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A new stage of competition will begin Sunday in the telecom industry when three major firms merge into KDDI, a long-awaited rival to the behemoth telecom group led by NTT Corp.

The three are long-distance call company DDI Corp., international call firm KDD Corp. and cellphone operator IDO Corp.

“The long-held dream of combining private telecom firms into a great one has finally been realized,” Jiro Ushio, who is set to become KDDI chairman, said at a press conference in April.

KDDI’s projected consolidated sales in fiscal 2000 — worth some 3 trillion yen — however, are no match for the NTT group’s projected 10.82 trillion yen in sales.

The question, therefore, is not whether KDDI can beat NTT but whether it can retain and strengthen its position as the nation’s No. 2 telecom firm, observers agree.

Competition in the industry has been intensifying in recent months ahead of the introduction of a user registration system in May.

Under the system, users register their preferred telecom firm in advance, a move expected to make it difficult for a carrier to win back customers once they are registered elsewhere.

KDDI decided to enter the local call market by renting NTT’s local access networks, fearing it would otherwise lose potential users of its long-distance and international lines after May, KDDI officials said.

“It’ll be a survival (race),” said Ryuichi Kinoshita, who is to be appointed managing director of KDDI. “If we lose customers in that competition, the basis of our business could be seriously affected.”

But Kinoshita said that KDDI is entering the local call market unwillingly at this stage. With the NTT group enjoying a virtual monopoly over local access networks, a level playing field has yet to be formed, he said, calling for additional regulations over the telecom giant.

KDDI plans to charge 9 yen every three minutes for local calls, against NTT’s rate of 10 yen.

But if NTT lowers the rate to 8 yen, KDDI and other competitors would plunge into the red if they tried to compete because they would have to pay connection fees to NTT, Kinoshita claimed.

“It’s competition only in appearance, not in reality.”

KDDI, however, should not stick too much to the shrinking conventional fixed phone market because the true battlefield is the rapidly growing mobile phone market, industry analysts say.

“There are few elements that would help (KDDI) beat NTT on the fixed-line market,” said Masaharu Miyachi, senior analyst at Kokusai Securities Co.

Profits in the fixed-line market will continue to shrink in the long term, which, he said, is another reason why KDDI should concentrate more on the cellphone business.

At the moment, however, prospects for KDDI’s cellular business remain grim. The number of subscribers to “au” (access to you) cellphone services has been falling since July, when DDI and IDO established the joint brand.

But Shinji Moriyuki, senior analyst at Daiwa Institute of Research, said there remains hope for recovery.

“The balance between marketing, content and equipment investment has been improving,” he said. “KDDI is also studying cases of other (rival) companies.”

DDI, eager to utilize the latest technology, tended to invest too much in equipment despite lacking a clear marketing strategy, he said.

This is partly because Kyocera Corp., DDI’s largest shareholder, profited by selling equipment and terminals to DDI.

But Toyota Motor Corp., known for its well-prepared marketing strategies and aggressive cost-cutting efforts, participated as a major shareholder and has changed DDI’s investment strategy.

Reflecting the new strategy, KDDI has decided to introduce next-generation multimedia cellphones with transmission capabilities of 144 kilobits per second next year, despite NTT DoCoMo Inc.’s planned introduction of cellphones of 384 Kbps.

Investment for next-generation cellphones in general is expected to be huge, with some observers predicting it will top 1 trillion yen.

But DDI Corp. President Yusai Okuyama, who will also be KDDI’s president, reportedly claimed that KDDI’s strategy will allow it to save about 40 percent on investment costs.

Moriyuki calls the strategy the “right choice,” saying that DDI Corp., which has always favored investing in advanced technology, would not have adopted the strategy without checking with Toyota.

“The speed of 144 Kbps is double the speed of the current ISDN (integrated services digital network),” Moriyuki said. “That’s good enough for a cellular phone with such a small display.”

Miyachi of Kokusai Securities, too, acknowledges the likelihood of some improvement in KDDI’s marketing strategy.

But Miyachi believes NTT DoCoMo still has the advantage, as shown by its alliance with Sony Corp.’s PlayStation2 and America Online Inc.

The key to KDDI’s success will be, after all, if the company can concentrate resources to offer more attractive contents for multimedia mobile services, Miyachi said.

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