Crossed Wires

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p> So far, NTT has kept up with the competition. More than a third of the country's 20 million broadband households get their service through NTT, for example. But KDDI's and Softbank's rapid advances into nearly every field of its businesses convinced NTT that more drastic measures were required. In a major strategy shift, NTT declared two months ago that it would spend $47 billion to convert 30 million Japanese households to fiber-optic service—bringing superfast optical cables right into living rooms—by 2010. Today, 3 million households in the country have direct fiber-optic connections (compared with 14 million who access the Web over ordinary phone lines via ADSL, and 3 million who subscribe to broadband cable). But NTT believes Japan's future is fiber-filled because the technology allows for faster transmission speeds and more flexible two-way communication than alternatives, meaning NTT should have the best triple-play capability in the nation. "They have changed their mind-set," says Kenshi Tazaki, a vice president at Gartner Research in Tokyo. "They have moved from a defensive strategy to an offensive one."

There's one glaring problem: to encourage competition, Japan's telecom regulators require NTT to allow competitors like KDDI and Softbank to use the giant's system, paying wholesale rates set by regulators—which means the competition will be able to reach customers via NTT's gold-plated network. "We spend all this money on our infrastructure, and we have to rent it out at a very low price," complains Yasuo Sakurai, chief researcher at InfoCom Research, an NTT subsidiary. "Softbank builds nothing, yet they have enough money to buy a baseball team?" (Softbank recently purchased the Hawks, a Japanese pro ball club.) "This is crazy." NTT executives argue that since the company is no longer a monopoly, its network should not be treated like a public utility. So far, regulators have been unimpressed, countering that NTT is paying for its fiber-optic network with cash amassed from its regional phone businesses, which maintain monopoly-like market share.

Without government relief, NTT will need to find a way to provide enough compelling TV content and services to stay out in front. "Otherwise, they are relegated to this role of a back-end, network wholesaler," says Nikko Citigroup analyst Toru Hosoi. NTT officials are aware of this challenge, but they admit to being newcomers in the entertainment arena. NTT's Plala interactive television subsidiary, which launched consumer programming last July, offers viewers 30 basic channels such as MTV, the National Geographic Channel, as well as 12 premium channels that carry Hollywood and Japanese movies—which is similar to NTT's competitors', who say they aren't cowed by their much larger rival. "I don't believe telcos know how to develop and sell entertainment," says Toru Kato, senior vice president of business development at J-Com. Indeed, NTT has never demonstrated multimedia savvy. As early as 1995, it was exploring interactive TV technologies with Microsoft, but the partnership produced nothing. "We go to Hollywood looking for content, and we don't know what is the appropriate price for things," admits NTT broadband senior manager Shuichi Deguchi.

Still, although analysts say NTT is bloated with inefficiencies and hampered by conservative management, the company enjoys significant advantages and is not necessarily fated to disappear like AT&T. Softbank's success in capturing broadband market share, for example, has come at a high price. The Internet firm is deeply in debt and has posted widening losses for three years running. While KDDI has expanded more cautiously, it also lacks NTT's deep pockets, which give the latter an edge in punishing price wars. In the U.S., the incumbents have decisively lost to telecom upstarts. But in Japan, the battle is just getting under way. Don't count on the Eastern version of Ma Bell to follow its U.S. cousin into the corporate graveyard.