First of a five-part series on reorganizing the domestic telecommunications industry

Staff writer

When Nippon Telegraph and Telephone Corp., the world's largest telecom group, makes its belated international debut later this week, it will face a global industry undergoing structural upheavals triggered by deregulation and technological advances.

Under revisions to the NTT Law that take effect Thursday, the NTT group — which posted consolidated sales of 9.7 trillion yen in fiscal 1998 — will reorganize under the umbrella of a holding firm.

Although NTT has been providing international services to corporate customers through affiliates since 1997, the changes will lead to NTT's first direct entry into international services since it was founded as the state-run Nippon Telegraph and Telephone Public Corp. in 1952.

In contrast to other telecom carriers that started out as conventional voice operators, NTT will place priority on data transmission and value-added services from the outset.

"We are a latecomer (in the global market). ... We see no business incentive in doing the same thing as others," said Tatsuo Kawasaki, vice president in charge of global strategy at NTT-Long Distance and Global Provisional Headquarters. "(Instead) we are considering some sort of combination (of services), if they make economic sense."

Although NTT lost a recent bidding war with Britain's Cable & Wireless PLC over control of International Digital Communications Inc., an international operator, it is playing down the impact of the loss, saying its schedule of launching international services on Oct. 1 remains intact.

Competitors view as NTT's strengths its huge individual and corporate customer base covered by its nationwide network as well as its sheer size as a group offering comprehensive products ranging from fixed-line to mobile services.

Under the planned reorganization, NTT will split into two regional carriers — tentatively called East-Nippon Telegraph and Telephone Corp. and West-Nippon Telegraph and Telephone Corp. — and NTT Communications Corp., which will offer long-distance and international services under the holding firm.

NTT's current subsidiaries, including NTT Mobile Communications Network Inc., the country's dominant mobile carrier, and NTT Data Corp., a growing information services firm, will fall under the direct control of the holding company, though their management at present is separate from NTT.

"All indications are that NTT will be a tough competitor for everyone ... with their resources and their experience," said Clive Ansell, president of BT Japan, a subsidiary of British Telecommunications PLC. "I certainly don't wake up at night feeling sorry for NTT."

NTT's entry into the global market comes as traditional telecom alliances approach a turning point, with established carriers undergoing realignment as new players experience rapid growth, mainly in the United States.

Although foreign carriers have been approaching NTT on possible capital cooperation and exclusive tieups, NTT maintains it will take a case-by-case approach on cooperation with others and has no intention of joining forces with a particular carrier or alliance.

"We are not saying that we won't team up with anyone," Kawasaki said. "If we do, for example, it would be on a project-by-project or regional basis. But we will not do the old type of exclusive alliances because we don't see the point of such tieups."

Noting the problems faced by exclusive telecom alliances such as World Partners and Global One, Kawasaki said there is no successful example of such groupings to date.

AT&T Corp. and BT announced a plan last July to establish a joint venture to offer intracountry services as well as wholesale services to other carriers.

Because AT&T is a core member of World Partners, the plan triggered the breakdown of that 20-carrier alliance, which will be dissolved by the end of this year.

Kawasaki also noted that the intentions of AT&T and BT in setting up their proposed global venture are unclear.

As for Global One, formed by Deutsche Telekom AG, France Telecom SA and Sprint of the U.S., its future has similarly become uncertain, with the two European carriers remaining at odds over the failed takeover of Telecom Italia SpA by the German carrier.

The existing alliances no longer seem to make sense in an industry where worldwide deregulation has privatized state-run carriers and promoted in-country competition. In addition, multinational companies are increasingly demanding seamless services of the same quality anywhere in the world, nudging major carriers to accelerate competition.

"Traditional carriers used to be friendly with each other because their territories were clearly defined and they didn't compete on each other's turf," said Hiroaki Koga, a researcher at KDD Research Institute. "But now those carriers have to go out and compete in others' markets. They are no longer friends."

With demand rising for seamless, uniform-quality service, loosely knit alliances cannot deliver what their corporate customers want because they lack fast decision-making mechanisms, one industry analyst said.

Another result of deregulation is the new breed of telecom carriers such as Level 3 Communications, Inc. and Qwest Communications, both of the U.S. Both have grown rapidly by using Internet-based technology to build networks at a much lower cost than the conventional telecom infrastructure.

In the case of Level 3, new technologies reportedly whittled down the cost of building a network to one-27th or less than that of traditional networks. Also, these low-cost carriers have fewer employees than their traditional counterparts.

While the new carriers tend to be weak in terms of customer base and experience, traditional ones need to improve cost-efficiency, in most cases drastically, to survive global competition, industry pundits say.

NTT's Kawasaki dismissed the possibility of competing with up-and-coming carriers, saying that will only happen if NTT enters the U.S. market and tries to build a fiber-optic network there.

However, Koga pointed out that the new carriers may become more comprehensive as corporate nature, while Western-style mergers and acquisitions may also push them to pursue growth. He noted those carriers may well become the next focus of cross-border alliances.

Although NTT places priority on Asia through investments in and management participation with carriers in the region, it faces competition with other global carriers trying hard to set a foothold in Asia, which is still relatively protected by government regulations and thus offers an untapped market.

"I think there are a lot of players in the (international) marketplace right now," said Darryl Green, president of AT&T Japan Ltd. "I'd be curious whom NTT takes a share from."

But as it sets its sights on overseas markets, NTT cannot afford to rest on its laurels at home. It faces competition from foreign carriers entering the domestic arena after Tokyo opened up the world's second-largest market by lifting restrictions on foreign capital participation in major telecom carriers in February 1998.

"The domestic market is actually much bigger," Green said. "I think there is a lot of room to compete with NTT domestically."

In a sense, NTT's Kawasaki shares this view, noting NTT must first prevent foreign carriers from taking away its domestic market share as they seek to penetrate Japan by expanding ties with existing Japanese carriers.

"We need to wait a while and see whether foreign carriers will become a threat to us," Kawasaki said. "The size of competitors doesn't matter. The issue is whether they are efficient."