VoBB rises in Japan: voice over broadband has the potential to disrupt telecom markets around the world. It's already gaining ground in Japan

If you are an incumbent sitting on a nice, steady flow of cash from switched voice services that run over your last mile, why would you undermine that? The answer, unsurprisingly, is, you wouldn't, unless the alternative offered better margins, or you had little choice. McDonald's, after all, did not start out offering salad. Similarly, voice over broadband is still in its infancy, particularly in Europe. According to IDC there will be only around one million active VoBB users across France, Germany, Italy, Spain, Sweden and the UK in 2004 and still less than six million in 2009.

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However, there are markets that are developing quite differently. Japan, for example, is both well ahead of the UK and keen to catch up with neighbours like Korea. "The Japanese government provides some direct financial help to rural regions and has been very responsive in creating a regulatory framework that makes it possible to compete with the incumbent," points out Daniel Newman, an analyst with IDC in Japan. According to IDC, by 2007-2008 around 50 per cent of all households in Japan should have broadband. IDC expects that ADSL will still be dominant, with around three ADSL lines for every fibre connection. "At the end of 2003, of the 47 million Japanese households, around 13.6 million had broadband and around 19.1 million dial-up internet access," says Newman.

Hard competition

Yahoo! BB, the broadband provider owned by Softbank, is the main alternative competitor in the Japanese DSL market--pitted against NTT (East and West). It is, however, "by no means a two-horse race", says Mark Main, an analyst with Ovum. NTT offers a wholesale VoIP service to a number of ISPs, for example, that compete with it in the domestic market. At the end of March 2004, according to Ovum, there were 11.1 million DSL lines in Japan of which NTT had four million. Main estimates that Yahoo! BB and NTT are currently around "neck-and-neck" in terms of signing up new subscribers.

Softbank launched its "Yahoo! BB" voice over broadband service in April 2002, in tandem with Yahoo! Japan. By the end of March 2004, the service had nearly 3.8 million registered users (Table 1). The network is multi-vendor network and part of the equipment is being provided by Sonus Networks. The fact that the broadband services offered are best effort does suggest that the quality of the voice calls might be lacking, but Takehito Ichida, an analyst with RHK in Japan, describes it as "satisfactory" and equipment vendors are similarly sanguine. "The voice quality issue is a relic of the past. As long as providers have a properly engineered network--that is with a good, MPLS-base core--there are no problems at all," says J. Michael O'Hara, vice president of marketing at Sonus. O'Hara views 2004 as the year when the use of VoIP in access networks--and not just in Japan--will begin to blossom. He views broadband as "a really good catalyst to this, as operators do not need to own the last mile". He argues that one of the reasons that there has been "no glorious history of success" by alternative operators in getting to end users in a cost-efficient way is that the cost of entry using switched voice infrastructure is just too high.

Softbank may not be spending heavily on switched infrastructure, but it is considered to be making major outlays to attract subscribers. How much it spends on subscriber acquisition costs (SACs) is not clear as the company does not break out SACs as such. However, as of the end of March 2004, Softbank was signing around 73,000 additional Yahoo! BB subscribers a month and it reported a net loss for the year ending March 2004 of 107.09 bn yen (around US$950.5 m), which was seven per cent wider than last year's loss. Sales grew 27 per cent over the period to 517.39 bn yen. One of the most widely publicised marketing schemes used by Yahoo! BB was giving away free modems to passers-by in shopping areas.

"The only company clearly making money on broadband access in Japan is eAccess, which is a wholesaler with minimal subscriber acquisition costs. They are not out on the street handing out ADSL modems to people who might or might not use the service," says Newman.

Why Japan?

The strong development of broadband in Japan is not a matter of chance. "The pricing and process regime for LLU in Japan makes it incredibly cheap and straightforward. Clearly, the government has taken the view that they want to see Japan as competitive on broadband as other countries in the region. They also want Japan to gain the greatest socio-economic benefits from broadband services," argues Main.

Regulatory encouragement to service providers to offer broadband does not, however, necessarily translate into roaring consumer demand. "What is the driver for broadband growth in Japan? Price," says Newman. "ADSL is only marginally more expensive than dial-up." Japanese consumers use internet access and video services as well as voice, though there is an argument that the reduction in call charges that VoIP brings is one of the defining factors in demand. "The historic phone rates, both long-distance and international, were quite exorbitant. On-net VoBB calls are free [to other Yahoo! BB subscribers] and international charges are extremely attractive. Yahoo! BB built its own IP network to keep costs down," points out Main. He adds that around 85 per cent of subscribers to Yahoo! BB in Japan take the VoIP services. "The subscription to the voice service costs just US$3 a month, so it's really a question of 'why not take it,'" he adds.

Newman is more sceptical about demand for VoBB. "Voice is becoming a required feature of the service, but I don't think anyone takes broadband to get voice," he says. As things stand around 35 per cent of broadband subscribers in Japan (both ADSL and fibre users) take VoBB today, according to Ichida. "The subscriber base should grow gradually this year, but it may grow more rapidly in one or two years since incumbent service providers are planning to widely offer VoIP in the near future," he adds.

Though broadband voice may or may not be the main driver of broadband take-up in Japan, it undoubtedly has the power--over time--to undermine switched voice revenues. This horror scenario (for the incumbents) of an expensive race to protect the fixed voice market is still many years away in Europe, according to research from Analysys. It estimates that the market for voice over broadband (VoBB) will be around [euro]1.3 bn in 2007, with most of that sum generated by small businesses. The main brake on consumer take-up, Analysys points out, will be the limited broadband penetration in Europe, together with limited incentive for the incumbents to encourage the use of VoBB. BT may have grasped the nettle partly because the cable operators in the UK can provide additional competition.

"In some respects, the Japanese market is unique. Long-distance calls were very expensive--around ten times the cost of a local call--local loop unbundling was very cheap and Softbank came up with the money to build an all-IP network," points out Main. Japan also makes a striking contrast to the European situation in terms of what consumers are offered. "As the average loop lengths are quite short in Japan, suppliers can offer the upper limits on what ADSL provides. Speeds of 8Mbps and even 12Mbps are quite common and Yahoo! BB are preparing now for 45Mbps services. Beyond copper, around one million Japanese homes have fibre to the home," says Main. All of this sounds very sumptuous, but Newman cautions that the services may not be all they appear to be. "Though the headline speeds in Japan are high, they are only best effort. There can be a very steep drop off in performance if the subscriber is more than 1km away from the central office," he says.

Value over IP?

Even if the service sometimes falls short of the marketing hype, Sonus promises great financial benefits to the operator from the use of VoIP over broadband. "Charging just US$3 a month for voice is probably still good economics for Yahoo! BB," says O'Hara. According to Sonus, there are "huge" economic gains from using IP equipment, such as having equipment that takes up 80 per cent less rack space, though he also believes that this financial impetus is no longer the main reason why service providers are drawn to IP. "What you see now is people being more interested in services and convergence ... that is the real driving factor," says O'Hara. "Switch phone", "click to dial" and "find me, follow me" services are among those that are either made possible, or more practicable, by IP he adds.

Softbank has a pan-Japanese IP backbone and has expressed interest in launching a 3G service. It already has a licence to test TD-CDMA technology and the funds to expand its service portfolio could be provided by a recent US$1.4 bn debt issue. This issue caused some jangling of nerves in the market as it was bought by Nomura Bank, which was the lead manager of the deal, rather than by investors who showed little appetite for Softbank's corporate bonds. However, Softbank still has the money and looks likely to drive ahead with mobile.

What is intriguing about this is that the signaling protocols in IP mean that mobile operators using IP could start to compete with fixed operators. 'Fixed' operators not using the public internet to access wireless devices, over, say, WLAN, would have either to own a 3G network, or reach an agreement with a UMTS operator. However, it still opens up new vistas. "With SIP, mobile operators are no longer constrained to mobile devices," argues Tim Hubbard, director of next generation technical marketing at Nortel, who was speaking at a recent Yankee Group conference in London. This is a point that is being made with increasing frequency in the market. "By enabling services to be decoupled from the access, VoIP allows new products and business models to emerge," points out Stephane Teral, managing director at RHK. Hubbard reports that there is already a European mobile operator that intends to start offering its services on fixed-line devices, though details have yet to be released.

If a broadband operator like Yahoo! BB had a mobile network running IP, they could offer converged services. "In theory, with SIP they could offer full multi-media services to a fixed point (laptop, PC, etc) and a wireless terminal (PDA, new smartphone, etc). The SIP-enabled server would be located in Yahoo's data centre, and the clients on the user terminals (PDA, laptop, 3G smartphone, etc) would establish a connection to the server. At this point the terminal would be online and connected, able to use the multimedia services. Whether the transport is over a fixed network, wireless network, or combination of the two is irrelevant, it just needs to be broadband," says Hubbard.

This potentially disruptive force may be why Softbank is interested in spreading its broadband net wider than fixed networks. Even free VoIP calls on fixed networks do not lure people away from their mobiles and, if mobiles can move into the fixed space, fixed-line operators could lose control of the customer and find themselves functioning as utility capacity providers.

That said, Japanese mobile operators are not replacing their circuit networks just yet, says Ichida. "Service providers and vendors are developing and testing mobile phones using VoIP over WLAN," he says. Newman is also sceptical that Softbank might be worried about the sort of presence services supported by IP. "I think presence services could be very attractive to corporate users, but I don't think they are something that consumers will attach a lot of value to," he says. He also points out that Softbank's backbone enables it to cut out the backhaul costs that mobile operators have to meet. "If Softbank can recoup the running costs on offering mobile, anything over that is gravy," says Newman.

Table 1 Yahoo! BB subscriber take-up rates

                            End of March 2004  Monthly increase

Number of Yahoo! BB
  lines installed           Approx. 4,004,000  Approx. 73,000
Number of BB phone lines*   Approx. 3,782,000  Approx. 79,000
Number of central offices
  ready for service                     3,241             172

Source: Softbank Corp.

* The number of BB phone lines is based on the number of lines whose
registration is completed for the BB phone service.

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written by Ouida Taaffe

Ouida Taaffe, features editor (otaaffe@horizonhouse.co.uk)

COPYRIGHT 2004 Horizon House Publications, Inc.
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