In April, as Japan Telecom's chairman Koichi Sakata shook hands with two men in a Tokyo Hotel, he was happier than a sumo champion winning the Emperor's Cup - and with good reason. The two men he was meeting were none other than Sir Peter Bonfield, chairman of British Telecommunications, and John D. Zeglis, president of AT&T Corp. The reason for their meeting? To publicly announce that BT and AT&T will take a 15 percent stake in JT, the third largest telecom operator in Japan. It was a big day for JT's Sakata, whose sole stated goal is to challenge Japan's reigning telecom champion, NTT Corp., and hopefully push them right out of the telecom ring.

At the news conference held after the April tie-up announcement, Sakata couldn't stop grinning. "Both BT and AT&T recognized JT as the strongest prospective challenger to NTT," he stated. With this major financial, technical, and psychological boost from two of the biggest players in global telecommunications, it appears that JT is now on course to accomplish Sakata's goal. NTT, meanwhile, has yet to respond, and understandably so. With the July 1, government-mandated breakup upon them, they've got their hands full.

Prelude to Japan telecom shakeup

Telecom industry watchers here have long predicted that the breakup of NTT would happen, it was just a question of when and what the result would be. This month, the world finds out. NTT is scheduled to be divided into two domestic carriers - NTT East and NTT West - and a long distance/international carrier named NTT Communications, all three operating under a holding company parent. Like Japan Telecom above, domestic companies have been occupied with formulating strategies to deal with the new NTT. Whether due to the growing severity of global telecom rivalry or the lousy Japanese economy, players are for the first time actively courting capital investment from foreign telecoms, or at least seeking product- and service-based alliances with other carriers. Many companies expect post-NTT breakup telecom competition in Japan to be harsh.

This flurry of M&A activity has been aimed at injecting new vigor into domestic telecom companies, allowing them to provide seamless, comprehensive services. Said one executive of DDI Corp. - one of the leading NCCs (new common carriers) - "If we cannot provide comprehensive services to our customers, then there's a good chance that we'll be forced out of the market." Most importantly, all of the NCCs are being forced to take this approach. They have to - if only to keep up with NTT's elaborate plans.

NTT sets the pace

Last October, NTT's president Junichiro Miyazu declared that his firm will remake itself as a global information distribution business, and since then the firm has been emphasizing content and international data services targeting MNEs (multinational enterprises) over the provision of conventional voice telephony. Upon reorganization, the new NTT will form one of the world's largest telecom conglomerates, with interests in all aspects of the information business; building and managing infrastructure (domestic, long distance, international, and satellite), platform (broadcasting, advertising, e-commerce, mobile, and Internet), and the provision of content (including computer software, education, and publishing) are all included.

One of the most remarkable features of NTT's reorganization plan submitted to the Ministry of Posts and Telecommunications is the formation of a holding company to control the new NTT organizations. The scheme was worked out as a concession after a decade-long battle between the MPT and NTT over the reorganization. The MPT had demanded a genuine separation of NTT's services in order to promote competition and lower prices, while NTT had demanded centralized management to preserve competitive power. NTT seems to have lost the battle, but won the war. Market watchers say that the structure will allow the new group of companies to reallocate resources to rescue ailing business efforts or to reinforce successes. To find strong support for that stance, look no further than last year, when NTT DoCoMo - NTT's thriving mobile cellular arm - was forced to step in and absorb the PHS business from deficit-ridden NTT Personal.

NCCs prep for the challenge

Other than NTT, there are four new common carrier groups in Japan. Three are centered on one of the big telecoms - the Japan Telecom group, the DDI group, and the KDD group - and one is centered on a consortium of electric utility companies. Each group has been actively expanding its core telecom business - either long distance or international, while energetically starting or acquiring new businesses, such as mobile (cellular, PHS, satellite), software, infrastructure, maintenance, system integration, or R&D.

Japan Telecom - a subsidiary of the Japan Railway group - has laid more than 10,000 kilometers of optical fiber along JR's network of railway tracks throughout Japan, and today, JT's mobile subscriber base exceeds 6 million. With the April announcement of investment from BT and AT&T, JT chairman Koichi Sakata has every reason to be pleased.

Meanwhile, DDI Corp. - a subsidiary of Kyoto-based Kyocera Corp. - has been providing long distance services using its own nationwide trunk radio network (the firm is presently building a supplemental optical fiber network), while actively selling mobile telephone services through two wireless subsidiaries, the Cellular Telephone Group and the DDI Pocket Group.

Last December, KDD Corp. - formerly Japan's international telephone monopoly - acquired Teleway, a long distance carrier owned by Toyota Corp., and the acquisition helped KDD to accelerate its still infant domestic services. Using Teleway's nationwide optical fiber network, KDD is now able to provide integrated, seamless services, and KDD has stated that it is earnestly seeking a business partner, possibly involving a capital tie-up.

The electric power companies' group, meanwhile, has failed to ignite much interest, and the group's carriers have failed to aggregate their services due to differences between their respective parents. But as a positive sign, 10 electric utility-owned regional telephone operators from throughout Japan established Power Net Japan in February of this year, aiming to launch nationwide telecommunication services, including both voice and data using an integrated nationwide network.

The giant vs. the four dwarfs

Although each of the four NCC groups is trying hard, none can cover all areas of the information business like the new NTT can. NTT recently released its fiscal 1999 business plan, and although the plan showed both revenues and profits on the decline, NTT still expects to earn profits of JPY216 billion on revenues of JPY6.1 trillion. These figures far exceed those of the four NCCs combined. In addition, the era when the NCCs could generate sales by offering cheaper services has ended. The only way for the NCCs to compete is by offering the same integrated services that NTT does, or by providing services that NTT does not. Both take time, money, and resources that the NCCs just don't have. Despite Sakata's optimism, it is clear that he really had no choice when JT's new foreign partners came courting. He recently admitted that he accepted investment from AT&T and BT because he feared JT's survival in the era of vicious competition looming after NTT's reorganization.

However, there is no doubt that the biggest benefit of this month's breakup for NTT and the greatest impact on the NCCs will come from NTT's entry into the international market. Entering the international business has long been the goal of NTT executives, and many industry watchers think it is key to the success of the new organization. Unlike the two other operating companies - NTT East and West - NTT Communications will be a pure private firm competing under little regulation. Although NTT is a well-established incumbent carrier, the company is new to the intricacies and difficulties of the international market. But it's learning fast.

NTT learns the international game

In an unexpected move two days after JT announced its major tie-up with AT&T and BT in April, NTT and AT&T jointly announced a business alliance of their own with IBM Global Network (IGN). IBM's IGN operates in over 850 cities in 59 countries, and through this move, NTT hopes to be able to gain time to catch up with existing global players. NTT and AT&T intend to establish a joint venture providing comprehensive solutions over the IGN network - initially in Japan, but later in the Asia Pacific region. A modest step, perhaps, but the giant is only just flexing its muscles.

But for all the talk of impending doom at the hands of the newly deregulated NTT, many point out that the group does have a vulnerable underside. The group companies are not effectively centralized and many predict that it will be a tough if not impossible task for the 300 staff who will work at the new holding firm to manage the huge conglomerate, comprising some 240,000 employees. Some of the 160 current NTT group companies - including the hugely successful NTT DoCoMo and NTT Data - have been operating more or less independently for several years, and it is questionable whether these players will kowtow to holding company direction.

Fair competition vs. lower rates

Most recently, the NCCs have argued that NTT's new companies should do business under the principle of fair competition. One issue they're condemning is the mutual allocation of business among NTT's three new operational firms. According to the reorganization plan, NTT Communications will be able to entrust some services to either the NTT East or West company, giving a powerful seamless edge to NTT's service offerings. The antitrust zealots are watching - and rightfully so - like hawks.

NTT goes global

One other thing to watch is when the new NTT will be forced to deal with international competition. In a direct blow to NTT, Cable & Wireless (a leading UK-based carrier and a major shareholder in Japan's International Digital Communications), announced in April its intention to buy up a majority share in IDC. The IDC board recommended that shareholders sell only to NTT, but C&W countered that even if its majority bid failed, it would not sell a single share to NTT. As of May, the fate of IDC had not been settled. The knives are out.

After more than 10 years of discussion, NTT's reorganization plans were finalized two and half years ago. During this period of almost 13 years, both the US and European markets have changed. New carriers such as MCI WorldCom have appeared, while large scale M&A activities between global megacarriers have become almost commonplace. On the other hand, NTT has failed to improve its efficiency, and even after reorganization, its two local firms will operate under strict regulation. In the borderless global telecom market, the skill and shrewdness of the new NTT will be sorely tested.

Yaeko Mitsumori writes regularly for Computing Japan.