-Japan is the sole provider of any service in any particular geographical area. And, we note that IDC- Japan's sale's revenue is 52 million yen or 15 percent of the total sales revenue for all international telecommunications services with all countries. This amount is small compared to KDD-Japan's sales revenue, which is 248 million yen or 71.2 percent of the international telecommunications services market. Given IDC-Japan's low market share and relatively small size compared to KDD-Japan, we find that IDC-Japan does not have the ability to discriminate against U.S. unaffiliated private line carriers in favor of IDC-America. 17. Because we find that IDC-America's affiliate, IDC-Japan, does not have market power in the domestic market for terminating private lines or the international facilities-based market, we need not apply the ECO test to IDC-America's application. B. ADDITIONAL PUBLIC INTEREST FACTORS 18. The additional public interest factors that we consider include the general significance of the proposed entry to the promotion of competition in the U.S. communications market, any national security, law enforcement, foreign policy, and trade concerns raised by the Executive Branch, and the presence of cost-based accounting rates. 19. The Executive Branch has not raised any national security, law enforcement, foreign policy, or trade concerns about this application. As we stated in the KDD-America and the ITJ-America Orders, however, we are concerned about Japan's high accounting rates and would like to see them decrease. But, we do not find that a reason to deny IDC-America's application to enter the non-interconnected international private line market, as proliferation of these services will help put pressure on the above-cost accounting rates. Thus, we find that there are no other countervailing public interest reasons to deny IDC-America's application. We believe also that U.S. consumers will benefit by authorization of a new non-interconnected international private line resale carrier serving Japan. We accordingly find it in the public interest to permit IDC-America to enter the non-interconnected international private line resale market on the U.S.-Japan route. C. REGULATORY STATUS OF IDC-AMERICA 20. The final issue to determine is whether to regulate IDC-America as dominant on the U.S.-Japan route. IDC-America requests non-dominance because it asserts that its affiliate, IDC-Japan, lacks the ability to discriminate against unaffiliated U.S. carriers through control of bottleneck service or facilities in Japan. In addition, IDC-America states that it is obligated under Article 7 of the Japanese Telecommunications Business Law to provide non- discriminatory treatment in providing telecommunications services. And, IDC indicates that Article 31 of the Japanese Telecommunications Business Law requires Type I carries to establish "fair and reasonable" charges under non-discriminatory tariffs that do not unreasonably limit the use of facilities. IDC-America contends that the practical inability of IDC-America to discriminate against unaffiliated U.S. carriers and the legal prohibition on IDC-America to do so warrants non-dominant carrier regulation. 21. Given our finding that IDC-America's affiliate, IDC-Japan, does not have market power in the underlying domestic market for terminating private lines or the international private line facilities-based market, we find that IDC-Japan does not have the ability to discriminate against unaffiliated U.S. private line carriers in favor of IDC-America. Therefore, we find that IDC-America should be regulated as non-dominant on the U.S.-Japan route. IV. CONCLUSION 22. We find that grant of IDC-America's application to resell non-interconnected international private line circuits for service to Japan is in the public interest and consistent with Section 214 of the Communications Act. We classify IDC-America as non-dominant on the U.S.-Japan route for providing international private line resale services. Authorizing IDC- America to provide non-interconnected international private line resale service to Japan will benefit consumers by adding another resale carrier on the U.S.-Japan route. V. ORDERING CLAUSES 23. Accordingly, IT IS ORDERED that application File I-T-C-96-685 IS GRANTED and IDC America, Inc. is authorized to resell international private line circuits not interconnected to the public switched network for the provision of international private line services between the United States and Japan. 24. It is FURTHER ORDERED that IDC America shall comply with Section 203 of the Communications Act, 47 U.S.C.  203, Part 61 and Sections 43.51 and 43.61 of the Commission's Rules, 47 C.F.R. Part 61 and  43.51 and 43.61, and shall file annual reports of circuit additions in accordance with the requirements set forth in Rules for Filing of International Circuit Status Reports, CC Docket No. 93-157, Report and Order, 10 FCC Rcd 8605 (1995). 25. It is FURTHER ORDERED that this authorization of IDC America, Inc. to provide resold private line service as part of its authorized services is limited to the provision of non-interconnected private line service only between the United States and Japan, that is, private lines that originate in the United States and terminate in Japan, or that originate in Japan and terminate in the United States. In addition, IDC America may not -- and IDC America's tariffs must state that its customers may not -- connect private lines provided over these facilities to the public switched network at either the U.S. or foreign end or both, for the provision of international switched basic services, unless authorized to do so by the Commission upon finding that Japan affords resale opportunities equivalent to those available under U.S. law, in accordance with Regulation of International Accounting Rates, Phase II, First Report and Order, 7 FCC Rcd 559 (1991), Order on Reconsideration and Third Further Notice of Proposed Rulemaking, 7 FCC Rcd 7927 (1992), Third Report and Order and Order on Reconsideration, FCC 96-160, released May 20, 1996. See also Foreign Carrier Entry Order at  133-138. 26. This order is issued under Section 0.261 of the Commission's Rules and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commission's Rules may be filed within 30 days of the public notice of this Order (see Section 1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Diane J. Cornell Chief, Telecommunications Division International Bureau