Where The Net Has Telecom On The Run

Yahoo! BB is luring subscribers in droves, and owner Softbank expects profits soon

Not so long ago, Nobuaki Tanaka had to think twice before calling his daughter. She lives in Saitama, northwest of Tokyo, and the Tanaka family home is 500 km away, near Kyoto. The 56-year-old high school teacher typically racked up bills of $100 a month and worried about spending too much time on the phone. "It was just too expensive," says Tanaka.

Not anymore. Since signing up for an Internet phone last April, he chats with his daughter whenever he wants. These days he pays $40 a month for high-speed Net access from Yahoo! BB. Included in the fee is a phone link using voice over Internet protocol, or VoIP. Calls to others who have the service are free, and calls to regular phones cost a maximum of 7 cents for three minutes -- about a fifth of dominant carrier NTT's (NTT ) peak rates.

It's enough to send shivers down the spine of a telecom exec. With its cutting-edge technology, Japan offers a window into what may be ahead for the rest of the world -- and that future looks mighty bleak for traditional phone companies. Voice calling is becoming just like e-mail or instant messaging -- an application that comes free with your broadband service. And if it's free, or nearly free, why not give it a try? Today, some 4.5 million people -- 95% of provider Softbank Corp.'s broadband customers -- use the Yahoo! BB voice service. By 2009, some 27 million Japanese households will have Net phones, predicts researcher Gartner Japan (IT ).

While other companies offer Net phone calls, credit for the speedy growth goes to one man: Masayoshi Son, president of Softbank. Until 2001, high-speed lines were available only from NTT. Then Son began offering broadband for about $22 a month -- just over half what NTT was charging. "Because of Son and Softbank, you pay much, much less for your broadband in Japan than anywhere else in the world," says Philip Sugai, a mobile marketing expert at International University of Japan in Niigata.


Early on, Softbank saw the potential of cheap phone calls. So in 2002, Yahoo! BB began including a free Net phone with its Internet service. "From the beginning our role was to stimulate the Japanese communications market," says Junichi Miyakawa, a Softbank director in charge of its phone division. Then, in October, 2003, the government created a special area code -- 050 -- for Internet protocol phones and mandated that NTT connect calls to them. "That was a turning point -- suddenly people could use their IP phone like a normal line," says Gartner analyst Kenshi Tazaki.

What's good for consumers hasn't done Softbank shareholders much good yet. For the year ended in March, Softbank posted a loss of $550 million -- its fourth straight year of red ink -- in part because of the billions it has spent on broadband development. This year, though, the high-speed unit is likely to show a profit of $276 million and push Softbank into the black, figures Deutsche Securities. Now, Softbank is trying to persuade broadband customers to add more profitable services. One hope is television, delivered via the same broadband lines. Last year, Softbank launched BBTV, which streams 24 TV channels for an extra $10 a month. There's also a video-rental service for $3 a film.

While Yahoo! BB is the giant in the market, it faces growing competition. Some 3.5 million homes receive broadband and IP phone service from rivals, including NTT, No. 2 cell-phone carrier KDDI Corp., and a host of regional players. And Yahoo! BB's broadband, delivered via DSL over copper wires, may soon be eclipsed by higher-speed fiber optic networks, with speeds of 100 megabits per second. Whoever ends up providing the service, Internet calling is going to keep folks like Tanaka and his daughter talking up a storm.

By Ian Rowley, with Hiroko Tashiro, in Tokyo

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