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Information Technology Industry Overview

11, 01. 2004

Current State of the Japanese IT Industry

World's Leading Broadband Services

Young business managers check information in the street
Young business managers check information in the street
 

   Japanese IT industries experienced a setback with the bursting of the IT bubble in 2000, but negative growth was later reversed through massive budgetary injection by the government towards the e-Japan initiative.The IT industry has been growing ever since.
   The objective of the e-Japan initiative is to make Japan the world's most advanced nation in IT use by the end of fiscal 2005.One of its targets is to spread the use of high-speed (broadband) Internet access to 40 million households.

Launched in 2001 under the Mori Cabinet, e-Japan is a governmentprogram that is similar in nature to America's National Information Infrastructure (NII) and Singapore's IT2000 initiatives, although Japan lagged behind these two countries in the launch of its program. However, through deregulation and the promotion of competition, Japanese broadband services have been able to achieve a level as a global leader in terms of both low costs and high quality.

Targets established in e-Japan related to IT infrastructure are on their way to being fulfilled. As for the realization of an electronic government which would enable administrative procedures to be conducted online, although a portion of commercial firms are beginning to use such services, it is not yet at a stage where the general public can enjoy its benefits

Fiber terminaton module that accommodates optical fibers
Fiber terminaton module that accommodates optical fibers

   The monthly costs for broadband services in Japan have fallen to a level of between 2,000 yen and 3,000 yen for Digital Subscriber Line (DSL) services and 6,000 yen to 7,000 yen for FTTH (optical fiber) services. Under a flat-rate system, however, an increase in the volume of traffic is not directly tied to increases in revenues for broadband service providers, making it difficult for them to ensure profits. Because of such financial difficulties, the reorganization and consolidation of the telecommunications industry has proceeded. As of October 2004, the major players related to IT infrastructure are being consolidated into three groups: NTT, KDDI and Softbank. POWEREDCOM, a new market entrant backed by an electric power company, has not yet become financially stable.

  Meanwhile, a major change is beginning to take place in the telecommunications industry that supports IT infrastructure. The fixed telephone service market has seen sluggish growth since the 1990s due to the expansion of the mobile phone market and the reorganization of fixed-line carriers have taken place. Mobile phones have spread explosively over the last 10 years, and NTT, which had marked more than 60 million fixed-line subscriptions at one point, is losing its fixed-line market shares to mobile phones. NTT subscriptions have now fallen to below 50 million, and its management base is being rocked. There is fear that revenues from fixed telephone services will be further threatened by the recent spread of Internet Protocol (IP) phones. It has become difficult to form an outlook on the future of the fixed telephone service business, and NTT is considering a further reorganization of its operations.
   Besides NTT, major players in the fixed telephone service industry are KDDI (a merger between KDD, DDI and IDO), Softbank (which acquired Japan Telecom), and telecom carriers backed by electric power companies.

Digital Television Broadcasting Proceeding at a Rapid Pace

Television broadcasting in Japan began in 1953. Today, television has spread to almost all Japanese households. Analog broadcast satellite (BS) broadcasting began in 1989. There are four analog BS television channels: NHK(Japan's public broadcaster) has three, including a Hi-Vision (high-definition TV) channel, and the fourth is operated by a commercial broadcaster. NHK, which gained confidence in the practical application of its Hi-Vision technology, made a move to make Hi-Vision a world standard, but it abandoned its move for the international standardization of analog Hi-Vision technology due to the movement toward digitization seen from around 1990.

  Meanwhile, the digitization of multichannel broadcasting utilizing communication satellites (CS) began from 1996. 200 channel broadcasts were launched at this time. J Sky B, led by Rupert Murdoch's News Corporation, and DirecTV (run by U.S.-based Hughes Electronics) entered the market, but unprofitable operations continued due to the proliferation of CS platforms. JSkyB merged with PerfecTV! and became SKY PerfecTV!, while DirecTV retreated from the Japanese market.
   Digital BS broadcasting also began at the end of 2001, with Japan's five commercial television networks all jumping to join the race.
   IP television broadcasting, which utilizes broadband lines, was launched in 2004. In addition to KDDI , Yahoo! BBTV (Softbank Group) and Plala TV (NTT), a series of new market entries are being made by Internet Service Providers (ISPs) and venture firms. A new race is beginning as many CS channels advance into broadband IP broadcasting.

  On the other hand, terrestrial digital TV broadcasting began in three major cities in Japan in 2003, lagging behind similar moves in the United States and the United Kingdom. A digital tuner or digital TV is necessary for viewing terrestrial digital TV broadcasts. The Japanese government is aiming to spread 12 million digital TVs by 2006 FIFA World CupTM Germany, and make a complete switchover to digital TV broadcasting by 2011. However, some are beginning to feel that it will be difficult to achieve these targets based on the current pace of developments.
   Digitization requires massive investment on the part of broadcasters, and whether or not local commercial broadcasters will be able to bear such costs is also becoming a major issue.
   With mobile broadcasting that sends broadcast signals from satellites directly to mobile terminals now also in the running, there is a melee occurring in the Japanese television broadcasting industry.

History

Telecommunications in Japan: a State Monopoly until 1985

   The Japanese telecommunications industry basically developed alongside the creation of a modern state in Japan by the Meiji government. As in European nations, it was a state monopoly, which continued until 1985 in the case of Japan.
   After the devastation of World War II in which the Japanese communications network experienced catastrophic damage, domestic telecommunications became a state monopoly under Nippon Telegraph and Telephone Public Corporation(NTT) from 1953, while international telecommunications was monopolized by KokusaiDenshin Denwa Company (KDD), which, despite being a joint-stock corporation, was under the jurisdiction of the Japanese government. Free market entry by private firms was not permitted during this time.

Home telephones used in various times
Home telephones used in various times
Public telephones used in various times
Public telephones used in various times

  Although advanced as a state monopoly, the recovery of the Japanese telecommunications network proceeded at a swift pace. The development of the infrastructure progressed steadily, and direct dialing was achieved nationwide in 1979. However, the inefficiency of and wasteful spending by state-owned monopolies were gradually revealed. Following the lead of the UK in its privatization of British Telecom, the Japanese government proceeded to privatize NTT as part of its administrative reforms of the 1980s. Policies to promote competition in telecommunications were also introduced. After NTT's privatization in 1985, new common carriers such as Japan Telecom (major shareholder at the time: the now defunct Japan National Railways), Daini Denden Incorporated (DDI) (founded by private sector companies) and Teleway Japan (backed by the Japan Highway Public Corporation) entered the long-distance market, while two companies entered the international telecommunication services arena.

  Long-distance and international calling rates gradually fell as a result of competition between the carriers. The opening of the communications equipment market, which had until then been monopolized by just a handful of companies dubbed "members of the NTT family," progressed. The liberalized sale of terminals resulted in lowered prices for telephones as well.

The NTT Split-up

  While competition was created in long-distance telephony services, local phone services continued to be monopolized by the privatized NTT. Calls to split up NTT arose from competitors as well as from the authorities in charge of telecommunication policies. This debate continued for more than 10 years after NTT's privatization. NTT was finally split up into three companies in 1999 under a holding company; they are: NTT Communications, which handles long-distance and international phone services, and NTT East and NTT West, which handle regional telephone services. The mobile phone carrier NTT DoCoMo was split off from NTT early on, in 1992. The telecommunications market was opened to foreign investors as well, and British Telecom, AT&T, Cable and Wireless, and other companies entered the market through means such as equity participation, but the foreign companies retreated, one by one, from the market due to intense market competition.

The Explosive i-mode Boom in Japan

  In 2004, mobile phone ownership exceeded 80 million terminals in Japan. Although mobile phone services had begun in 1979 as a car-phone service, it was not until 1994 that the mobile phone market exploded in Japan. This was through the new competition created by the allotment of frequencies to digital mobile phones. Another cause of the explosive growth of the market was i-mode, a mobile phone service that enables Internet access. Mobile Internet underwent a unique development in Japan with users accessing online services offering such features as ring melody distribution (users download a favorite tune to use as a ring melody), game distribution and even train schedule distribution. Meanwhile, Japanese youths became adept at using a phone's numeric key pad to write e-mail messages to send via their mobile phones. Mobile phones equipped with digital camera features also proved popular among the young. The integration of the Internet and mobile phones is proceeding at a swift pace.

A great variety of content providers for mobile phones also appeared. Success was achieved by utilizing the billing services of mobile phone carriers and others, and by setting prices at an affordable monthly price of just a few hundred yen. Companies that expanded their operations through such services are beginning to advance overseas.

Outlook

Will the Laying of a Fiber-optic Network Advance?

Nippon Telegraph and Telephone East Corp. offers high-speed Internet connections via optical fiber to offices, homes, apartments etc.
Nippon Telegraph and Telephone East Corp. offers high-speed Internet connections via optical fiber to offices, homes, apartments etc.

As of the summer of 2004, more than 16 million households in Japan have broadband connectivity in Japan through DSL, cable Internet and FTTH (fiber-to-the-home). Although the broadband penetration rate is behind that of Korea, Japan's broadband services are in themselves a global leader in terms of transmission speeds and low costs.

  During the reign of the Nippon Telegraph and Telephone Public Corporation, the use of telecommunication lines for data transmission were monopolized by the public corporation, and there were restrictions imposed on free use by the private sector. Data transmissions in Japan lagged far behind other countries until the 1980s, a cause of criticism from the industrial circles. Although the market was liberalized after the privatization of NTT, there was a delay in imposing measures to unbundle NTT's local loops, and the use of DSL in subscriber lines was behind even Korea. In 1999, however, a system for unbundling subscriber lines that made wholesale of telecommunications functions by element was implemented, and many DSL service providers entered the high-speed Internet market. Penetration was especially spurred by the launch of an ultra-low-priced DSL service by the Softbank Group. Faster transmissions speed services also appeared.

  NTT has lost its top share in DSL services to Softbank, and it is currently in second place. For this reason, it is focusing on FTTH (fiber) broadband services. As of October 2004, NTT's FTTH subscribers numbered 1.6 million. The fiber optic lines that NTT lays, however, must be open for use by other carriers. KDDI is "borrowing" NTT's fiber-optic network to unfold its broadband services. NTT is voicing discontent saying that this is taking away NTT's incentive to invest in fiber optics.

A New Price War Erupting in the Form of IP Phones

Various cellar phones line in a store
Various cellar phones line in a store

   NTT was able to mark record ordinary income in its consolidated financial statement for FY2003. However, NTT DoCoMo was responsible for almost all of the consolidated operating earnings, and its regional and long-distance sister companies saw sluggish growth. It is unavoidable that the earnings of these companies will change for the worse once the impact of its streamlining activities disappears.

  Rivals Softbank and KDDI have announced that it plans to launch new nationwide fixed-line dark-fiber telephone services. They are aiming to procure NTT customers by lowering basic subscription charges. NTT countered these moves by announcing that it will lower its basic charges from January 2005. A further downturn in NTT's earning power is therefore expected. Furthermore, if IP phones, which utilize the broadband environment, come into widespread use, revenues gained through phone charges are certain take a further hit.
   NTT has come up with the resonant communication network architecture (RENA) initiative, which utilizes the bi-directionality and high speed of fiber optics. Shifting from a fixed telephone network to an IP network while continuing to provide "universal services" (something that it is strapped with) will not only be a new challenge for NTT but also a fight against time.

New Mobile Phone Services through 3G Mobile Technology

   While mobile phones have become a prevalent means for accessing the Internet in Japan, 3G mobile technology is also being offered ahead of the world through WCDMA, CDMA20001X, and other third-generation technology. Mobile phones can now be used as video phones or for high-speed data transmission. Payment functions embedded in a phone have introduced services that allow users to use their mobile phone as a "virtual wallet." Reception of television broadcasts by mobile phones is another newly introduced service. The possibility that mobile phones will become an effective information terminal in the ubiquitous age is starting to surface.
   Mobile phone carriers have been consolidated and reduced to three carriers: NTT DoCoMo, the KDDI Group's au, and Vodafone. In September 2004, the Softbank Group announced its entry into mobile telephony in the 800MHz band; and there are also signs of a move to enter the mobile phone carrier market by utilizing TDCDMA technology in the 2GHz band.
   Mobile phone subscribers in Japan already exceed 80 million users; growth in new subscriptions has peaked. The general view is that entry by the Softbank Group will result in the eruption of a price war as it moves to seize market share from existing mobile phone carriers.

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