Though the adoption of broadband technologies in Japan has been sluggish to date, market watchers would be wise to mark August 1, 2001 on their calendars as the start of something special in Japan's Internet market. On this date, NTT and Yahoo Japan Corp. are scheduled to launch competing new broadband services aimed at attracting more users at bargain prices.

The Japanese government made a sound commitment to promote nationwide broadband proliferation in a major policy paper that it released last month. In its "2001 Communications White Paper" the Koizumi government boldly asserts that the widespread introduction of broadband in Japan will spur the nation's "IT Renaissance."  Specifically, the government is promoting the development of multiple broadband infrastructures aimed at encouraging new market entrants, greater competition, and lower prices.

High-speed broadband Internet technologies provide users with a richer, more interactive online experience. Businesses too are gearing up to reap the benefits of high-speed Internet service. A recent study by Verizon Communications calculates that the widespread introduction of broadband to both businesses and homes should contribute almost $500 billion annually to the US economy. Japan can expect similar results.

Japan has lagged behind other countries such as South Korea, Canada, and the US in bringing broadband to homes and businesses. But just this year, Japan has begun to display all the necessary ingredients that support rapid broadband development-government promotion, a competitive market, rival infrastructures and technologies, and access to an unbundled local loop for new market entrants.

Broadband growth projections in Japan are high. In January 2001, the IT Strategy Council's e-Japan Plan set the ambitious goal of achieving the world's most advanced Internet network within the next five years. A key aspect of this goal is the provision of affordable, "always-on" high-speed access in 30 million households and ultra-high speed access in 10 million. Now, only a half-year later, this goal seems increasingly achievable as more new companies enter the market with rival services running on different infrastructures. Not surprisingly as competition increases and investment costs rise, profit margins are shrinking. Incumbent telecom operator NTT (East and West) will weather the storm but several new entrants will likely fold in the coming months.

According to the latest Organization for Economic Cooperation and Development (OECD) numbers, South Korea and Canada have emerged as the top two international leaders in broadband deployment. Nine in every 100 South Korean households have high-speed Internet access. This figure represents 6 million South Korean households, or 41 percent of the total with Internet access. By contrast, Canada has just over 4 in 100, and the US ranks a distant third with a mere 2.25 in 100. Japan ranks eleventh in terms of broadband connections per 100 inhabitants, with less than 1 per 100.

The 1997 Asian financial crisis hit South Korea hard and forced economic reforms, including efforts to open the telecommunications market. Canada also achieved high penetration rates by adopting several basic policies that emphasized market competition and open access to the existing telephone infrastructure. Encouragingly, Japan is largely following suit. As Prime Minister Koizumi contemplates sweeping economic reforms, it seems appropriate to review what worked in Korea.

The guiding principles that shaped success in South Korea and Canada are the promotion of competition and the development of rival broadband infrastructures that can compete with the existing national telephone network. Digital Subscriber Lines (DSL) have been an early and popular broadband solution that can provide high-speed access by utilizing existing telephone lines and special conversion hardware. However, DSL is generally viewed as a bridging technology to more advanced and high-speed services such as cable, fiber optic Iines, and Fixed Wireless Access (FWA). With government support and a conducive market, South Korea and Canada experienced a boom in these alternative broadband infrastructures.

In Japan, the government's e-Japan plan has charted a similar approach by promoting the development of multiple broadband technologies and related infrastructures. Specifically, the e-Japan plan focuses on fiber optic cable, otherwise known as Fiber to the Home (FTTH). FTTH was originally pushed by the Ministry of Posts and Telecommunications in 1994 as part of their IT infrastructure plans, and the current round of aggressive deployment should create an attractive alternative to DSL or cable.

Additionally, as is occurring in most developed markets, fast-tracking efforts to "unbundle the local loop" is critical to ensuring competition and expansion in the broadband market. Canada led in unbundling its market and has been among the first to reap the benefits. In Japan, a Ministerial Ordinance on unbundling came into force in September 2000.

The US, ranked third in broadband household penetration by the OECD, has experienced a comparatively slow growth rate, especially in the rural areas. More than 50 separate Internet related proposals have been introduced this year in the US Congress. One standout in this welter of legislation is the Tauzin-Dingell bill, which attempts to promote increased broadband deployment by allowing the former Bells, who still control 92 percent of the local market in most states, to enter the market for high-speed access across regional boundaries.

The Tauzin-Dingell bill contradicts conventional thinking on promoting broadband development and open access. While it would require dominant local carriers to deploy high-speed Internet service in hard -to-reach and rural areas, it would also effectively "rebundle" the local loop by allowing the dominant telecom operators to offer long-distance data services without opening local networks to competitors. As a result, the Tauzin-Dingell bill could in time undermine local telephone competition, which will undercut market and price competition.

Japan would be wise to avoid a similar trap. The Tauzin-Dingell bill is a trade-off between leveraging the resources of dominant market entities to provide broadband services and opening the market to increased competition. Should high-speed access competitors stumble-as some already have-officials and Diet members will have to resist the temptation to turn automatically to NTT to meet the goal of extending high-speed connections to 30 million households by 2005.

NTT and Yahoo Japan are fighting for the same market but are offering divergent broadband technologies and infrastructures. This competition bodes well for the future of Japan's broadband market. NTT is offering high-speed Internet access via their fiber-optic network. Yahoo Japan, backed by majority owner Softbank, is offering an Asymmetric Digital Subscriber Line (ADSL) service. NTT's fiber optic network can deliver connection rates approaching 100 mbps, which is lightyears faster than conventional ISDN or analog dialup modems which do not exceed 64kbps connection rates. NTT is providing this service for between 11,000 to 6,000 yen per month depending on the service speed. Yahoo Japan's ADSL service is slower at 8Mbps, but at a cost of 2,280yen per month, will be an attractive option.

Yahoo Japan aims to acquire one million ADSL subscribers by December and there is a high likelihood they will succeed. Because DSL broadband solutions run on standard copper telephone lines, Yahoo Japan can, in theory, target the entire nation with their service. In contrast NTT's fiber optic network is still centralized in Tokyo and Osaka, and remains several years away from becoming a nationwide network. However, NTT is currently the largest provider of DSL service in Japan, with 62 percent of all DSL users, and is offering competitive rates. NTT DSL service provides 1.5 mbps for between 3,800 to 4,050 yen per month.

A number of companies are now in the broadband market and offer a range of options. Other DSL entrants include Japan's second and third largest telecom operators, Japan Telecom and KDDI, as well as eAccess, a startup that wholesales DSL networks to some of the nation's largest Internet Service Providers (ISPs). NTT's only major competitor in the fiber optic market, Usen Corp, remains small with only about 3,500 household subscribers. In the cable market, Jupiter Telecommunications Inc., a Microsoft subsidiary, has over 180,000 high-speed Internet subscribers. Their only rival, Tokyu Cable Corp, only provides access in the Tokyo metropolitan area to just over 46,000 subscribers.

Fierce market competition and multiple broadband access options are pushing consumer prices down. But price cuts are occurring just as the need to invest in infrastructure is mounting for both NTT and its new competitors. Relying on the deep pockets of the Softbank group, Yahoo Japan should be able to adapt to these conflicting pressures. Other early entrants, though, have begun to buckle under the strain.

Tokyo Metallic Communications Corporation serves as a warning. Despite being the first serious new entrant to challenge NTT, and the first to offer DSL in Japan in February 2000 (eventually securing 50 percent of the market), Tokyo Metallic was the first to fold. With thin profit margins, the company struggled to cover its initial investment costs. Before its acquisition by Softbank in July, Tokyo Metallic had disclosed that it was overdue payments worth 4 billion yen ($33 million). Faced with plans to implement drastic restructuring to maintain its market position, Tokyo Metallic had few options when Softbank presented a buy-out offer.

At the moment, the market is flush with new entrants offering broadband access in several different flavors. This has brought much needed fixed flat rates to Japan's Internet market at substantially reduced prices. The broadband market seems sure to consolidate over the next 12 months and many of the new entrants are likely to find that, like Tokyo Metallic, they will be unable to survive on razor-thin profit margins. Moreover, NTT DoCoMo 3G cellular, scheduled to start service in October 2001, will offer an additional broadband alternative and add another tier of competition. With Internet users expected to double by 2005, demand for affordable broadband connections is likely to increase. The real question that remains is how much of the broadband market will companies like Yahoo Japan manage to wrest from NTT. With unlimited local access, a new 3-year business plan that focuses on broadband deployment, and plans to invest 190 billion yen in its fiber optic network in this fiscal year alone, NTT, East or West, may be hard to beat.