Japan’s telecommunications equipment sector accounts for 12.5% of total industrial output, and its telecommunications services are among the world’s most advanced. Yet European companies operate in a closed and highly regulated market.
Targeting consumers has required extensive local knowledge and support. Selling to corporate customers has meant dealing with NTT’s dominant position. Meanwhile, equipment vendors are often faced with local certification or standards issues that can delay their entry to market.
Over the last few years there have been some casualties among European challengers. The humiliating retreat from Japan by Vodafone and Nokia, both leaders in their own markets, were perhaps the most memorable. But it hasn’t all been bad and, while problems remain, the outlook appears good.
The election last year of a DPJ-led government brought with it the possibility of significant change in the telecommunications services market.
The government wants to expand Japan’s broadband network so 100% of households are accessing the internet via broadband by 2015. Right now about 60% of Japanese homes have a broadband hook up, so the goal represents a significant amount of business.
A task force, established to figure out how to achieve the goal, soon began to focus on NTT and its position as both the owner of the access network and a service provider.
That situation means that companies like SoftBank and NIFTY, which supply internet service to consumers, not only have to rely on NTT’s fibre optic cables and switches, but also must compete with NTT to sign-up customers.
“They are still strong and block competition,” said Yoko Ono, a senior market analyst at IDC, an IT market intelligence company. “SoftBank and other carriers who don’t have their own FTTH [fibre optic] facilities insisted that the government should split NTT.”
NTT’s power doesn’t just affect local competitors. European telecom carriers looking to connect customers in Japan are also beholden to the company.
“We’re reliant on [NTT] for price, terms and conditions, provisioning, repair time and supply time,” said Stephen Crisp, head of external affairs in Asia Pacific for British Telecommunications (BT).
It also gives NTT a potential competitive advantage through inside information on the business done between foreign carriers and their customers.
But things haven’t moved perhaps quite as quickly as the DPJ would have hoped.
The task force wants an extra year to study a potential split-up of NTT, while Communications Minister Kazuhiro Haraguchi is pushing for this to be done in six months.
“We must reach some kind of conclusion by year’s end on ways to build a fibre optic network crisscrossing the whole country, as well as NTT’s possible management restructuring,” he said at a task force meeting in mid-May.
Current thinking in the industry is that one of three things will happen: the access network will be put in a new division within NTT; it will be spun-off to a new group company; or it will be separated entirely.
“This doesn’t mean you slam NTT into the ground, but you do allow for free and fair competition,” said Crisp.
The talk comes 10 years after the last great restructuring of the telecom market, when NTT was broken up into three parts: NTT East and NTT West, each handling local services and access lines in eastern and western Japan, and NTT Communications handling international and some internet business. That early internet-era move is regarded as a success by many.
An independent regulator
European companies are also among those lobbying the government for the creation of a new regulatory body to take over the role of the Ministry of Internal Affairs and Communications. The ministry is unsuitable for this task because the government remains a major shareholder in NTT, say critics of the current status.
In its 2009 white paper the EBC calls for the establishment of “an independent, well-resourced and empowered telecommunications regulatory authority,” and says it should answer to the Japanese parliament, not the government.
“BT believes in fair and open competition with low barriers to entry,” said Megumi Hasegawa, president of BT Japan. “It believes that such competition is valid and positive, whether it be service level, infrastructure level or a combination of both. Competition creates wealth, employment, innovation, investment and consumer choice. BT believes in effective and independent regulators that treat all players fairly.”
Of course, getting better access to local lines or a new regulator won’t guarantee success. European carriers will still face tough competition from local operators.
“The Japanese consumer prefers to buy Japanese,” said Franck Despouy, who works in marketing and business development at Orange Business Services in Tokyo. Foreign carriers will need to provide something unique if they are to capture the consumer’s attention, he believes, although Orange’s business-to-business sales in Japan are growing.
If there’s one lesson from Vodafone and Nokia’s experiences in Japan, it’s that one size does not fit all and locally flavoured or produced options are a necessity.
At the same time, there are signs Japanese companies are becoming more global in their outlook, at least for telecommunications services.
“We’re starting to see approaches from Japanese companies looking for global coverage,” said BT’s Crisp. “Some are much happier going to foreign companies than others. I think Japan is changing.”
Things may also be changing in Japan’s large telecommunications equipment market.
When carriers began building their current networks the equipment deals were dominated by Japanese vendors, said George Hoffman, group manager for communications at IDC. But things are changing as they begin upgrading to a new generation standard that will offer even faster data transfers.
“With 3.9G and 4G you are seeing Nokia Siemens winning in partnership with a Japanese vendor, which is a pretty significant deal.”
Nokia Siemens Networks developed a base station with Panasonic for NTT DoCoMo’s new “LTE” data network that is scheduled to launch this year. LTE is an add-on technology for today’s 3G that promises to eventually deliver download speeds of up to 300Mbps, around 100 times the speed of most cell phones today.
NTT DoCoMo will launch an LTE network in Tokyo in December – early enough to make it the first LTE implementation in Asia, but not before some European carriers. TeliaSonera launched an LTE service in Oslo and Stockholm in late 2009, giving European companies an early look at the technology.
Ericsson was also selected as an LTE vendor by NTT DoCoMo.
The Swedish company has been enjoying success in Japan with its 3G equipment. Last year it supplied the gear that enabled EMOBILE to launch Japan’s fastest 3G data service, at 21Mbps, in Tokyo, Osaka, Nagoya and Yokohama.
But just as the market is receptive to European equipment makers, so it is getting easier for competitors from other countries. China’s Huawei Technologies has picked up contracts from EMOBILE and was selected as an LTE vendor by SoftBank.
“That is a bit of a significant move. People didn’t think Huawei would succeed in making deals,” said Hoffman.
Vendors still need to localise equipment for the Japanese market.
NTT DoCoMo’s LTE network will operate in the 2GHz band, a group of frequencies that won’t necessarily mean it’s compatible with services in other countries.
The lack of international standardisation for wireless frequencies sometimes acts as a barrier to market entry because it requires that products be adapted for the Japanese market. The EBC is among groups pushing to have regulators and governments agree on common frequency bands for wireless equipment.
Similarly differences in standards can also affect vendors of fixed-line equipment.
“For fixed line, the lower layer is dominated by Japanese vendors, mainly because it’s an NTT or KDD specification,” said Hoffman. “They may be using open standards, but it’s still largely proprietary technology being employed.”
The good news for foreign companies is that years of pressure from European and American industry and government is paying off. The Japanese market is more open than ever to competition and foreign companies are winning deals.
But the openness comes at a time when Chinese and South Korean companies are also entering the market. Competition too will be fiercer than ever.