NTT Coming Unwired
By David James, Thu Aug 03 00:00:00 GMT 2000

(August 3, 2000) The Japanese government is famously supportive of Japan?s industries. And no Japanese company has benefited more from government support than Japan?s dominant telecom, Nippon Telegraph and Telephone (NTT Group), currently 59 percent government-owned. But in this age of intense global competition, that support is coming a bit unglued ? or unwired ? in part due to the international ambitions of its wireless subsidiary, NTT Mobile Communications Network, known as NTT DoCoMo.

Given the Japanese government's long support of NTT, it came as a surprise in June when Prime Minister Yoshiro Mori said that NTT should be completely privatized. "The government should not own NTT forever," he said. "We must think in terms of full privatization." Two days later, Hiromu Nonaka, secretary-general of the ruling Liberal Democratic Party, added that NTT ought to sell part of its 67 percent stake in NTT DoCoMo.

These remarks came on the heels of a report by Japan's Fair Trade Commission that NTT's control over its two domestic wired divisions (NTT East and NTT West), and over NTT DoCoMo, was harmful to overall competition. The politicians' remarks must have played well in Washington, where the office of the U.S. Trade Representative was doggedly pursuing a long-standing dispute with Japan, finally resolved a few weeks later on July 19, over the high access fees that NTT charges other carriers for use of its regional and local networks. And no doubt the remarks were also privately applauded in the offices of NTT DoCoMo, where new capital is needed for the international rollout of DoCoMo's popular third generation (3G) wireless technology.

"The Japanese government is making telecommunications reform a key plank in its economic recovery program, and NTT is the biggest nail in that plank," says Krishna Kishore, director of international marketing for Asia-Pacific at Telcordia Technologies Inc. in Piscataway, New Jersey. "The reduction of access fees is the major reform needed. It is indispensable to galvanizing competition and sustaining growth in Japan's telecommunications sector."

Prying Open the Last Mile

NTT controls about 90 percent of Japan's fixed telecommunications infrastructure, including "the last mile" that connects local lines to each home and office, according to Marc Castellano, government relations analyst at the Japan Economic Institute of America in Washington, DC.

As a result, he says, high access fees, which the office of the U.S. Trade Representative claims run eight times those in the United States, tend to freeze out competition in the domestic wired markets and drive up costs to the consumer. This accounts in part for the success of wireless in Japan, where mobile phone subscribers now outnumber wireline subscribers. According to Japan's Telecommunications Carriers Association, there were 57.9 million wireless subscribers in Japan at the end of April 2000 and 55 million wireline subscribers.

The U.S.-Japan settlement of the telecom access fee dispute calls for NTT to cut its regional access fees by 50 percent, and its local access fees by 20 percent, over a two year period retroactive to April 1, 2000, for a combined reduction of about 35 percent. "Resolution of this dispute will benefit Japan tremendously," says Castellano.

But the cut in NTT's access fees puts additional pressure on NTT to sell part of its 67 percent stake in NTT DoCoMo in order to make up for the shortfall. This comes on top of a need to help fund the global expansion of NTT DoCoMo.

Today Japan, Tomorrow the World

Despite NTT DoCoMo's fabulous success in Japan - it is the world's largest and Japan's leading wireless provider and the most profitable member of the NTT Group - it is still not a major player in the international area, according to Kishore. "NTT DoCoMo needs to deploy its third generation wireless technologies rapidly in Europe and Asia if it is to catch the opportunities that are unfolding there," he says.

NTT DoCoMo's Internet-connected i-mode service, launched last year, already has more than eight million subscribers in Japan, with the number of subscribers increasing at a rate of 20,000 to 25,000 a day. Users are sending and receiving e-mail, downloading music and popular cartoon characters such as Bandai's TarePanda (saggy panda), performing banking transactions online and surfing more than 7,000 mobile-enabled Web sites.

As it moves overseas, however, NTT DoCoMo's i-mode technology will be competing head-to-head with WAP (wireless application protocol), the leading mobile Internet technology in Europe. Currently, i-mode enjoys a distinct advantage over WAP, which requires Web sites to write new programs for delivery over WAP. By contrast, i-mode uses the common HTML Web language.

Bidding for Gold

Stepping up to the international challenge, NTT DoCoMo recently teamed up with Hutchison Whampoa, the huge Hong Kong communications conglomerate controlled by billionaire Li Ka-shing, and Royal KPN, the Dutch mobile phone operator, to buy up rights to provide 3G services in Britain, Germany, France and Belgium. NTT DoCoMo owns 19 percent of Hutchison Telecom, an affiliate of Hutchison Whampoa, and 15 percent of Royal KPN. NTT DoCoMo and Royal KPN are also invested in Hutchison 3G Holdings, which already has the license in Britain. Supported by the huge financial resources of Hutchison Whampoa and the technical expertise of NTT DoCoMo, the three partners promise to be strong bidders for 3G licenses soon to be auctioned in Germany, France and Belgium.

If the Japanese government follows through on its reforms, and if NTT DoCoMo gets the cash to fund its international expansion, it looks like the only loser in the picture will be the NTT Group itself. In that case, NTT will join the ranks of many other telecoms around the world that are bending under the competitive pressures of new technologies.

David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in Asia-Pacific business opportunities.