TEPCO-KDDI Telecoms Alliance May End Up Helping Rival NTT

The projected capital and management tie-up between Tokyo Electric Power Co. (Tepco) and carrier KDDI Corp. is creating a stir in the telecommunications industry. Tepco, which has an optical-fiber network but not a mobile phone division, and KDDI, which is in the opposite position, are pooling resources to gain a competitive edge against all-round telecommunications giant NTT. But the strategy risks backfiring, inadvertently handing NTT a hands-down victory in the key broadband telecommunications market.

   In November, KDDI signed an agreement to formally absorb PoweredCom, Inc., Tepco's telecommunications unit. Under the agreement, Tepco transfers to KDDI shares in Poweredcom, while Tepco gets a 4.81% stake in KDDI-making the Tokyo power company one of KDDI's main shareholders, behind Kyocera Corp. and Toyota Motor Corp. KDDI also gets a preferential option on use of Tepco's 100,000-kilometer optical-fiber network, enabling it to lay the groundwork for launch of Fiber-To-The-Home (FTTH) services, which are delivered directly into the customer's sitting room and are considered a key to controlling the optical-fiber market.

Toward a 'Big Three' for Japan's Telecoms Market

 KDDI is doing very well from mobile phones, but its fixed-line operations are losing money as it must pay fees to NTT for local connections. Tepco plans to relaunch its communications business by focusing on wholesale FTTH services, after selling off a struggling telecoms subsidiary that lacks a presence in the promising mobile phone business. If their alliance is successful, the Japanese telecommunications market is headed toward domination by three giants: NTT, KDDI-Tepco, and SoftBank-Japan Telecom.
A senior official at the Ministry of Internal Affairs and Communications (MIC) notes, however, that the biggest cheerleader for Tepco-KDDI tie-up has been none other than NTT. Why? Because the alliance would end up providing a strong argument for keeping optical-fiber networks closed, something NTT earnestly wants. Under Japan's telecommunications business law, NTT East and NTT West, which together hold a virtual monopoly on urban networks throughout Japan, must open them up for use by other companies. NTT President Norio Wada, however, seeks a more lax regulatory stance, arguing that, although his company has metal-wire networks in place, it has yet to build up substantial optical-fiber networks, so there is no likelihood of distortion of competition in this market. And if the tie-up between Tepco, with its extensive optical-fiber network, and KDDI goes ahead, NTT will have a real rival in FTTH services, which it currently dominates. Hence there will be no need to open the market up to spur competition.

Tepco Criticized for Going it Alone

At present, the officially authorized connection fee for NTT optical-fiber networks is 5,304 yen per fiber. If the business is kept closed, NTT is bound to raise it. With this competitive advantage, NTT could force KDDI and other telecommunications companies out of the FTTH market, and wrest control of the broadband communications market. Tepco and KDDI would only be able to make anything of their alliance in the metropolitan area.
 At the same time, discontent is mounting among Japan's other nine electric power companies at Tepco's go-it-alone stance, which breaks an established pattern of cooperation among the ten companies in their telecommunications businesses. KDDI is also courting Kansai Electric Power Co. (Kanden), but Kanden has no intention of selling its telecommunication subsidiary.
Taking advantage of this situation, IT services giant SoftBank Corp. too is reportedly making approaches to both Kanden and Kyushu Electric Power Co. With Kanden based in the Osaka area, this makes it increasingly likely that the ten electric power companies will be divided into eastern (Tokyo-centered) and western (Osaka-centered) blocks.