Japan Telecom: emerging into NTT's main competitor

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Japan Telecom was founded in 1984 as one of the new long-distance carriers. Following a merger with International Japan Telecom in 1997, it began to offer international services. In 1999 it entered into a strategic agreement with British Telecom and AT&T. The president of Japan Telecom, Haruo Murakami, talks to Basil Ballhatchet about developments.

Japan Telecom was formed in 1984 as a long-distance carrier from the former Japanese National Railways, as Japan began to deregulate its telecoms sector. In August 1986 the operator was the first company to introduce leased circuit services between Tokyo and Osaka. In November 1992 it completed work on its nation-wide digital network, composed primarily of fibre-optic cables. In September 1994 the company's shares began to be traded publicly on the second sections of the Tokyo Stock Exchange and Osaka Securities Exchange. In September 1996 the shares were listed on the first sections of these exchanges.

In October 1997 the operator pioneered a new era of reform in Japanese telecoms through a merger with International Telecom Japan. As a seamless carrier of domestic and international services, it became the main challenger to NTT. In April 1999 Japan Telecom consolidated its position as the number one alternative carrier to NTT by entering into a strategic agreement with British Telecom and AT&T.

Japan Telecom is also strengthening its position as a leading rival to NTT DoCoMo by initiating outdoor tests of the next generation cellular standard, W-CDMA, five months earlier than NTT DoCoMo. It has established a subsidiary, IMT2000 Planning to oversee service preparations. The subsidiary is capitalized at Y200 million ($1.86 million), with 40% finance provided by Japan Telecom, 34% by Nissan Motor and 26% by the Vodafone AirTouch Group.

In an interview with Global Telecoms Business, the president of Japan Telecom Haruo Murakami talks about the benefits of the alliance with British Telecom and AT&T and expands on the operator's plans in wireless.

Under the terms of the alliance with BT and AT&T signed in April 1999, the two operators will each hold 15% of Japan Telecom's outstanding shares through a new share issue. Japan Telecom expects to receive about Y220 billion ($2.04 billion) from this offering. BT and AT&T will appoint a managing director to Japan Telecom's board. The Japanese subsidiaries of BT and AT&T will be incorporated in Japan Telecom. In addition Japan Telecom will be able to participate in Global Venture, the joint venture to be established by BT and AT&T. BT will also play a role in Japan Telecom's efforts to promote W-CDMA.

Benefits of the alliance

Murakami perceives the following benefits: "First of all, the partnership with BT and AT&T will make Japan Telecom sole distributor of Global Venture brand services and enable us to provide global one-stop shopping services. Secondly, the integration of BT and AT&T subsidiaries in Japan into Japan Telecom will strengthen data transmission services. Thirdly, it will increase our financial credibility by adding investments from BT and AT&T. We can use these resources to build up and restructure our networks."

Murakami adds: "The global partnership with BT and AT&T is bound to increase our prestige as an international carrier. Japan Telecom already has a world-wide network. For the time being we need to secure our position firmly in Japan in the data transmission market."

Toby Rodes, a telecoms equity analyst at Dresdner Kleinwort Benson, refers to the cost benefits for Japan Telecom: "First of all, the BT/AT&T link-up allows them to control their costs and cut prices for international service. Ultimately, in an international call, a large proportion of the cost of actually delivering that call comes from the accounting rates of whichever carrier finishes that call into the home, or wherever that call ends up."

Rodes explains how the alliance will expand the carrier's European presence: "The tie up with AT&T/BT effectively means that Japan Telecom obtains a very strong global footprint in Europe and the US. It offers AT&T and BT a cut rate for delivering their calls into Japan and Japan Telecom benefits by getting cheaper access into Europe and the US. I thought this deal was absolutely essential."

Rodes believes that it was a shrewd move: "I think that Japan Telecom was really quite clever, because the global telecoms scene right now means that you are either a globalizer or globalized, a merger, in the process of merging or being merged. You are an eater or you are eaten. Japan Telecom realized that it is not a globalizer. It is not going to be reaching out of Japan effectively. It probably found the world's premier fixed line partners to tie up with."

Need for differentiation in an increasingly competitive market

Clearly Japan Telecom will benefit from the managerial expertise of its partners. Rodes points to the need for Japan Telecom to move quickly: "One of the points of competition here is that AT&T and NTT are going to creating a company later this year, in which they provide data services over the recently purchased AT&T global network that they bought from IBM. Japan Telecom has to differentiate itself in terms of data networking services. It is aware of this challenge. AT&T is putting Japan Telecom under pressure by having a dual pronged approach. In simple terms, Japan Telecom can no longer be the outsourcing/railroad telecoms company. It has to become an aggressive telecoms company."

While Murakami acknowledges the threat posed by NTT, he pinpoints Japan Telecom's assets: the alliance and its own future IP network: When they restructured in July this year, in a sense the NTT group was rather strengthened under a holding company, by adding NTT Data and DoCoMo as members. We have to guard against their dominant behaviour, which impedes fair competition. Anyway we have the advantage of our own global network, which enables us to provide one-stop shopping and end-to-end services. In addition, we can build our IP-based network as soon as possible."

In the 1999 fiscal year Japan Telecom's net profit totalled Y6 billion, a decline of 25.7% on the results for the previous year. However, despite the competition, Murakami believes that the operator can move forward. "The reduction in network costs and allocation of and/or shifting of resources to areas of greater growth, such as data transmission, will lead to an increase in our total revenues."

Japan Telecom is also trying to differentiate its service offerings through new Internet services, such as "Town Link Harujuku", a virtual shopping mail service. Murakami comments: "The Japanese Internet market is growing rapidly despite the high cost for local access. So if the network cost is reduced more in future, there will be more growth in Internet data traffic in Japan including E-commerce. We are providing content platform services, such as TownLink Shipping Mall. In this value-added business field, Japan Telecom as a telco will not provide the content itself, but will create and strengthen a new hosting service for future demands."

PRISM, the basis for Japan Telecom's future network

Murakami says that Japan Telecom will link its next generation network, PRISM to that of its partners. Field trials of PRISM, which stands for progressive and revolutionary integration service media, were launched in summer 1999: "We plan to connect our future IP-based network, PRISM, to their networks. I believe that the partnership will make Japan Telecom's network services and solution services more attractive. Since Japan Telecom Communication Services cover a wide range of multinational customers in Japan, we will move forward to strengthen its sales forces to the multi-national corporation market in Japan."

Murakami explains how Japan Telecom will leverage its PRISM network to compete with other next generation IP carriers: "We need an IP backbone to diversify our service range and decrease total network costs to deal with growing data traffic. I believe that we can be competitive, as we leverage the advantage of deploying an optical fibre network along JR railways, with the benefits of synergy from IP technology."

Cisco is supplying routers for the PRISM network. However, Murakami notes that Japan Telecom has still to take a decision on the final vendor for the network, which is still at an experimental stage. PRISM will eventually be the operator's only network: "The PSTN will be integrated into the PRISM network in the next decade. By that time we can enjoy an IP-based telephony service. That means that a specific IP telephony service will no longer be an independent element, as the transmission protocol in the present telephone service will be changed into an IP-based one that sustains the same high quality as that of the present system."

Capital expenditure plans

Japan Telecom will spend Y90 billion ($837 million) in 1999 on capital expenditure projects. Murakami outlines the main areas of Japan Telecom's network upgrade: "The expenditure will mainly be targeted on strengthening and building more network infrastructure. We have the following categories for expenditure:

  • developing a new customer billing system;

  • leased lines and data transmission business;

  • strengthening and upgrading facilities to cater for the demands of ATM Internet-related services;

  • mobile business: inter-connection with Japan Telecom's backbone

  • direct access business (for local network): FWA and CATV;

  • international network business: backhaul build-up for the submarine cable landing points, investments in other current and future submarine cable projects;

  • fibre-optic construction: network build for domestic backbone.

    Japan Telecom to focus on core competencies

    Asked whether the operator might move into broadcasting, Murakami insists that Japan Telecom will for the time being stick to the telecoms sector: "I don't think that Japan Telecom will go into the broadcasting business for now. Japan Telecom will stay in the telecoms business providing the platform for content, as well as network solutions. The integration of fixed and wireless communications business will be completed when IMT-2000 operations starts."

    Murakami explains how Japan Telecom will exploit the opportunities for convergence: "We are well positioned to take advantage of numerous access means to expand the local network. And it will enable Japan Telecom to provide an inexpensive and flexible range of service, as we will depend less upon NTT's local network than other carriers in Japan."

    Increasing role of cellular operations

    Until now, as Rodes points out, Japan Telecom has considered its cellular businesses

    as minority holdings. The tie-up with AT&T and BT will strengthen its cellular operations: "What is interesting in the second generation cellular world, Japan Telecom has only treated their cellular operations, either in the Digital Tu-Ka or Digital Phone Groups, as minority interest companies. Well they have been in accounting terms, taking the minority interest revenue and including it in the P&L. They haven't been fully consolidating cellular operations in the P&L or balance sheet. The move to third generation cellular in conjunction with Vodafone, BT and Nissan provides Japan Telecom with two things that it never had. Firstly, deep pockets to help with the capital expenditure. Secondly, they will own upwards of 40% of a company that moves to third generation cellular. It enables Japan Telecom to fully consolidate this company's earnings and assets on the balance sheet. This had not been on Japan Telecom's P&L or balance sheet. The cellular companies will appear. We think that this is very positive from a valuation standpoint."

    Murakami explains how Japan Telecom plans to spend the Y220 billion equity investments, indicating that it may well increase its stakes in the J-Phone group: "About Y80 billion will be spent on the integration process of in-country business, including the former subsidiaries of BT and AT&T. And Y90 billion will be spent on the mobile business (both 2G-J-Phone group and 3G). A further increase in our share of the J-phone group. The rest will be invested in our domestic and international network infrastructure."

    Japan Telecom is the leading shareholder in the nine J-Phone companies, which include three digital phone firms - in Tokyo, Kansai and Tokai - and six Digital Tu-ka companies - in Hokkaido, Tohoku, Hokuriku, Chugoku, Shihoku and Kyushu. Nissan, the other principal shareholder in the Digital Tu-ka companies, is considering the sale of non-core businesses following its alliance with Renault. Here, Japan Telecom clearly has an opportunity to increase its stakes. Murakami notes: "We can empower our mobile group by acquiring Nissan's stakes in the Digital Tu-ka Group to become the single major shareholder. As Japan Telecom is also the major shareholder in the Digital Phone Group, covering Tokyo, Tokai, and Kansai areas, this acquisition will make it possible to integrate our mobile businesses and build up one service brand under the brand name of "J-PHONE". This will makes it easy for us to compete with NTT DoCoMo in the Japanese wireless market, especially as Japanese mobile needs are skyrocketing. IMT-2000 operations will lead and create new demand in mobile computing. IMT-2000 will be the best fit for that."

    Competitive advantage in wireless

    As Murakami notes, Japan Telecom can draw on the experience it gained in wireless when it was part of Japan National Railways: "We have the experience and know-how of handling wireless technology, as we were the telecoms section of the former Japan National Railways (now JR) And our network, which covers the most densely populated areas all over Japan, can be expanded more quickly, so that wireless access services are accessible to significant numbers of people."

    Japan Telecom has 7.1 million cellular subscribers. However, IDO and NTT DoCoMo have been gaining new subscribers through a series of free minute pricing plans. Murakami describes one of the packages, long-way support, that Japan Telecom is offering to gain subscribers: Under long-way support, which involves a one-time payment of Y2,000, users will benefit from three months of free calls after one year subscription. We have many other discount packages. So I don't think that we need to offer another new discount to be competitive with the other players."

    While DDI and IDO would seem to have captured a head start on other cellular operators with their CDMAone offering, Murakami doesn't perceive any threat to Japan Telecom's business: "For J-PHONE, there is no significant loss of our subscribers because of the cdmaOne service. We have already provided numerous value-added services, such as short-messaging services and Web content, which are becoming increasingly popular with young users. Numbers are still growing."

    Murakami goes on to talk about Japan Telecom's preparations for 3G: it has set up a subsidiary, IMT2000 Planning: "As we will be the first planning company of IMT-2000 services in Japan, Japan Telecom is taking the lead to promote IMT-2000 in co-operation with 2G mobile business to maximize the impact of synergies and the efficiency of the group's operations. With Vodafone AirTouch and BT, we expect to benefit from their accumulated experience and know-how of management and advanced technology and jointly adapt them to the 3G operation. At present our financial credibility is also enhanced by their involvement."

    Murakami continues on 3G:" There should be a clear marketing dimension for 3G. Cellular phone users in Japan are already satisfied by availability and a high quality voice service. But when it comes to value-added services, there will be plenty of ways to meet user demands. Some will use 3G for their Internet connection with its fixed position, while others will combine voice and data for SOHO. Service applications and mobile communications style will be so diverse that Japan Telecom will soon test potential demand to offer more specific service offerings."

    Japan Telecom: exploiting branding opportunities

    As more and more international carriers try to break into Japan's deregulating telecoms market, Rodes explains how Japan Telecom is exploiting the opportunities that their presence offers: "I think that Japan Telecom fits in very well within this new deregulating, increasingly competitive market, as they actually offer foreign carriers what I would term the "Trojan Horse" - a way to enter the Japanese market, but under the Japan Telecom brand name. Ultimately, I think that the companies that try and come into the Japanese market with a foreign brand name will find it very difficult. But Japan Telecom offers, on both the fixed and wireless sides, a great avenue for foreign carriers to make their way into the market. I think that Japan Telecom is probably next to NTT the best prepared company to take advantage of what should be a very interesting telecoms market going forward."

    Murakami speaks briefly about his hopes and ambitions for the company. "Over the next five years at Japan Telecom we will raise our data transmission business and make it one of our most important areas. We will build the most advanced IP-based network to provide multi-media services by connecting our mobile network, fixed wireless network and CATV networks."