Toe To Toe With Ntt

In a fight for its life, eAccess went public--a highly unusual step in Japan

In a land of subtlety and understatement, Japan's Sachio Semmoto is not afraid to stand up and scream. That's not a typical winning formula for a Japanese entrepreneur taking on Nippon Telegraph & Telephone Corp., the country's former telecom monopoly that still controls 90% of the local market. But the industry veteran, 57, figures it's the only way to carve out a piece of Japan's emerging broadband market.

Semmoto's foil--and soapbox--is eAccess Ltd., a startup that offers high-speed asymmetric digital subscriber lines (ADSL) to Japan's Internet-starved consumers. ADSL lines are permanently connected to the Internet, so users pay a flat fee, avoiding NTT's per-minute local call charges. At $60 a month, the eAccess service is priced like the telecom giant's ISDN technology, which is just one-tenth the speed of ADSL. And because ADSL uses existing copper cables, installation is simple.

In theory, that is. In practice, eAccess says NTT has been slow to provide access to its copper network. Like most other former monopolies, NTT isn't eager to get outflanked by upstarts, especially after spending $10 billion over five years to roll out its slower ISDN lines. And in mid-December, the telecom giant announced it would soon offer a competing ADSL service. The upshot of the apparent foot-dragging: This country of 127 million people now has only 8,300 ADSL subscribers.

So Semmoto and his year-old company have taken the very un-Japanese step of bringing their battle to the public. At a recent public hearing called by regulators to discuss the use of NTT's local lines, Semmoto and his four-man lobby team came armed with research that included detailed assumptions on costs, investments, and future demand that clarify his company's sales and profit targets. The not-so-subtle message was that eAccess is willing to open its books, so why isn't NTT?

And rather than numbing his listeners with dry, prepared scripts--the way some NTT execs do--Semmoto tossed one-liners. For instance, he compared NTT's unwillingness to reveal how it calculates the monthly fees it charges ADSL customers for billing, call centers, and other services to a sushi chef who charges outrageous sums but provides no itemized bill. Even the bureaucrats giggled.

It worked. The pressure caused NTT to lower the fees it charges eAccess and other ADSL providers by 75%, to $1.70 a month. "NTT realizes it can't keep bullying everyone," says Ortwin Gierhake, an analyst at West LB Securities.

Ultimate solution. Semmoto's main beef, and one shared by executives at other telecom startups, is that NTT slows down newcomers by preventing them from installing equipment in NTT switching stations. NTT denies the charges, yet the result is the same: It takes four months to get an ADSL line in Japan, while NTT hooks up its own ISDN service in about two weeks.

Semmoto's table-pounding is starting to stir up Japan's usually docile regulatory agencies. On Dec. 20, the country's Fair Trade Commission agreed with eAccess that NTT has unfairly shut out new service providers and demanded that NTT promote competition. And the Telecommunications Council, a panel of top bureaucrats, academics, and companies, called for NTT to be split into independent units by 2003 if it fails to improve access. More players would mean more competition and lower prices in the $140 billion telecom market. "The ultimate solution to Japan's info-tech problem is the complete breakup of NTT," insists Semmoto.

Taking on the Establishment is nothing new to this former NTT engineer. Semmoto started working for the then-public monopoly in 1966, but quickly left for the U.S. when he won a Fulbright scholarship. Five years later, with a doctorate in electrical engineering from the University of Florida, he returned to Japan and helped NTT develop the very ISDN lines that he's now trying to bury.

Semmoto's time in the U.S. turned his thinking inside out. "After learning about fairness, competition, and deregulation in the U.S., I realized NTT's state-owned monopoly was a mistake," he says. In 1984, he jumped from NTT to become co-founder of DDI Corp., Japan's first competing long-distance carrier. Aggressive pricing helped DDI grow into a $14 billion company before its merger in October, 2000, with former long-distance monopoly Kokusai Denshin Denwa, or KDD, and wireless provider IDO Corp.

Semmoto's pioneering reputation has helped eAccess lure engineers away from other carriers--no easy feat in Japan, where workers rarely job-hop. It also led him to former Goldman, Sachs & Co. telecom analyst Eric Gan, his chief operating officer. The two started the company in November, 1999, with $1 million each of their own money and $45 million from Goldman, Morgan Stanley Dean Witter, and others. It now has 100 employees.

If any startup has the stuff to take on NTT and win, it's eAccess, analysts say. "In Semmoto and Gan, you've got the grandfather of telecom entrepreneurs and the right guy to send the message to the market," says Thomas Rodes, an Internet analyst at Nikko Salomon Smith Barney Ltd. And the market looks promising. The Yankee Group projects that ADSL subscribers in Japan will jump to 3 million by 2005, although that would still be one-third the number of expected U.S. connections.

While Semmoto hammers away at NTT, Gan is trying to move the company into the black by 2003. So far, eAccess has spent just $7 million overall, although costs will rise as it installs equipment in more NTT switching stations. Gan expects 15,000 customers by March, 2001--up from about 1,000 now--by offering discount ADSL lines for about $50 a month to customers of eight Internet service providers. EAccess is also putting kiosks at 300 electronics shops run by major chains so consumers can see what it's like to surf the Web at high speeds.

The company will have to sign up subscribers quickly to stay in the game. NTT says it will charge $43 a month for its basic ADSL service as well as start testing even faster fiber-optic lines to the home.

Still, NTT's entry into the ADSL business may aid Semmoto. With its household name and army of engineers, NTT will help popularize the high-speed technology and pour money into improving it. It's a risky strategy since eAccess could get squashed by the competition. But Semmoto has played chicken with NTT before, and he expects to survive again.

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