Telecommunications

March 2006

Use Of 3G Cell Phones Spreads As Models Get Smaller, Smarter
The use of third-generation cellular phones, which allow the transfer of music, image and other data via the Internet, is expanding thanks to the growing popularity of models compatible with terrestrial digital broadcasting, which is slated to begin full-scale operations on Saturday.
Also fueling their popularity is that they are becoming increasingly compact and offering more services, industry analysts say. The combined number of 3G subscribers at NTT DoCoMo Inc., KDDI Corp. and Vodafone KK stood at 50.8% of their total cell phone subscribers as of the end of February, exceeding the 50% mark for the first time, according to the Telecommunications Carriers Association. DoCoMo has increased the number of its 3G subscribers over the past year at a faster pace than in the previous year, thanks largely to the popularity of models enabling noncontact IC-based account settlements. The company is also receiving a better customer response than before because of its expanded 3G service area. KDDI, which entered the 3G market ahead of its rivals, enjoys growing sales of 3G models featuring the Lismo function enabling the replay of music stored in personal computers. "The Lismo models are particularly popular among young people in their 20s," said an official at Yodobashi Camera Co., a large electronics retailer. (The Nihon Keizai Shimbun, March 30, 2006)

Rivals Push For NTT Group Breakup To End Virtual Monopoly
Capital ties among Nippon Telegraph and Telephone Corp. group firms should be severed to pave the way for fairer competition in Japan's telecommunications market, the presidents of KDDI Corp. and Softbank Corp. said Wednesday at a government panel meeting on the NTT group and its operations. Softbank President Masayoshi Son called for the NTT group to lower leasing fees for fiber-optic circuits, saying that "low circuit-leasing fees prompted competition" in the ADSL Internet access service market. KDDI President Tadashi Onodera agreed and told panel members that "the terms that KDDI has been offered in leasing fiber-optic circuits are not the same as those offered to NTT group companies." In its response, NTT indicated its intention to continue making more fiber-optic circuits available to third-party firms, but also insisted that leasing fees need to be raised because it has been incurring losses from the operations. NTT also said it will be able to roll out 30 million fiber-optic circuits nationwide on its own, but will need public funding to ensure that the circuits reach all households, including those in rural areas. The discussions at the Wednesday meeting of the Communications Ministry's panel on telecommunications and broadcasting also led to the topic of the NTT group's overwhelming dominance in the industry. "The NTT group should spin off the division that lays and manages local circuits, including NTT East Corp.'s and NTT West Corp.'s fiber-optic cables," Onodera said. Son went a step further and suggested that such a spinoff should create multiple regional companies rather than one entity to promote competition. The Softbank president also said that if his suggestion on multiple regional firms is realized, it may be possible to replace 60 million phone lines nationwide with fiber-optic cables in the next five years. This would push down the leasing charge for a fiber-optic circuit to 690 yen per month, according to Son. "I do not understand why NTT cannot make money when it is leasing a fiber-optic circuit for 5,000 yen a month," he said. Onodera also expressed concern about the NTT group's overwhelming dominance and said the holding company should be abolished and capital ties completely cut off among NTT East, NTT West, NTT DoCoMo Inc. and other group firms. Softbank supported this as well, but NTT President Norio Wada was opposed. "In the telecommunications business, it is important that a company can provide all services responsibly," Wada said. The advisory panel to Communications Minister Heizo Takenaka is slated to compile its final report by June. Some of the report's recommendations are expected to be reflected in the government's basic economic and fiscal management policies for 2006. (The Nihon Keizai Shimbun, March 23, 2006)

Govt To Promote Wireless Commun System Having Fiber-Optic Speed
The Ministry of Internal Affairs and Communications plans to make next-generation high-speed wireless communications available to home and corporate users so they can send and receive large amounts of data and sharp images at the same speed currently possible through fiber-optic networks, The Nihon Keizai Shimbun learned Saturday. If the initiative is realized, it would improve the communications environment in older condominiums and office buildings that are difficult to link to fiber-optic lines, enabling residents and workers to receive and transmit high-resolution images more easily. The ministry intends to promote the advanced networking technology -- an upgraded version of existing wireless LAN technology -- and a UWB (ultra wide band) communications system that can send data and images about five times faster than a fiber-optic network, though the range of data transfer is limited to a single room. The advanced technology transmits data at a speed of 100 megabits per second within an area 200 meters in diameter and can simultaneously send more than one high-resolution television program at a time, something that cannot be done through existing wireless LAN systems. The technique can be applied to large corporate LANs that constantly receive and transmit large volumes of data, as well as be used by telecom carriers to provide ultra-high-speed Net services in public places like railway stations, airports and hotels. The wireless technology will also make it possible to equip an old building with a high-speed LAN because it does not require a line to be installed. The UWB system will be used to connect digital home appliances, personal computers and recording devices with the Internet, enabling about 50 TV programs to be sent or received at the same time. (The Nihon Keizai Shimbun, March 19, 2006)

Vodafone Deal To Make Softbank No. 3 Telecom Firm In Japan
The recent agreement with Vodafone Group Plc to purchase the U.K. cellular phone giant's Japanese unit will transform Softbank Corp. into the third-largest comprehensive telecommunications service provider in Japan.　The acquisition of Vodafone KK, which was announced Friday, will bolster Softbank's group sales by about 150% to around 2.5 trillion yen, narrowing the gap with KDDI Corp.'s roughly 3 trillion yen group sales and Nippon Telegraph and Telephone Corp.'s group sales of about 11 trillion yen.Following the autumn introduction of the so-called number portability system, which will allow cell phone users to switch service providers without losing their existing phone numbers, cell phone service firms are expected to engage in a fierce battle to lure rivals' customers. Many industry watchers predicted that Vodafone would be hard pressed to stop losing customers to KDDI and NTT groups once the system is introduced. Now that Vodafone will come under the Softbank group's control, the cell phone service firm may slash prices and offer new services. Softbank President Son Masayoshi said Friday that his company "is considering many things" for the cellular phone business. Because the Softbank group already offers fixed-line phone services through Japan Telecom Co. and broadband Internet services via Softbank BB Corp., the addition of Vodafone KK will enable the group to provide comprehensive telecommunications services, as well as various online services and content offered by Softbank unit Yahoo Japan Corp. In the future, the Softbank group will likely start packaging products, such as cellular and fixed-line phone service, as well as high-speed Internet access and Web-based television program retransmission, to its customers. Softbank and Vodafone Group have also agreed to discuss the possibility of a joint venture for mobile content distribution. A business tie-up with the U.K. firm, which controls a quarter of the global cellular phone service market with a customer base of roughly 500 million people, will likely present the Softbank group a great opportunity to enter the global telecommunications service market. (The Nihon Keizai Shimbun, March 18, 2006)

Softbank Signs Y1.75tln Deal To Buy Vodafone's Japan Unit
Softbank Corp. announced Friday that it has reached a final agreement to buy Vodafone Group Plc's Japanese unit for 1.75 trillion yen. Under the agreement with the British cellular phone giant, Softbank within the next two months will acquire a 97.7% stake in Vodafone KK through a wholly owned subsidiary and take over roughly 200 billion yen in the unit's interest-bearing debts. To finance the deal -- the largest business acquisition ever by a Japanese firm -- Softbank intends to raise 1.1 trillion yen to 1.2 trillion yen via leveraged-buyout financing, borrowing the money using Vodafone KK's assets as collateral. In addition, Softbank will provide 200 billion yen, with group firm Yahoo Japan Corp. pitching in 120 billion yen. "We thought we could develop business from a much bigger base than starting from scratch," Softbank President Masayoshi Son said of the acquisition in a news conference Friday. "We aim to develop a comprehensive digital business that delivers services and content sought by users, rather than developing an ordinary telecommunications business." Softbank is the second-largest broadband Internet access provider in Japan, after Nippon Telegraph and Telephone Corp. And its Yahoo Japan unit operates the most popular Web portal in the nation. Boasting 15 million customers, Vodafone is Japan's third-largest cellular service company. The fate of the Vodafone brand in Japan will likely be decided over the next six months to one year. With the acquisition of Vodafone KK, Softbank will seek to develop a diversified communications business, integrating news, video and other online content with its cellular and fixed-line services. Softbank and Vodafone Group have also agreed to establish a joint venture for providing Internet access services to cell phones. In addition to efforts to make Internet services offered by Yahoo Japan accessible from mobile handsets, they are expected to jointly develop cell-phone-based Net access services for Vodafone Group firms in other countries. (The Nihon Keizai Shimbun, March 18, 2006)

Softbank's Finances Under Scrutiny Following Vodafone Buyout
Softbank Corp., which is borrowing about 1.3 trillion yen to finance its purchase of British phone service provider Vodafone Group Plc's Japanese unit, now faces the challenge of dispelling market concerns about its financial health. The sum is the largest-ever to be raised for a buyout by a single Japanese company. A syndicate of banks led by Mizuho Corporate Bank and Deutsche Bank will extend between 1.1 trillion yen and 1.2 trillion yen in bridge loans. From around September, Softbank will procure funds through fixed-rate long-term instruments. Softbank -- the nation's second-largest broadband Internet access provider -- will also borrow 100 billion yen from Vodafone Group. In addition, Softbank will raise 420 billion yen through equity financing, with its cell phone entity issuing 120 billion yen worth of preferred shares to Yahoo Japan Corp. and 300 billion yen to Vodafone Group. With the transaction to be made in cash, instead of stock swaps, and Softbank depending on cash flow from its operations for recouping the investment, the profitability of its business will be scrutinized. In reaction to the deal, the financial market is factoring in the expected deterioration of Softbank's financial health. The spread -- calculated by subtracting the value of government bond yield from that of its corporate bond yield -- had been about 1.2% until last month, but the gap has gone up to 2.4% after the acquisition plan was unveiled earlier this month. Market participants are becoming cautious because they have seen many unsuccessful large acquisitions in the past. Softbank's stock moved lower after the news broke. On Friday, Japan Credit Rating Agency Ltd. said it will re-evaluate its rating for Softbank bonds. In fundraising for acquisition, the borrower usually faces early debt repayment if financial strength of an acquired company falls below certain standards. (The Nihon Keizai Shimbun, March 18, 2006)

Softbank To Buy Japan Unit Of Vodafone
Softbank Corp. has reached a formal agreement with Vodafone Group Plc to purchase the U.K. mobile phone firm's Japanese subsidiary, Vodafone KK, it was learned Friday. The purchase price is estimated to be just under 2 trillion yen, sources close to the matter said. Softbank plans to announce the deal later in the day. Vodafone's Japanese unit is the third-largest cellular phone service provider in the country, with 15 million subscribers. (Nihon Keizai Shimbun, March 17, 2006)

KDDI To Offer Combined Fixed-Line, Mobile Phone Service
KDDI Corp. announced on Monday that it will begin in July a combined fixed-line and mobile telephone service for companies. For the service, KDDI has developed the E02SA, a handset that is compatible with wireless-LANs (local area networks). The handset can be used as a mobile phone outside the company and for internal-line service inside the company. KDDI will team up with system configuration companies and promote the phone to corporations as a way to reduce communication charges. The new handsets can function as internal-line phones in the company, communicating with fixed-line internal phones via wireless LAN base stations. The handsets can also make use of a fixed-line service when calling an outside line from within the company. In addition, they can be configured to ring when an outside party dials the number of a fixed-line phone in the company. (The Nikkei Business Daily, March 7, 2006)

Softbank Stock Rises On Word That Firm Will Buy Vodafone KK
Softbank Corp. shares ended 120 yen higher at 3,430 yen Monday following news at the end of last week that the company had reached a basic agreement to purchase Vodafone KK, the local subsidiary of U.K. mobile phone giant Vodafone Group Plc. Sparked by intensifying expectations for improved profits at its telecommunications division, Softbank stock recorded its first rebound in six days, with turnover leading the first section of the Tokyo Stock Exchange. The shares also attracted buy orders from individuals trading online. If an agreement is reached during final negotiations, Softbank would acquire Vodafone KK's customers, who numbered over 15 million at the end of January. And instead of entering the cell phone business using its license, starting capital spending and looking for customers from scratch, it will be able to push ahead with expanding its operations base. In the leadup to number portability, which begins in autumn, the acquisition comes just in time for the full-scale battle for customers. But if the purchase has a price tag of 2 trillion yen, it is likely to take Softbank nearly seven years for it to log a return on its investment, even if Vodafone's fiscal 2004 operating profit of over 100 billion yen continues to be matched. In addition, Softbank's total assets will more than double if it borrows all the funds required for the takeover, and shareholder equity, which was just 12% as of Dec. 31, will fall further. On the corporate bond market, the yield on Softbank's straight bonds that mature in nearly five years will increase, albeit slightly. There are indications that institutional investors are already concerned about a deterioration in Softbank's financial health because of this large-scale investment. (The Nihon Keizai Shimbun, March 7, 2006)

Softbank Slated To Buy Vodafone Group's Japan Cell Phone Ops For Y1.7-2tln
Softbank Corp. has reached a basic agreement to buy Vodafone Group Plc's roughly 98% stake in Vodafone KK, the U.K. mobile phone giant's local subsidiary and Japan's third-largest cell phone service provider, The Nihon Keizai Shimbun learned Saturday. The deal is projected to be worth 1.7-2.0 trillion yen, which would make it one of the largest acquisitions by a Japanese company. The purchase of Vodafone KK would boost Softbank's annual sales to around 2.5 trillion yen, up roughly 150% from the current level, making it one of the "big three" suppliers of comprehensive telecommunications services, covering both fixed-line and cell phone operations, along with the Nippon Telegraph and Telephone Corp. group and KDDI Corp. Annual sales at the NTT group stand at about 11 trillion yen, followed by KDDI at about 3 trillion yen. The Vodafone Group indicated Saturday that it would accept in principle Softbank's offer to purchase its Japanese unit. The Tokyo-based Internet-services company intends to enter final negotiations to determine the acquisition price early next week, while performing due-diligence to assess the target company's assets. Softbank aims to reach a final agreement with Vodafone Group by the end of March. Softbank will not seek to acquire the remaining stake of about 2% held by institutional investors and other shareholders. The Tokyo-based firm is likely to use various means of financing to raise the capital needed for the investment, such as issuing new shares and conducting a leveraged buyout, which uses the assets of the acquired firm as collateral. Last November, Softbank obtained the go-ahead from the Communications Ministry to enter the cell phone business, but it could take up to one and half years to build up the necessary infrastructure for the service, not to mention a huge amount of money. The planned acquisition will enable Softbank to take over about 15 million Vodafone customers and greatly move up the launch of its cell phone business, which was originally scheduled for next spring. (The Nihon Keizai Shimbun March 4, 2006)