Booming IP telephony challenges NTT's telecom empire.

Nippon Telegraph and Telephone (NTT Group has held a de facto monopoly in the fixed phone business for the past 100 years. Despite the keitai boom, as well as the coming of the broadband age, the Japanese still need NTT's connections for their fixed phones even if they use other fixed line providers such as Heisei Denden and Cable & Wireless IDC for intermediary connections. But the recent expansion of voice communications via IP telephony in Japan may change the whole picture. IP telephony services, using VoIP (Voice over Internet Protocol) technology that divides voice data into IP packets for transmisson across the Internet, have been on the rise over the past two years. According to Yano Research Institute (YRI), the number of IP phone subscribers increased from 304,000 in 2000 to 1.58 million in 2001. YRI estimates that the number will reach 2.42 million in 2002 and 3.64 million in 2003.

So far, the expansion of IP phone in Japan has been closely connected to that of ADSL. Yahoo! BB, for example, provides BB Phone IP phone service as a package deal for its ADSL subscribers. BB Phone is much cheaper than NTT's station-to-station phone calls: [yen] 7.5 every three minutes for domestic calls and international calls to major countries such as the US or England, plus minimum ADSL monthly connection fees of [yen] 3,143. Electronics firms are also entering the space. NEC and Oki Electric Industry said in January that they have agreed to cooperate in developing an IP telephony business.

This must be scary enough for NTT, but what is worse is the recent entry of electric companies into this space. Telecommunication Network (TTNet), in which Tokyo Electric Power Co. (Tepco) has a 36 percent equity stake, is planning to launch fiber-to-the-home (FTTH) based IP phone services by the end of March, while Osaka-based k-opti.com--100 percent owned by Kansai Electric Power Co. (Kepco)--has just completed a deal with KDDI to jointly provide FTTH-based IP phone services.

ADSL-based IP phone services in Japan still depend on NTT phone lines for the "last mile"--the distance from the nearest NTT connection point to the phone--and subscribers still pay the same NTT monthly basic connection fees of between 1,500 yen and 2,500 yen for home phones and slightly more for office phones. But FTTH-based IP phone services are theoretically free from that restriction and could bypass NTT phone lines all together, says a TTnet spokesperson, although she adds that some calls--such as emergency toll-free calls with the prefix 0120, still require NTT lines. Although the details of the services are still under discussion, the new service will be available for the company's broadband connection subscribers by attaching a modem to the phone they are using.

Although it's too early to predict whether FTTH-based IP phones will boom in Japan, electric power companies with their rich fiber networks may become a major threat to other ISPs, including Yahoo! BB, which is in the middle of a fierce price war for ADSL subscriptions.

The NTT Group may suffer a lot too, as its regional companies are already hurting from a decline in revenue from phone service businesses. But while these companies are struggling from the decline in fees for calls made, the basic monthly connection fees are providing stable revenue.