Second in a five-part series on reorganizing the domestic telecommunications industry

Staff writer

Much to the disappointment of telecommunications carriers both at home and abroad, the huge size of Nippon Telegraph and Telephone Corp. will remain intact even after its reorganization slated for Thursday.

Yet, the move signals the beginning of a new chapter in telecom deregulation in Japan, bringing the management expertise of rivals into closer scrutiny and heating up the relatively lukewarm competition of the past.

"In its current form, NTT is gigantic," said Hiroshi Sakurai, general manager in charge of corporate planning at Japan Telecom Co. "That huge carrier will become even bigger (with its reorganization into a holding firm). It can offer a full lineup of services and could be the sole winner in all sectors."

Initial moves to reorganize NTT began with a plan to break the company up as the second phase of the deregulation of the monopolized telecom sector, after former Nippon Telegraph and Telephone Public Corp. was privatized in 1985 and new telecom carriers were born.

The so-called new common carriers, established after the first stage of telecom deregulation, had demanded that NTT be completely divided up, hoping the reorganization would topple it from its dominant position and level the playing field.

However, as a result of lengthy negotiations between NTT and the Posts and Telecommunications Ministry, which ended in 1996, NTT managed to preserve its unity as a corporate group under a holding company.

This came as a letdown to rival carriers and aroused strong concerns that rules for "fair" competition between the NTT group and other carriers were not really in place.

For instance, rival carriers find it problematic that NTT Communications Corp., which will be the group's international and long-distance carrier, can commission sales activities to its two planned regional carriers — East-Nippon Telegraph and Telephone Corp. and West-Nippon Telegraph and Telephone Corp.

The rival carriers, which must rely on NTT's local networks to deliver their services, question whether the NTT regional carriers will push their rivals' services with the same zeal as they probably would those of NTT Communications.

"NTT will start operating in a new form before these issues are clearly settled," said Mamoru Mishina, a spokesman for DDI Corp., the country's second-largest telecom carrier. "Discussions on the breakup took as long as 15 years. Nevertheless, the reorganization contains the danger that it might reverse course back to an (NTT) monopoly again."

In response to such fears, NTT President Junichiro Miyazu argues that fair competition will be maintained because the two regional carriers will be special companies, rather than private ones, over which the Posts Ministry will exercise strong authority.

Some pundits point out that the reorganization of NTT may benefit competitors if the carrier is unable to fully utilize its corporate group power.

"I hope (that) once the company is broken up into local companies, cross-subsidization between NTT will stop," said Darryl Green, president of AT&T Japan Ltd. "One thing that makes NTT very tough is they are able to take profitability from one area in business and move it to another."

Competitors are also watching to see how tightly and for how long NTT, as a holding company, can control the corporate group, because once a company is broken up, its unity tends to loosen over time.

As another possible benefit of the regrouping, other carriers hope to see a fall in interconnection rates they currently pay to NTT for the use of its local networks and will continue to pay to the regional carriers after July 1.

The reorganization will require NTT Communications to pay interconnection charges to the NTT regional carriers. This will put NTT Communications on the same side as NTT's competitors in price talks, possibly enabling its rivals to also negotiate more favorable charges.

Clive Ansell, president of BT Japan, a subsidiary of British Telecommunications PLC, said it is important to secure transparency in transactions among the NTT group companies. He added that the roles regulators play in case competition becomes skewed must also be clarified.

Yet, there is no doubt that the reorganization of NTT has been stirring up a sense of crisis among its rivals and driving them to offer a full range of services to combat the move.

Japan Telecom obtained an international unit by acquiring the former International Telecom Japan Inc., while KDD Corp. merged with the former Teleway Corp. to gain a domestic service unit. DDI Corp. launched international services through tieups with foreign carriers. "We have a sense of crisis about the fact that a carrier of extraordinary size is offering international services. But we must cope with the situation," said Ichiro Kondo, managing director of KDD Corp., a former exclusively international operator. "We are trying to expand our domestic operations and bring the ratio (of international and domestic services) to 50-50."

As a way of becoming less dependent on NTT's local networks and gaining control of their cost base, these carriers are trying to extend their networks closer to customers and directly reach them with wireless networks. "The access charges (paid to NTT) account for 40 percent of our sales of long-distance services," DDI's Mishina said. "We plan to slash this cost by linking our network to that of NTT at points closer to customers."

Mishina noted that DDI regards mobile services as an alternative to NTT's local network. The group is considering offering a wide range of services, from fixed-line to mobile links, in a package, so that users will not have to pay a number of different carriers, he said.

Meanwhile, foreign carriers hoping to crack Japan, the world's second-largest telecom market, regard the competition between NTT and other domestic carriers as a sort of proxy war.

Earlier this year, AT&T Corp. and British Telecommunications decided to make a capital investment in Japan Telecom amounting to 220 billion yen.

"We should imagine that alternative local access (to NTT's network) is a major area for investment," Ansell said. "The focus (of the cooperation) is on making Japan Telecom a successful challenger to NTT."