Telecommunications

November 2005

CELL PHONE: 3 Firms Take Different Roads To Enter Market
Softbank Corp., eAccess Ltd. and IPMobile Inc. received the government's formal approval Thursday to enter the cellular phone service market, becoming the first newcomers in the sector in 12 years. At a news conference the same day, Softbank Corp. President Masayoshi Son said, "Our strength lies in the depth and breadth of our group's Internet business." Taking advantage of its capital tie-up with Yahoo Japan Corp., Softbank plans to join forces with Net access provider Yahoo BB and launch the service through a wireless LAN on April 1, 2007. Although Softbank is seen as a "formidable price buster" in IT-related services, it is unlikely to offer deeply discounted rates for its cellular phone service, which will require a huge investment to launch. In fact, the industry took note of the firm's contribution to fueling a price war only when it moved into the ADSL business in 2001 by offering service at a 50% discount. When Softbank started a fiber-optic communications service, its charges were set around the same levels as its competitors. Meanwhile, Sachio Senmoto, the head of ADSL broadband service firm eAccess,said, "We want to benefit from digital content peculiar to Japan and change the business model for cell phone service here." The firm has been preparing to offer a mobile service -- slated to start on March 15, 2007 -- since long before it obtained a license, by forging a capital tie-up with Tokyo Broadcasting System Inc. It also plans to receive several billion yen in investment from Yoshimoto Kogyo Co., from which it also hopes to obtain content in the form of comedies and other entertainment programs. Leveraging its partnership with the television broadcaster and the entertainment firm, eAccess will examine the possibility of allowing its subscribers to view TV programs. Itsuo Sugimura, president of IPMobile, a broadband service firm, said, "We want to explore demand particularly for our machine-to-machine (M2M) service." It will sell cellular phones that are designed to communicate with vending machines, game machines and automotive on-board equipment, as well as provide a mobile communications service for the handsets, starting Oct. 1, 2006. It aims to sign up 7 million subscribers for the M2M service, or 60% of its projected 11.6 million cellular phone customers. Because it will not be possible for the companies to operate their respective businesses without partners, their success will hinge on efforts to woo a huge amount of investment to finance the costly enterprises and enlist cooperation from communications equipment makers, an observer said. (The Nikkei Business Daily, November 11, 2005)

EDITORIAL: Open Telecom Environment Must Be Secured In IP Era
The restructuring plan recently announced by Nippon Telegraph and Telephone Corp. clearly signals that a transformation is occurring in the telephone industry due to the growth of "Voice over Internet Protocol (IP)." NTT's plan focuses on integrating Internet-based services offered by its group companies. The IP infrastructure businesses will be jointly handled by the group's local carriers -- NTT East Corp. and NTT West Corp. -- and the wireless service provider, NTT DoCoMo Inc.. Internet connections and telephony services will be integrated into NTT Communications Corp., the group's long-distance service operator. In addition, the two local phone service companies and DoCoMo will team up to provide services based on "fixed-mobile convergence (FMC)," which uses so-called "cleaver" technology to provide both the freedom of mobile phones and the reliability and low cost of fixed lines. Subscribers can use the same handset to make calls via fixed lines at home and on mobile networks when they are outside. NTT also wants to turn NTT Communications into a provider of unified, all-inclusive telecom services for corporate customers. All these steps, NTT claims, will not require any revisions to the NTT law, which set the rules for NTT's breakup in 1999. President Norio Wada says the law only covers traditional phone services and not Internet-based businesses. NTT needs to adjust its organizational structure to suit the new operating environment, as its main rival, KDDI Corp., is moving toward a converged fixed-mobile service while joining hands with Tokyo Electric Power Co. through the purchase of the power company's telecom unit, Wada argues. But NTT's reorganization blueprint inevitably raises antitrust concerns. Last year, NTT announced a plan to replace half of its 60 million domestic phone lines with fiber-optic cables for IP telephony services by 2010. This will secure NTT's dominance in the market for next-generation phone services. The NTT group controls 70% of the optic-fiber service market and nearly 60% of the mobile market. A large market share translates into huge customer-attracting power in the telecom industry, more so than in other industries. NTT has promised to open its IP network to rivals. But there are legitimate concerns about whether NTT will really offer deals that do not put competitors at an unfair disadvantage. Internet telephony is already prompting strategic responses by telecom companies worldwide. BT Group plc, Britain's telecom firm, has already announced a plan to replace its backbone network with a global IP network. But the British government has expressed concern about BT's expansion into the IP business while maintaining its dominant status in the traditional markets. The government has separated the IP network business from BT into a new organization so that competitors can use the infrastructure on equal terms. The situation in Japan has its roots in the flawed approach to the NTT breakup in 1999. The holding company formula has failed to produce satisfactory effects in terms of weakening NTT's control over the markets. Moreover, the scheme paid little attention to IP telephony, which was just beginning to emerge at the time. Regulators need to study the antitrust concerns about the NTT group's planned restructuring and take regulatory steps to promote an open telecom environment that stimulates innovations and supports the Japanese telecom industry amid the growing international competition. Such an open environment is essential in the IP era, and the government must start reviewing its telecom policy within this technological context. (The Nihon Keizai Shimbun, November 11, 2005)

New Entrants Likely To Stir Competition In Cell Phone Market
The Radio Regulatory Council, an advisory panel to the Communications Minister, on Wednesday recommended that three newcomers be allowed to enter the cellular phone service business. The council's recommendation centers around allocating the 1.7 GHz spectrum to Softbank Corp. group and the eAccess Ltd. group, and the 2.0 GHz band to IPMobile Inc. These three firms are expected to first set up base stations and build up their networks, then officially apply for licenses to the Ministry of Communications. If they start offering services in fiscal 2006, as many expect, it will mark the first new market entrance in 12 years. The newcomers are expected to bring in new fee structures and services and challenge the domination enjoyed by NTT DoCoMo Inc., KDDI Corp. and Vodafone KK. With number portability, which will allow cellular phone users to keep their current phone numbers even if they switch to other service providers, to take effect in the latter half of 2006, the three new players could steal considerable market shares from the existing companies. Fixed-line phone charges declined sharply as newcomers introduced price competition. Cell-phone charges dropped more than 70% in terms of both basic monthly fees and communication charges over the last decade, but they still stand considerably higher than fixed-phone charges. (The Nihon Keizai Shimbun, November 10, 2005)

NTT DoCoMo Sees Operating Income Rise 2%, Supported by Reduced Handset Marketing Cost
NTT DoCoMo, Inc. has revealed its consolidated financial results for the first half of FY2005 (April-September). Sales decreased 3% year-on-year (YoY) to Y2.3735 trillion, operating income inched up 2% YoY to Y558.4 billion and net income grew 15% YoY to Y385.3 billion. The key factor behind the decreased sales was mobile phone handset sales, which sharply dropped 23% YoY to Y222.5 billion. This impacted and curtailed overall sales by Y65.7 billion in six month. Voice sales edged down 1% (Y17.1 billion) YoY, while packet sales were up 1% (Y7.5 billion) YoY. "ARPU is Expected to Decline Again," Predicted President Nakamura. In July-September 2005, average revenue per user (ARPU) decreased by Y290 YoY to Y7.050. Voice ARPU dropped by Y270 YoY to Y5,170, while data ARPU decreased by Y20 YoY to Y1,870. Monthly minutes of use (MOU) were 152 minutes, compared to the 155 minutes a year ago. ARPU of the "FOMA" third-generation mobile phone service declined by Y840 YoY to Y9,050 and its MOU decreased by 28 minutes to 211 minutes. Commenting on the ARPU change, Masao Nakamura, President of NTT DoCoMo, said, "ARPU decline has been slowing down thus far in FY2005. However, we anticipate ARPU to make a downturn again, drawing an S. We also expect FY2005 and FY2006 will be a bleak period for us," indicating a possibility of further aggravation. Cancellations during the July-September period decreased 0.27 point to 0.81%. Cancellations remained at the lowest 0.81%, following the preceding April-June period. Asked for a comment on this, Nakamura indicated his view by saying, "We consider this is due to lack of features like mobile phone cameras that once prompted a broad range of users to replace handsets. Our "Osaifu-Keitai" contactless IC card capability can hardly promote replacement, unless compatible reader/writers penetrate streets more. I assume such a circumstance caused the lower cancellation rate than before." Boosts FY2005 Operating Income Forecast by Y20 Billion. In light of such a trend with decreasing sales and an increasing income, NTT DoCoMo revised its earnings forecasts for the full-term of FY2005. Sales are now expected to be Y4.784 trillion, Y21.0 billion lower than the previous estimate (released on May 10, 2005), while operating income is predicted to be Y830 billion, Y20 billion higher than the preceding estimate. (Nikkeielectronics, November 01, 2005)