Not problems, opportunities

The transition from government monopoly

to private competitor has been difficult for Japan's largest company.

But necessary.

An interview with the president of Nippon Telegraph and Telephone,

Masashi Kojima.

Originally apperad in WIRED magazine, Dec. 1994

By Izumi Aizu

Today, almost 10 years after the privatization process began, NTT has yet to win full independence for itself. The Japanese government still owns more than 65 percent of the giant corporation - 220,000 employees, ¥6 trillion (US$60 billion in sales) - its tariffs are still regulated, and it needs the approval of bureaucrats at Japan's conservative Ministry of Posts and Telecommunications for many of its activities.

But lately NTT has begun to pick up speed. In May the corporation beat off an attempt by bureaucrats to install one of their own as president, opting instead to reelect NTT's current president, Masashi Kojima, for a third straight two-year term. Now Kojima faces a formidable task: with revenues from NTT's conventional enterprises taking a hammering from new commercial rivals, he must aggressively seek new business.

NTT has embarked on an ambitious project to build a ¥45.4 trillion ($454 billion) nationwide fiber-optic network by 2015. Trials of potential multimedia applications for the new network began in September. At the same time, Kojima has shocked NTT's domestic suppliers by signing a string of alliances with US firms like General Magic and Microsoft Corporation. NTT's president has realized that the rules of the game have changed. The question is, will he be allowed to make the most of the opportunities that the changes bring?

Wired asked Izumi Aizu to find out.

* * *

Wired: It's been 10 years since the privatization of Japan's telecommunications market. What have you learned? What remains to be changed?

Kojima: Privatization was originally intended to spur a move from a telephone-only society to a new communications era. The result was price competition in the long-distance telephony market, which used to be based on cream skimming. This change was good for users - they got lower prices - and it was good for NTT. We had been relying on our monopoly situation for so many years, we had grown a bit complacent. It certainly prompted our reengineering efforts. But with the recent emergence of multimedia networks, the current Japanese regulatory framework may no longer work. No one can predict what is going to happen in the multimedia business. I want our government to have the boldness to change the regulatory framework, especially the sort of regulations that constrain new services.

We are in a primitive stage of capitalism, and the strongest contender is going to win. If you lose, you're out of the business. In the United States, there are entrepreneurs staking everything on a single technology or single service. Very brave. That's the US industry's source of strength. We can learn from that spirit.

Last year you often mentioned that NTT was far behind in the process of innovation, especially in the field of networking new digital and intelligent terminals and related software.

Last year we were far behind the latest trends of the digital, multimedia revolution taking place mainly in the personal computing and communications areas. Today it's much better, however. After examining our own technical strength in the communications field, we found that when it comes to the underlying technology of the network - especially major trunk lines with high bandwidth transmission capacity - NTT is still rather advanced. But we need to provide these higher capacity and higher speed lines from the switch to the users' homes or offices. Financing is the real challenge. Here, the "if we build it they will come" model may no longer work. Most customers are satisfied with conventional telephony; they don't want advanced services to be funded by their telephone bill. We need to significantly lower the cost of building fiber-optic networks to the home, make it as cheap as existing copper lines. And we need to educate our customers about the benefits of these new services so that they support funding them through the conventional telephony business.

Last year you invested in Thailand to help build its domestic telephone networks. What were your goals in making that investment? Do either international cooperation or international aid play into it?

No. We are thinking in terms of purely commercial, business relations. Neither "friendship" nor "international cooperation" can be an excuse for not making a profit. These new ventures are very important strategically for us. The mobile telephone market in the US also seems attractive. That's why we decided to invest in Nextel in January 1994. (NTT's investment of $75 million gave it a 1 percent share in the US cellular telephone company.)

Despite its size, NTT has not entered the international market. Why not?

NTT is not allowed to enter the international market because of regulatory constraints. Domestic and international communications have been divided into two separate entities since before World War II. Now there is no reason for that. But to be frank, we are not worried. The market for international communications from Japan is around ¥300 billion ($3 billion) per annum. By comparison, NTT's domestic market is ¥6 trillion ($60 billion). But we know that in the future the world market is going to be more seamless. Government regulations do not allow NTT to go into long distance between two countries, but we can enter domestic service in other countries. When circumstances allow, we want to do that. We also expect to gain some new benefits through aggressive alliances with strong, innovative companies from overseas. They are also interested in our network technology. This year we invested in General Magic, and we have business alliances with Microsoft and Silicon Graphics as well. By making strategic alliances with companies from the US and Europe, we should be able to come up with cooperative products that can be sold in the world marketplace. Then we need to expand the market for these new products. We are ready to help developing countries build strong, functional communications infrastructures.

Other major Japanese industries - automobiles, electronics - have been very aggressive in the international market. One could argue they've gained expertise and resources by doing business in foreign markets with fierce competition and difficult conditions. Do you feel NTT has missed out on that experience?

Yes, the Japanese telecommunications industry, as well as the government, has been very slow to recognize the importance of competition in foreign markets. One reason is that the domestic market has been very lucrative. Another may be that while we have been a world leader when it came to technological innovations, we have not cared as much about service innovations. There has been significantly little strategic discussion about how Japan as a nation should cultivate the information and telecommunications industry as a core resource for global business. As for NTT, the regulatory framework that prohibits us from going to international communications can be considered as one factor.

If regulations are changed, are you interested in becoming a major player in carrying traffic internationally between Japan and the US, for example, or between Japan and Europe?

No, we don't want to become an independent international carrier of that kind. We need to have strategic alliances and partnerships to offer seamless services to our customers globally, however.

Earlier this year US Vice President Gore gave a keynote address at the Development Conference of the International Telecommunication Union in Buenos Aires, calling for a global information infrastructure. He said that by deregulating and privatizing the telecommunications markets in developing countries, private investment will be rewarded by a growing market economy, thus providing market opportunity for developed countries and economic growth for developing countries. Do you agree with this happy marriage?

Basically we have a similar idea. But in actual cases - like our experience in Thailand - revenue has turned out somewhat lower than originally estimated. In some cases help from the government or other public sectors may be needed to launch the initial growth of the market.

In Japan, some observers say that the global information infrastructure vision is an attempt by Americans to push their technical standards on the rest of the world, insuring that new markets will be dominated by US companies. These critics encourage Japan to come up with its own original standards and try to persuade the international community to accept it.

That is a bit too extreme. We need international harmony as far as standards are concerned. As a general trend, some kind of global information infrastructure will sooner or later be built. Vice President Gore is encouraging the extension of advanced communications into developing countries. To make a telecom market, you need a global information infrastructure to link countries to each other. Encouraging "democracy" is also an important role in US strategy. Assuring the free flow of information to citizens, be it good or bad, is a fundamental tenet for any democratic society, and a global information infrastructure is a tool to propagate democracy and free society. However, there are other approaches to democracy and economy in the world - in Singapore, for example - and the values of the West are not always perfect or universal. These are very difficult issues, sometimes beyond the domain of the communications industry and technologies.

The Ministry of Posts and Telecommunications issued its policy report on the Next Generation Infocommunications Infrastructure in May 1994. At the same time, the Ministry of International Trade and Industry announced its Program for Advanced Informatization. The Ministry of Posts and Telecommunications plan set a goal of laying fiber-optic lines to all homes nationwide by the year 2010, and projected that the ¥33 trillion to ¥53 trillion needed to build it will create a new market worth ¥56 trillion per year. [The Ministry of Posts and Telecommunications report stated that the new network should be built primarily by the private sector, with the government playing the role of guide, ensuring fair competition and protecting consumer rights.] Both the report and program are strongly influenced by the White House's National Information Infrastructure initiative. What is your view on these plans?

It is good to have both ministries making proposals to the Japanese telecommunications industry. The two reports are not fundamentally different. The Ministry of Posts and Telecommunications report made it clear that the government is not going to directly build the infrastructure, but when it comes to applications, the government's role as a lead consumer is clearly stated. This is a very good direction.

The same is true for the Ministry of International Trade and Industry report. In September 1994 we started "high-speed backbone" experiments linking supercomputers in national universities and research institutes. This is one example of government involvement in the application area. We will expand the project early next year with more multimedia applications and with private companies and end users as well. We need to explore more applications with real end users.

What do you expect from the government sector, both national and local?

In order to advance the entire telecommunications field, we need a good understanding of the latest technology. The regulators also need a good understanding of technology. Regulation is a big issue. There are regulations which simply do not match changing times or changing technology.

NTT is often criticized as being too big, enjoying the lion's share of the market and not pushing the market forward. Do you need some competition to stay sharp? Should NTT be broken up as AT&T was?

The telecommunications industry in Japan is still a little uneven in terms of competition. The Japanese telecommunications industry's social and geo-economic structure is somewhat different from that of, say, the US. In Japan, only NTT maintains the nationwide telecommunications network, and there has been no full competition. We have competitors in the long-distance market, in the local loop, and in mobile telephony, but no one is trying to compete against NTT in all these markets. Real competition would be better not only for the competitor but for us as well. And, of course, it would be in the interest of the end users and the market as a whole. A few large companies of similar size and services might be the best solution. As for breaking up NTT, one of the reasons we get so many inquiries about alliances with foreign companies is that we have an excellent record in R&D. If you break up NTT simply because of its dominant size, its R&D capability will be diminished. There are two kinds of R&D, one that requires a shorter turnover of the product to market with relatively low cost, and one that requires long-term commitment and ample resources. This type of R&D needs to take place within a large organization capable of providing the necessary financial and other support.

NTT may need to undergo further restructuring, but does "weakening the giant produce strong industry"? Will the future bring weaker providers of services? Or are smaller providers better equipped to serve the market?

Consumers need better and seamless service based on more competition. Whether the competitors are big or small is a result, not a prerequisite.

But most large corporations tend to be more bureaucratic and slow - small entrepreneurs are much more agile and aggressive.

There are two kinds of "bigness:" large organizations with a single function, and large organizations with an aggregate of many different functions. NTT is the latter. We can spin out some of the businesses into subsidiaries and group companies. We can be large but efficient at the same time. We have been engaged in the telecommunications business for a long time; we know its positive and negative sides. We often encounter the argument for breaking up NTT, but seldom do we see the clear reasons why we need to do it.

What are NTT's current strategic targets? What is your next source of income?

No one knows the new sources of added value in the multimedia era. A good case in point may be the new personal handy-phone system (a Japanese version of the digital personal mobile telephone). If it becomes very popular - which may happen fairly soon, depending on who you believe - it might absorb our conventional telephone service.

Our mission now is to determine how to carry as much traffic as possible on our own network. In order to achieve this, we must make our networks easier for the customers to use and easy to customize. That is our survival strategy for now.

Mainstream research at NTT has focused on technology for switching or transmission, but new fields such as intelligent terminals, software, and human interface design are receiving a lot of attention. NTT alone cannot tap these new frontiers. We need to make more strategic alliances with foreign vendors, to be bold and open-minded. That kind of thinking is already emerging within our research laboratories.

This is a cultural revolution for NTT. Just two or so years ago, making a cooperative research agreement with an American company was never considered. Now it's nothing special.