Tepco's power play: The electric company's latest plans for IIJ set off sparks in the telecom industry. (Upfront).

KOICHI SUZUKI, THE PRESIDENT of Internet Initiative Japan (IIJ), made one of the most dramatic moves in the history of his small telecom company just a few weeks after I finished profiling him for the July issue of J@pan Inc. In hindsight, I see he had given me hints at the time. He said that he had a vision for reshaping the telecom industry in Japan. All that was required, he said, was "lots of money." There was no suggestion, however, that Suzuki was on the brink of a move that could project him into the catbird seat in Japanese telecoms as the progenitor of the most important shift in the industry in years.

His vision--and that of Tokyo Electric Power Co., or Tepco--is now common knowledge. On the morning of Thursday, July 18, two leading dailies-- the Asahi and the Nikkei--carried page one stories about plans for the IIJ group to combine forces with the Tepco group, to create a major competitor for Nippon Telegraph and Telephone (NTT) in telecoms. Of course! The proposal was so obvious, once one saw it.

The two sides bring different strengths to the combination. IIJ has the technology. Tepco has deep pockets and an extensive optical fiber network. Combine Tepco with IIJ and one may have a force to match NTT in the market. But, of course, it's far too early to predict how this deal will play out.

Infrastructure in place

Suzuki has been most interested of late in the rapidly growing corporate data communications market. Right now NTT controls about [yen]1.2 trillion, according to Nikkei estimates, while IIJ and others fight for the remain [yen]200 billion. But with help from Tepco, Suzuki wants to begin to chip away at NTT's share.

Tepco, the world's largest electrical utility, is one of 10 regional electric power utilities in Japan that are accustomed to working together, as an oligopoly. Count in all these firms as well and the stage is set for a head-on, nationwide challenge to NTT. Banzai!

There is a convenient way for IIJ to work with the regional utilities. Back in 1999 the 10 firms, led by Tepco, set up a combined company called PoweredCom--this is 32 percent owned by Tepco and all the other nine utilities are shareholders. Its president is Takeshi Taneichi. He and Suzuki, in fact, were the ones to make the public announcement on July 18 that they planned to work together to form an alliance, with details to be settled by the end of 2002. Meanwhile, another amalgamation is in progress. PoweredCom plans to tighten ties with Tokyo Telecommunication Network (TTNet), a joint company set up by Tepco, Mitsui & Co., Mitsubishi and Sumitomo in 1986 to provide telecom services. Suzuki is ready to bring in Crosswave Communications, the IIJ affiliate in charge of data communications, to create a four-company combination--two from the IIJ group and two from the Tepco group.

With so many companies involved and knowing the difficulties that Japanese firms have in pooling their interests, will this work? Knowing Suzuki, I think he can make it work, assuming he gets support from the top at Tepco. He is an exceptional individual. He is used to working with big companies, and seeking them as clients. Thus he set up Crosswave in 1998 with Toyota Motor and Sony as co-shareholders with IIJ. To be sure, there may be many twists and turns in the negotiations this autumn between the IIJ and Tepco groups, as analysts here have warned. But let there be twists and turns. This would not be Japan if everything was straightforward from the word go.

Early on, there were indications of trouble ahead. The corporate communications department of Tepco showed its displeasure at an early stage, apparently over lack of consultation. Foreign correspondents who called up Tepco to ask about the July 18 press conference were surprised to be told by the courteous officials there that they knew nothing about any press conference. They thanked one caller, a friend of mine, for letting them know about the event.

Naturally, they knew it was happening. What they were doing was to indicate that there were segments of Tepco that were far from being on board with Suzuki and his dreams. The top people at Tepco-- the president is Nobuya Minami--had spoken with the IIJ chief several times in complete secrecy. But Suzuki did not have time to do his full nemawashi, his courtesy calls, followed by detailed communications up and down the corporate tree at Tepco. People always want to be 'consulted' in Japan.

Cashflow needs

It still looks as if Suzuki is in good shape, however. I have three reasons for saying this. First, there is a strong air of common sense about his plans. What he offers is in the public interest, agree analysts I spoke to. I found a level of enthusiasm for Suzuki at major Western institutions in Tokyo. It is desirable that NTT have a strong competitor in corporate data communications. Two, the Japanese press is in favor of an IIJ/Tepco combination, There was a big turnout at the July 18 press conference, tame as the event was. I counted 10 network cameras. I met a young reporter from Jiji News at the press conference with hair dyed brown and fixed in the spiky style. Spotting him, Suzuki was all smiles. "You look like one of the people who work in my company," he remarked.

There is one other reason for Suzuki to go forward without looking back. He needs money. Ill has cash in hand, its accounts show, but Crosswave has been burning through its cash as the big spender in the group on optical fiber networks. IIJ itself made an operating profit in its last full year to March 2002, but the group has been operating in the red, The sums involved, however, are piffling if Tepco's strategy emerges OK in the next few months.