Bankruptcy highlights lack of price competition

12 May 2006

Heisei Denden, a bold new common carrier that pioneered cheaper phone services in Japan for consumers including fixed-line to mobile calls and built a 33,300 kilometer optical-fiber network, seems doomed to bankruptcy after its rehabilitation sponsor, Dream Technologies, cut off payments.

With debts in excess of $1 billion, it was the second largest bankruptcy filing in Japan last year and the biggest for some years in the telecom service field.

In business since 1990 as an ISP, Heisei Denden entered the 'MyLine' telephone business in 2001. MyLine enables new carriers to use NTT's network with subscribers pre-registering their preferred carrier access code. In 2003 it launched it Chokka service using its own network. At 6.8 yen per three minutes, it was the cheapest service in Japan at that time.

The company's collapse last October was sudden. Only in the summer it announced grandiose plans to roll out a WiMAX network and wireless services in a joint venture with Dream Technologies.

Company spokesperson Hideki Hayashida blamed the bankruptcy on over-investment in infrastructure. He also said that NTT's interconnection fees and the fierce competitive environment were major factors.

The pioneering Chokka service only managed to attract 150,000 subs as SoftBank's Japan Telecom and KDDI launched competing services shortly afterward. The company sued Softbank and JT, claiming that they had acquired the know-how during negotiations to buy the company, but lost.

The MyLine business grew to over 500,000 subs in early 2004 before falling back to 300,000 subs last August when it was sold to Dream Technologies.

High NTT interconnection charges have long been a major issue, and it cannot be a coincidence that Heisei Denden started bankruptcy proceedings shortly after NTT was actually permitted to raise interconnection charges last summer.

'It is still very difficult for any new company to survive in the telecom service market in Japan,' commented Hiroyuki Kadowaki, senior market analyst at IDC Japan, adding that 'NTT is always the winner.'

Heisei Denden built its own network because in Japan reselling primarily exists as a value-added service. To compete you have to build a network before you can enter the market and this severely inhibits would-be market entrants. In the DSL business the government, fearing that the market wouldn't develop, forced NTT to offer attractive pricing on line-sharing that attracted Softbank and others invest.

Only when the government adopts similar measures in the telephone service market will true competition emerge.

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