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Wednesday, Dec. 31, 1997

Telecom firms race for position ahead of 'Big Bang'


First in a two-part series

Staff writer

With deregulation and competition intensifying in global telecommunications, the map of the Japanese telecom industry is rapidly changing.

Just as WorldCom Inc. last year boldly bid to take over MCI Communications Corp., the second largest carrier in the U.S., to compete with U.S. megacarrier AT&T Corp., small Japanese telecom firms are accelerating their moves toward forming alliances to better compete with Japan's dominant carrier Nippon Telegraph and Telephone Corp.

However, many observers and people in the industry predict that Japan is still experiencing the first phase of a realignment, and that current groupings of domestic carriers may change in the near future as they try to secure better positions in the market and prepare to compete in the international arena.

"We hope to make the new firm big enough to enjoy a great presence in the telecommunications industry, and the merger of Teleway Japan Corp. and Kokusai Denshin Denwa Co. are just the beginning of the industry's realignment," said Hiroshi Okuda, president of Toyota Motor Corp. The automaker is a major shareholder of Teleway Japan, which announced plans last November to merge with KDD, the nation's largest international carrier.

Many industry executives in Japan admit that the planned reorganization of NTT in 1999, which will give birth to a long-distance carrier and two regional carriers under a single holding company, has been a major driving force toward seeking complementary partners.

A law to reorganize NTT cleared the Diet last June, and it will also allow NTT to offer international long-distance services. The government, at the same time, revised another law to enable KDD to enter the domestic market.

NTT's reform was initially meant to spur competition among telecom firms, but many executives in the industry claim that NTT will continue to be formidable because, as a group, it will be able to provide all kinds of services from local to long-distance and international services.

Japan Telecom, a long-distance carrier established in 1984, was quick enough to respond to the changes in the industry. Upon learning that NTT would be allowed to enter the international market, it merged with International Telecom Japan Inc. last October, becoming the nation's first company to offer both domestic and international services.

Then, last November, KDD and Teleway Japan, a domestic long-distance carrier affiliated with Toyota, announced that they will merge to form a new company in October of this year. "In 1999, NTT will become a purely private company. We need to be ready to compete with NTT by then," said KDD President Tadashi Nishimoto.

"We have chosen Teleway as our partner because Teleway has been offering domestic telecom services and they have the optical fiber network that covers the whole of Japan," said Kazuyuki Tsukada, managing director of KDD's corporate strategy department.

For Teleway, the merger is a good opportunity to rebuild its strength and extend an international service to customers through KDD's international network. Teleway, which has been suffering from accumulated losses of 64.6 billion yen, will increase its capital, and Toyota's share in the company will rise beyond 50 percent this year.

KDD and Teleway seem settled so far, but many analysts say there may be some changes in their relationship in the future. Some argue that the KDD-Teleway alliance -- which will have combined sales revenues of 434.4 billion yen -- is far from being competitive with the 6.37 trillion yen in sales NTT posted in the 1996 business year, and they will continue to look for additional partners.

Others even point out a possible breakup of the planned merger. The two companies have not even agreed on a merger ratio, and there are already signs that the negotiations over who will become the majority shareholder will be tough and troublesome.

While Toyota President Okuda publicly argued that it would be meaningless unless Toyota takes the initiative in managing the new company, KDD's Tsukada said the firm cannot guarantee that Toyota will be a majority shareholder in the new company because there are many other shareholders, including NTT and Nippon Life Insurance Co.

"Considering that a telecom firm is supposed to offer neutral and public services, we cannot easily say that a particular firm will hold a majority," Tsukada said.

Prior to reaching a consensus on the merger with Teleway, KDD had reportedly been negotiating with DDI Corp., another long-distance telephone company. The two firms now say that a merger is unlikely in the near future.

"When we were talking with KDD, they appeared to be more interested in merging with Teleway," said Yusai Okuyama, president of DDI. "We are no longer negotiating with KDD."

DDI, one of the major domestic carriers, and KDD currently have a sales cooperation agreement. They have connected their services under one brand name, combined billing systems and offer discount services.

But DDI's Okuyama indicated that the cooperative relationship with KDD may either shrink or end in the near future since KDD's disclosure of its plan to merge with Teleway, DDI's rival in the long-distance telephone market.

Meanwhile, International Digital Communications Inc., another international carrier and Toyota affiliate, is also rumored to be seeking a merger with NTT.

Although the two firms have publicly denied any such plan, many industry observers say that IDC, a relatively small company, needs a strong partner to survive the severe competition. NTT, which extended technical support when IDC was launched, can be the best partner considering the current grouping in the industry, they said.

If that happens, DDI is likely to be left without a partner in Japan. Considering the company's sales volume of 558 billion yen last business year, DDI's Okuyama said DDI should be competitive with the KDD-Teleway alliance. He added, however, that DDI is searching for a foreign partner.

Okuyama said the company is looking not only at megacarriers, but also fast-growing telecom firms like WorldCom.



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