Crossed Wires

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Executives at Japan's Nippon Telegraph and Telephone (NTT), the world's largest telecommunications company, admit they've been watching the merger wave now engulfing U.S. phone companies with a sense of foreboding. Especially unnerving was the announcement earlier this month that 130-year-old AT&T, the American former monopoly carrier that not long ago was the oldest, biggest and baddest telecom firm on the planet, was about to be swallowed up by upstart regional player SBC—providing a sobering reminder that in the information age, no institution is too big to fail if it squanders its competitive edge. "Technology is advancing fast," says Shuichi Deguchi, senior manager of NTT's broadband-Internet promotion department. "A complete transformation is required to make sure we stay ahead."

"Transformation" was not, in the past, a word heard frequently at NTT, which as a former monopoly carrier with 60 million customers is the Japanese version of Ma Bell. Like AT&T, NTT now finds itself beset by a variety of nimble competitors offering local and long-distance calling and Internet access at cheaper prices. In its most recent earnings statement, NTT reported a $6.7 billion profit but saw falling revenue in almost all of its businesses. Its stock price has dropped about a third since early last year. Indeed, in Japan, where there are today more mobile-phone numbers than there are fixed-line phones, POTS (plain old telephone service) is rapidly becoming a thing of the past. Survival in the future depends upon phone companies' being able to provide businesses and households with a broad slate of communications and entertainment offerings, including Internet-based calling and even cable-TV-style video services. NTT may be big and rich, but the company "is not used to thinking competitively and reacting quickly" to exploit new business opportunities, says Credit Suisse First Boston analyst Hitoshi Hayakawa.

Until recently, it hasn't had to. Although ostensibly privatized and deregulated during the 1980s and '90s, NTT's fixed-line business remained virtually unchallenged. With a 99% market share, NTT used monthly fixed-line fees as a multibillion-dollar annuity stream to fund growth enterprises such as DoCoMo, its successful mobile-phone service spun off in 1992 (NTT still owns 64%). But two new entrants in the fixed-line industry have rocked the company's complacency. Last August, Softbank, a leading Japanese broadband provider, announced it would begin offering traditional home-telephone services at a discount. Two weeks later, KDDI, Japan's second largest mobile-phone carrier, said it too was invading NTT's turf. NTT quickly reduced prices to match its competitors', but the cuts will hurt: Deutsche Bank forecasts that NTT's revenue will decline by 15% over the next two years.

This raid on NTT's war chest could not come at a more critical time. Only about 40% of Japanese households currently have high-speed Internet access, meaning an all-out battle is being fought for the fast-growing market. Leading the charge has been Softbank, which initiated a broadband ADSL service in 2001 under the Yahoo! BB logo at rates that far undercut anything then on the market. In December that same year, it added VOIP (voice over Internet protocol)—telephony delivered over the Internet—at deep discounts to NTT's fixed-line phone fees. And in July 2003 it rolled out BBTV, a selection of 24 channels streamed to users' televisions not via cable-TV wires but over the Internet. Today, 4.7 million households (or nearly a quarter of the broadband market) subscribe to at least one of Yahoo! BB's three major businesses.

While Internet television is still in its infancy, telecom executives now confidently opine that success awaits the companies that can reliably and economically provide consumers with what is called the "triple play": TV, Internet and telephone service. Softbank is not the only triple player in Japan. In late 2003, KDDI added television programming to its Internet access and telephone services, while J-Com, with nearly 2 million subscribers the country's largest cable-TV operator, last month began rolling out video-on-demand to augment the TV, phone and Net access it already provides via digital cable.