SachioSemmoto, a 64-year-old serial entrepreneur, has spent the last 22 years roilingthe Japanese telecommunications sector. And he is about to do it again.
Mr.Semmoto, a Fulbright scholar who earned a Ph.D. from the University of Florida in electrical engineering, went towork in 1966 for then-monopoly phone company Nippon Telephone & Telegraph(NTT), but eventually became restless.
He left in1984, armed with seed money from Japanese equipment and components conglomerateKyocera, to spearhead the introduction of competition on long-distance andinternational voice traffic as a co-founder of DDI, now Japan’s second-largest operator known asKDDI.
KDDI wasthe country’s first entrepreneurial telecom company, similar in spirit to MCIin the United States. The impact it and other newentrants had on the market can be seen in the cost of a phone call: In 1984, athree-minute call between Tokyo and Osaka cost $3.50. Today, it costs $0.07.
In 1999,Mr. Semmoto left KDDI and teamed with Eric Gan, an analyst at U.S. investment bank Goldman Sachs, tolaunch eAccess, which aimed to lower costs, raise speeds, and accelerate uptakeof broadband services in Japan. When the company started in 1999,subscribers were paying $157 a month for 64 kilobits-per-second connections.Today, thanks to eAccess and about 300 other competitive access providers,consumers pay $25 a month for speeds as high as 50 megabits per second, makingJapan one of the cheapest markets in the world for high-speed broadband.
eAccesswent public in 2003. The company became profitable in the fiscal year whichended in March 2004 and moved up to the Tokyo Stock Exchange First Section. Thesame year it bought out AOL’s Internet service provider business in Japan. Today it has a market cap of $1billion, 2 million subscribers, and in 2005 had profits of $160 million onsales of $500 million.
Mr.Semmoto is now on to his next project: building a new mobile phone company fromscratch. eMobile, a subsidiary of eAccess, is scheduled to begin operations inMarch.
Japan’s $75-billion mobile phone marketis dominated by three companies, NTT DoCoMo, KDDI—and Softbank, an Internet andtelecom service company best known for its Yahoo Japan unit. Although Softbank is arecent mobile entrant, it is not starting with nothing. In March, it paid $15.4billion for Vodafone’s nationwide mobile operation.
The bigthree have not been very aggressive in slashing prices. Japan’s 93.2 million subscribers payrates that are among the world’s highest: the cost per minute of mobile phonetime is $0.38 compared to just $0.05 in Hong Kong or $0.07 in the U.S., keeping usage low.
“I see atremendous opportunity in mobile,” says Mr. Semmoto, who is out to do in thecellular sector what he has already done in fixed-line voice and broadbandaccess. “I am going to need lots of guts and lots of luck, but I am confident,”he says.
Last year,eMobile was granted one of three new cellular licenses at no cost, opening themarket to the country’s first new entrants in a dozen years—and it’s sincesigned a roaming agreement with NTT DoCoMo. (The other two licenses went toIPMobile and Softbank.)
So far,eMobile has raised $1.2 billion in equity, including $489 million from parenteAccess, $340 million from Goldman Sachs, and $104 million from Asianinvestment company Temasek Holdings. It has also secured $1.9 billion in debt.
eMobile’smanagement team was one reason Goldman Sachs, an original investor in eAccess,invested in the mobile venture, Goldman’s largest investment to date in a greenfield operator outside of the U.S., according to Ankur Sahu, head ofthe bank’s private equity arm in Tokyo.
Mr. Sahusays eAccess delivered good returns, thanks in large part to Mr. Semmoto andMr. Gan, both of whom will play key management roles in eMobile. At eAccess,“these guys navigated the regulatory waters and the execution challenges anddelivered on every milestone,” says Mr. Sahu.
FormerU.S. Federal Communications Commission Chairman Reed Hundt, who agreed to be asenior adviser to eMobile, says he believes that Mr. Semmoto is among the firstto raise such a large sum of money for a greenfield telecom operator since the marketcrash in 2000.
“Sachio will prove—just as he did with eAccessin broadband—that he is a disruptive innovator who takes market share, bringsdown prices, and improves quality,” Mr. Hundt says.
“Sachio will prove—just as he did with eAccessin broadband—that he is a disruptive innovator who takes market share, bringsdown prices, and improves quality,” Mr. Hundt says.
He callsMr. Semmoto one of the three greatest entrepreneurs in Japanese IT andcommunications history. His other two nominees are Kazuo Inamori, the founderof Kyocera, and Matayoshi Son, the billionaire founder of Softbank.
In themobile sector, Mr. Semmoto will square off against Mr. Son and former employersNTT and KDDI, which got its start with Mr. Inamori’s backing. He will also goup against a Japanese personal handyphone (PHS) provider that he used to runwhen it was called DDI Pocket. The company was later renamed Wilcom andbranched out into mobile data after being sold to the Carlyle Group in2004.
“It isgoing to be a tough race,” predicts Michito Kimura, a mobile analyst in theToyko office of tech consultancy IDC.
And how.Softbank, for one, can be very fast on its feet, as it showed when its IPphone/ADSL business snagged almost 5 million subscribers, more than double thenumber of eAccess subscribers.
Indeed,established operators are far more worried about Softbank than they are abouteMobile, according to a member of NTT DoCoMo’s top management who recently leftthe company.
“Japan isa lucrative market but the lesson learned from Hutchison’s 3 in Europe is thatit is very difficult to make money starting greenfield in a market that hasbeen divided between licensed players for a while and has been saturated,” saysthe former NTT DoCoMo executive, who declines to be named. “If you try to dowhat Hutchison is doing in Europe, which is spend a lot of money, subsidize handsets andphone calls, and go deep in the red, your success is far from certain.”
Tough Road AheadBut Mr.Semmoto and his investors argue that eMobile does not have to beat NTT DoCoMoand KDDI at their own game. Many countries have more than three mobileoperators, and most are doing well. They reckon eMobile can generate $1 billionin income and be profitable even if it acquires 5 million subscribers or lessthan 5 percent of the mobile market and concentrates only on mobile data andprice-conscious customers, going head to head with Softbank and Wilcom. ExpecteMobile to take a completely new approach to everything, from network speeds topricing, handsets, and network equipment, says Mr. Semmoto. For openers, it’soffering only mobile data services and won’t start voice until March 2008.
It’s alsogiving foreign suppliers access to Japan’s traditionally closed market.Cozy relationships between telcos and domestic equipment manufacturers hadpretty much shut out equipment and handset makers like Samsung, LG, Motorola,and Nokia.
Mr.Semmoto cast the net wide when he asked for bids to build eMobile’s network,which will be based on high-speed downlink packet access (HSDPA), a technologywhich allows a migration path from third generation (3G) technology to higherdata transmission speeds. eMobile will have an advantage because it is notsaddled with legacy fees or a legacy network. Its network will be designed fromthe beginning to handle heavy data traffic and the next generation ofapplications such as mobile video, says Mr. Semmoto.
He saystop executives from every major foreign equipment maker have met with him,convinced that eMobile’s network will become an international showcase. Networkcontracts worth an undisclosed amount were awarded to Sweden’s Ericsson in March of this yearand to China’s Huawei in July, a real breakfrom tradition for a Japanese operator.
InFebruary, the company will come out with new handsets optimized for mobile datathat will be different than anything anyone has ever seen in Japan, or elsewhere, Mr. Semmoto says.He won’t disclose the manufacturer or say anything more, only that the handsetswill work anywhere in the world.
Still,competitor Wilcom has already unveiled a terminal that is a consumer equivalentto the BlackBerry and is offering its 2 million mobile data-only users serviceat up to 408 kilobits per second, says Nahoko Mitsuyama, Gartner’s Tokyo-basedmobile analyst. Mr. Semmoto says he isn’t worried; he used to run the companynow called Wilcom and says its network can’t hope to compete with the 3.6megabits-per-second data speeds eMobile plans to offer. “If eMobile andSoftbank start providing over 3 megabits per second that will be the end ofPHS,” predicts Mr. Semmoto.
Softbankhas its weak points, too. The purchase of Vodafone’s network saddled it withhuge debt—it has taken out ¥1.45 trillion yen ($12.34B) in loans. The companyalso has a lot of spending to do to upgrade beyond its second-generation (2G)equipment and fix other problems that have kept it at No. 3.
The lastweekend of October brought everything home: Softbank’s network proved unable tohandle a flood of requests from consumers who wanted to either switch in or outwhen Japan adopted number portability—the ability for consumers to changeproviders while keeping the same mobile number.
Softbankclaimed more consumers wanted in than out, but it was unable to processrequests.
Anotherissue is branding. Analysts are divided on Softbank’s approach to the market.Its broadband business thrived, thanks in part to aggressive promotion, whichincluded handing out free modems at subway exits. But some think the Yahoobrand, rather than Softbank’s, would have resonated better with young users ofmobile phones. (For some young consumers anything with the word “bank” in ithas a negative connotation, apparently.) The other problem is, when peoplethink about Softbank, “they think cheap price but not quality,” says Gartner’sMs. Mitsuyama.
But in thecoming months price slashing is what the mobile sector is going to be allabout, and Softbank will have a running start. The company launched a price warjust before the October 24 official launch of number portability. Customersdefecting from other operators are now able to choose between two options fromSoftbank: a discount of ¥200 ($1.70) per month off whatever package their formerprovider was offering them; and a range of services provided free for the firsttime, including all calls made outside peak hours to other Softbanksubscribers. It also said it would give away handsets at no initial charge.
eMobile,of course, can’t start cutting prices until it begins operation in March—and,right now, its brand has zero recognition with the public. So IDC’s Mr. Kimurapredicts it will be a very difficult road ahead. But Ms. Mitsuyama takes a morepositive view: if eMobile can offer attractive prices, terminals, and networkspeeds, the company has a reasonable shot, she says.
Born in the USAThewireless market is the latest example of how Japan followed the U.S. lead in telecommunications reformand is now leading the U.S, says Mr. Hundt.
First,KDDI followed MCI’s lead, says Mr. Hundt, then Japan adopted a version of the U.S. 1996 telecom law which stipulatedthat phone companies had to lease lines to rivals. Japan adapted those principles tobroadband, allowing rival companies to lease lines from NTT and convert theminto broadband through DSL. This created the legal basis for eAccess, and forSoftbank’s Internet operations.
Meanwhile,the U.S. flip-flopped on its unbundlingpolicy and removed that requirement from broadband. Japan soared in broadband usage, whilethe U.S. fell behind.
Then,partly as a result of Mr. Semmoto’s urging, the government decided that Japan should adopt the U.S.’ wireless policy and issue morelicenses for 3G services. “From long distance to unbundling of broadband, andnow on wireless, quite consciously Japan has chosen to copy from the openmarket, even while the U.S. has been feckless in its commitments to thosepolices,” Mr. Hundt says.
And thatfecklessness has brought the U.S. to a sorry state, in hisview—having gone from thousands of Internet service providers to just two (thetelephone company or the cable company), and from many wireless companies tojust Verizon and Cingular.
Japan—which few would have everenvisaged leading the way in telecommunications competition—is unlikely to lookback in regret. Opening up broadband access has achieved the desired result ofincreasing Internet penetration. Mobile competition is also likely to reap itsrewards.
Even withgovernment backing, it will be an uphill battle for Mr. Semmoto. But thenagain, nobody believed he could take on NTT when he started DDI or eAccess.
Contact the writer:JSchenker@RedHerring.com