Japan's operators look to utilities for bandwidth

The alliance between KDDI and Tokyo Electric Power Co. (TEPCO), a major part of which is the 127-billion-yen share-swap merger of TEPCO's Poweredcom subsidiary into KDDI, could point the way to credible competition against the NTT group in the near future when FTTH and fixed mobile communications (FMC) become mainstream.

It also puts the spotlight on the telco businesses of the country's electric power utilities and mounting pressure on them to withdraw due to increasing competition brought on by market liberalization. The days when they could pour surplus funds into telecoms from their main cash cow business are gone.

'It is not an alliance, but the pull-out of TEPCO from the telco business,' commented one industry watcher.

However, the KDDI-TEPCO deal shows that there will not be a fire sale of telecom assets by the utility companies. Indeed, the power companies are aware that their telco network assets alone might be the strategic key to competing against NTT over the next ten years.

Their optical-fiber networks loosely cooperate in the so-called Power Nets Japan (PNJ) group and offer access nationwide through 220,000 km of optical fiber.

Japan's consumers are now moving away from xDSL and plumping for FTTH, which is not significantly more expensive. In January NTT added 145,000 new FTTH subs and only 21,000 xDSL subs. Although several operators including KDDI and Softbank have launched FTTH services, FTTH is not an economically viable business for them at present and they are simply going through the motions. KDDI's FTTH customer base is less than NTT's January new additions.

As the country moves toward rapid FTTH rollout and with FMC just around the corner, KDDI and the other traditional competitors, including the new cowboys like Softbank, are looking suddenly vulnerable. A market shakeout and mergers appear to be in the cards.

KDDI's is a good example of the vulnerability. Its success is heavily dependent on its booming mobile business, and its fixed-line business has struggled to break even, largely due to the high interconnection charges payable to NTT. Up to now this was not a critical weakness, but it could become so in the age of FMC.

That is why KDDI (and others including Softbank) have been aggressively courting the power companies. Merging with the recently profitable Poweredcom, which has top-flight corporate customers and solid sales capability, should significantly bolster KDDI's fixed-line business. Combining KDDI's consumer marketing expertise with TEPCO's FTTH business should slow NTT's ability to run away with the FTTH market.

After TEPCO, look for developments at Kansai, Chubu (Nagoya) and Kyushu power firms.