Softbank May Get Broadsided in Broadband

Amid a telecom slump, its costly strategy pits it against NTT

For a moment it seemed the days of Net euphoria were back. On June 19, a standing-room-only crowd of 1,000 reporters and analysts jammed Tokyo's Hotel Okura ballroom. Ceiling-high speakers blared rock music. Giant video screens flashed clips from Planet of the Apes. Then, Softbank Corp. CEO Masayoshi Son, wearing a pink cotton shirt and white slacks, emerged from behind a curtain to pitch his bold plan: To launch the world's most affordable broadband service and deliver high-speed video and data to Japanese PC users.

The only thing missing was the thunderous applause. In fact, Son's announcement was greeted with dead silence. Since February, 1999, Softbank's stock has sunk 93%, to around $33. And many in attendance were baffled why Son was talking about plunging into broadband while the global telecom industry is in a swoon. In Japan, existing broadband providers are fighting for survival. And Son will have to take on Nippon Telegraph & Telephone Corp., which controls the local phone market. "Many people call me crazy, and I know many analysts say Softbank will go bankrupt," Son concedes. "But I look at things my way."

"A DISASTER." It's an audacious vision. Son aims to pour $800 million into asymmetric digital subscriber (ADSL) technology, which transmits voice, video, and data over copper lines. Son claims his system is five times faster than ADSL lines operated by Japanese rivals. Also, Softbank's new broadband unit, Yahoo! BB, will charge users $18.50 a month--half the cost of NTT's ADSL service. The first million customers get free installation, saving them a further $70. Son says he can break even next year if he signs up 3 million users.

Trouble is, there are only 175,000 broadband accounts in Japan, and market researcher Yankee Group predicts only 400,000 by yearend. If Softbank signs up 1 million subscribers this year, analysts doubt it can install the hookups quickly enough to bring them service. Son would have to get NTT, which itself controls half of the ADSL market, to lease access to its switching stations. And even if Softbank accomplishes all this, it will post a $118 million operating loss, estimates J.P. Morgan Securities tech analyst Noriko Manabe.

To launch the strategy, Son has enlisted help from companies in which Softbank owns stakes. Yahoo Japan, the nation's leading Net portal, will handle marketing, sales, and billing. Asia Global Crossing Ltd. will contribute high-speed international fiber links. On June 20, Son bought Tokyo Metallic Communications Corp., a cash-strapped ADSL provider that will install equipment. Son says some 40 media companies will supply music, videos, and other content. The plan is generating some buzz. The day after the service was unveiled, more than 150,000 customers registered on Yahoo Japan's site, helping push its stock up 23% in a week.

But to get anywhere, Son must work with NTT. The carrier owns the "last mile" phone connections to most Japanese households and has a reputation for dragging its feet on meeting its obligation to lease its lines to other carriers. Aftser investing heavily on advertising and equipment, Tokyo Metallic nearly went bankrupt as it waited for NTT to grant access. Also, NTT is likely to slash its $33 monthly ADSL fee--which analysts regard as the breakeven point. Mitsui & Co pulled out of ADSL in June after NTT cut prices 25%. Sachio Semmoto, chairman of eAccess, which has 20% of the ADSL market, is worried about the fallout. "If we get into a price war, it'll be a disaster," he says. Son, too, has stumbled in broadband. In 1999, Softbank, Microsoft, and Tokyo Electric Power formed SpeedNet to link wireless technology with fiber networks. But technical snafus delayed the launch until this May, and Softbank cut its stake.

Analysts also doubt Softbank can sell enough content to pay for the 3 million lines it will install. "He's very exposed," says West LB Securities Pacific Ltd. Net analyst Ortwin Gierhake. Son has his work cut out to prove he has some magic left.

By Ken Belson in Tokyo

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