Japan's changing internet Industry

by Stu Magnuson

Can the Japanese market support so many ISPs, especially with the big players lowering prices and offering nationwide access? Probably not. "There's going to be a shakeout in 1997," warns Craig Oda, president of Tokyo-based ISP TWICS. "A lot of providers will probably go under."

In December, Japanese telecommunications giant NTT launched its Open Computer Network (OCN) in Tokyo. Japan Telecom intends to follow, in April 1997, with its Open Data Network (ODN). Meanwhile, long distance companies DDI and TelewayJapan are testing their own versions of Internet access services.

Like almost everything, Internet access is more expensive in Japan, especially for would-be net surfers in rural areas. But that may soon change. Access points are the name of the Internet game, and NTT plans to have an OCN access point in every area code, from Okinawa to Hokkaido, by the end of 1998. Charges are currently JPY2,300 per month for 15 hours, and JPY9 per minute thereafter. And for a flat fee of JPY37,000 per month, corporate clients can lease a 128K-bps line, according to NTT's Kazuhiko Nishizawa. Japan Telecom has yet to formally announce its ODN price structure, but says its rates will be lower still.

As OCN and ODN fight for customers, lower prices for consumers seem inevitable. What does that mean for Japan's ISPs? Trouble, since NTT and Japan Telecom, with their deep pockets, can survive a period of losses to bring heavy competition to the smaller firms.

Roger Boisvert, president and vice chairman of Global OnLine Japan (GOL), though, predicts that many smaller providers can survive the competition - especially if they offer flat rates (as his company does), since heavy Net surfers will come out far ahead by paying a fee for unlimited access. "Some of the ISPs that will survive will be very small ones: teeny-tiny little providers in tiny little towns, providing local service that nobody else can provide - including NTT. And the bigger ISPs will persist. It's the medium-sized ISPs that will fall away; I doubt many will be able to survive." (With approximately 7,000 clients, Boisvert considers his company a large provider.)

Small market providers, Boisvert predicts, will be able to come out on top if they pay attention to the service factor. "Anybody who competes purely on price is in deep trouble, with or without NTT. But companies who have something different to offer beyond a cheap price will still have opportunities here."

Mark Devlin, president of Crisscross Internet Services, agrees. "Everyone is taking a wait and see attitude about what the quality of [OCN and ODN] service is going to be. Users will just have to decide whether the tradeoff between price and service is acceptable or not."

Devlin sees his own service filling a niche, since about 70% of his approximately 500 clients are English-speaking foreigners. Helping customers in English is a service NTT probably will not be providing, admits company spokesman Nishizawa.

But Devlin also foresees big changes for companies that are not diversified. Mergers are inevitable. "The smaller ISPs can't fight against the large corporations. The reason is very simple: marketing power." The new players will have huge advertising budgets, Devlin notes, and "some will have to band together so they can compete."

TWICS' Oda agrees that there is room for the smaller players. "The market itself is booming. There are many more opportunities now than at any time in the past." Oda, with about 3,000 clients, sees Internet access prices dropping to "nearly zero. It will be a commodity, like electricity or water," he predicts. The main sources of revenue for companies like TWICS, says Oda, will come from extra services provided to customers.

Oda compares the ISP business to food distribution. The first stage is when the farmer sells his vegetables by the roadside. That was how the ISP business was three years ago. The second stage is when the farmer sells to a middleman, who distributes the vegetables to supermarkets. That's the status of the industry today. The next stage is when the vegetables are sold as raw material to restaurants, which prepare them as dishes that are appealing to diners, who will pay extra for the convenience. That, says Oda, is the future of the ISP business.