Japans cable-TV industry faces new competitive challenges

Japan`s cable-TV industry faces new competitive challenges

By Paul Mortensen

The recent introduction of digital satellite broadcast services has put pressure on Japan`s struggling cable-TV operators. In the face of this increasing competition, their strategy is to offer services such as Internet and telephony via their hybrid fiber/coaxial-cable (HFC) networks. While this strategy has yet to pay off, some urban cable-TV operators are confident that the number of subscribers will pick up in the early 2000s, with the window of opportunity opened by the digitalization of terrestrial TV broadcasters.

Of the total number of cable-TV operators, the number of urban cable-TV operators (those who do not offer services to rural areas where conventional terrestrial broadcasts are difficult to receive) had reached 708 last year, 10.5% from the previous year. Meanwhile, the subscriber base of these urban cable-TV operators, the most prolific users of HFC systems, had surged to just over 5 million (up by 37.5%).

The overall sales revenues of cable-TV operators, meanwhile, increased dramatically (by 89.3%) in FY1996, reaching 𨕝.1 billion (US$1.6 billion). This contributed to a reduction in the cable-TV industry`s yearly "ordinary loss" to 䁾.7 billion (US$77.5 million), a decrease of ٴ billion (US$14.4 million) from FY1996. After noting that almost half (49.3%) of Japan`s cable-TV operators produced a profit in FY1996, the Ministry of Posts & Telecommunications (MPT) concluded that the condition of the cable-TV industry is continuously improving.

These statistics, however, cover a time when Japanese cable-TV operators had not yet been much exposed to the threat of digital technology. Two digital satellite broadcast services, PerfecTV (owned by Itochu, Sony, and others) and DirecTV Japan (led by Hughes Electronic Corp. and Matsushita Electric Industrial, among others), have recently been introduced, each offering about 100 channels. And the entry of one more satellite broadcaster, JSkyB (owned by News Corp., Sony, Softbank, and Fuji TV), began this year. It is inevitable that cable-TV operators will hereafter face fierce competition from satellite digital broadcast TV services.

One leading operator who is attempting to counter that challenge is Titus Communications Corp. (Tokyo), a cable-TV multiple-system operator jointly backed by Itochu, Toshiba, MediaOne International, and Time Warner. Titus has begun preparations for application with the MPT to launch Internet services in Kashiwa and Abiko, Chiba (an outer township of Tokyo). If the application is approved, Titus will become the first cable-TV operator in Japan to provide a full lineup of cable-TV, telephony, and Internet services.

To date, Titus has installed 750-MHz HFC systems in six service areas in Japan. As of June 30, 1998, the network had passed 778,000 homes and attracted 55,900 subscribers. Two years ago, those figures stood at 300,000 and 3000, respectively. The company`s aim is to form a network of 2 million households by 2001.

A key to enticing those households is budget-priced telephone services. Unfortunately, Titus has so far failed to attract the anticipated droves of customers due to aggressive rate cuts by conventional phone operators, such as Nippon Telegraph & Telephone Corp. (NTT--Tokyo). To counter rate reductions by NTT, Titus eliminated charges on nighttime calls in April. To take advantage of the free nighttime service, 343 users signed up the same month. Nevertheless, the number of subscribers remains small--approximately 2000.

Other cable-TV companies are planning to offer phone services but wariness about moving into the phone business is growing. The question remains whether the number of users that phone services can attract to cable TV is big enough to justify the additional investment needed.

Negotiations with NTT over fees for interconnection to its network are still ongoing after more than three years. Cable-TV operators will need to access NTT`s long-distance lines to link one network to another; such tie-ups could form the second largest local network after NTT. But the companies will need NTT`s cooperation if they ever hope to roll out interactive cable TV nationally. Issues to be resolved are the cost and time required for network modification by NTT and, of course, the access charges. These charges should be considerably less than those for new common carriers (long-distance services) because cable-TV operators have their own networks to originate and terminate calls. As they will pay access charges to NTT, they are hoping that most of the charges can be completely offset.

Internet a key service

Another key service is the Internet. In Japan, cable TV started being used in Internet service trials in 1996. Cable-TV companies basically become Internet service providers; the main difference is that a cable modem is installed in the cable-TV headend with potential for speeds approaching 10 to 30 Mbits/sec. Besides the fast speed, other selling points include dedicated access and no telephone charges. On the down side, not all locations are installed with cable systems that can handle data going both ways, so connecting through traditional services for uploading may be necessary. In short, Japan`s cable-TV operators still have a long way to go, in terms of both technical capability and business expertise, before they can successfully offer such services.

The road ahead is by no means easy, even for those operators who are successful in launching communications services. The cable-TV operators will face tough competitors, including the telecommunications carriers who can provide inexpensive Internet services--such as NTT`s Open Computer Network, Japan Telecom`s Open Data Network, and Teleway`s Sirius. NTT`s fiber-to-the-home (FTTH) plan is another major threat, since it would allow NTT subscribers to access the Internet at 10 yen per three minutes via NTT`s nationwide fiber-optic network.

As for NTT`s nationwide FTTH plan, a little-known fact is that NTT is concentrating its rollouts in areas where so-called multi-unit dwellings exceed 40%. Many cable-TV companies, on the other hand, operate in service areas that are far less densely populated. This may give them time to establish their own communications service infrastructure before fuller FTTH implementation, and thus keep their market share.

Titus is predicting massive consumer confusion in the early 2000s, when mainstream terrestrial TV broadcasting goes digital and starts to compete with satellite broadcasters. Subscribers will need either to upgrade to a new TV set or buy an adapter that allows their current TV sets to pick up the digital signal. This is the window of opportunity that the company hopes to exploit by offering "one-stop shopping" of telephony, Internet, and cable TV to potential subscribers. q

Paul Mortensen writes on telecommunications from Australia.