Where Net Phones Are Really Ringing

Internet telephony is taking off in Japan, and that's making long-line players nervous

Communication costs have long been a heavy burden

for Tokyo Gas Co., Japan's largest natural gas utility. Last year it spent $9 million on phone calls and $3 million to maintain its 90 internal telephone exchanges. Then there's the expense of paying nearly two dozen engineers to keep the network humming. But Tokyo Gas is bidding farewell to all that: By next June, it plans to replace its 20,000 phone lines with a system that routes calls over Internet-style data networks. That will enable the company to slash calling fees by half, to $4.5 million a year, cut maintenance costs, and reduce its corps of engineers. "The savings are huge," says Hideo Tai, who oversees the company's information technology systems. "There's no doubt that Internet telephony is going to take off."


For cash-strapped companies, the appeal of Internet telephony is obvious. UFJ Bank Ltd. just kicked off a $36 million, three-year project to put in 37,000 Net phones. Mitsubishi Corp. (MSBHY ) and two of its group companies installed 5,000 Net phones in their new Tokyo headquarters, while Sumitomo Mitsui Banking Corp. is considering adding 50,000 Internet phone lines. Yano Research Institute Ltd., a private think tank, predicts that 12,000 companies in Japan this year will shift to Net phones, which work by turning callers' voices into digital bits and bytes and routing them over the Internet. Conventional phones create a dedicated circuit between each pair of callers -- a far more expensive process. By yearend, the country will have 5.3 million Net phone lines, up from 3.8 million last year. Four years out, Japan will have some 28 million Internet phones, Yano predicts.

Such numbers have turned Japan into the world's hottest market for Internet telephony. Much of the credit goes to maverick Masayoshi Son, founder of Softbank Corp., who triggered a boom in cheap high-speed Internet access with his Yahoo! (YHOO ) BB service. Now, Son is aiming to do the same with Net phones. Since April, 2002, Yahoo has offered BB Phone, which charges a flat nationwide tariff of 7 cents for a three-minute call, a savings of 90% over rates on conventional lines. Already, Son has attracted 2.8 million users, mostly consumers and small businesses. "Voice has been an NTT monopoly for too long," says the combative Son.


That couldn't be worse news for Japan's dominant carrier, Nippon Telegraph & Telephone Corp. (NTT ). NTT depends on the traditional phone market for 80% of its revenue. The company expects voice revenue to decline by some $9 billion over the next three years due to the spread of cell phones and Net telephony. Wireless isn't a huge issue, since the group's earnings are shored up by subsidiary NTT DoCoMo (DCM ), Japan's most profitable cellular operator. Net telephony, on the other hand, has NTT worried. So in March, the company started offering Internet phones to some corporate customers through its network services arm, NTT Communications. And on Oct. 7, NTT's two carrier subsidiaries got permission to roll out discount Internet phone services.

With competition heating up, NTT is right to be concerned. Teleport, based in Nagoya, has 70 corporate customers who can make unlimited domestic calls via Net phones for $90 a month. KDDI Corp., Japan's No. 2 carrier, is beefing up its Net phone business. And Tokyo's Fusion Communications Corp., a pioneer in Internet telephony in Japan, is picking up fat outsourcing contracts, including Tokyo Gas's system. "Japan is becoming a big battleground," says Hiromi Imakoga, Fusion's general manager. "No one can predict who will survive." Phone companies worldwide will, no doubt, be watching with keen interest.

By Irene Kunii in Tokyo

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