Nippon Telegraph And Telephone Corporation Business Information, Profile, and History

Company Perspectives:

NTT Group aims to optimize corporate value of the entire group by boosting business and management efficiency throughout the Group.

History of Nippon Telegraph And Telephone Corporation

Nippon Telegraph and Telephone Corporation (NTT) is the largest telecommunications firm in the world. In 1999, NTT was reorganized as part of Japan's telecommunications reform and became a holding company for regional phone companies, NTT East and NTT West, and long-distance carrier NTT Communications. Along with traditional telephone services, NTT offers Internet access, broadband services, and mobile communication services. The company owns 64 percent of Japan's leading cellular provider, NTT DoCoMo Inc. Japan's telecommunications sector continues to face increased competition from foreign entrants, leaving NTT heavily focused on international investments--including the $5.1 billion purchase of U.S.-based Verio Inc.--and restructuring business operations. In 2002, Japan's government owned 46 percent of NTT.

Origins

In 1877, one year after its invention by Alexander Graham Bell, the telephone became available in Japan. At first its use was reserved for the government, public affairs organizations such as the police, and a few businesses. It was not until 1890 that telephone services became available to the general public. Lines were laid between Tokyo and Yokohama, connecting 155 Tokyo subscribers to 42 in Yokohama. The first long-distance service became available in 1899 between Tokyo and Osaka, and discussions began as to how the telephone industry could best be developed. In 1889, the government approved a state-run telephone system. Although there were calls for a privately run company to be established, the Sino-Japanese War of 1894 to 1895 and the Depression of the 1930s meant that calls for privatization went unheeded. In the 1930s, the Ministry of Communications created a special telegraph and telephone system research committee, which discussed the establishment of a half-government, half-private company. Initial plans were made for the formation of Nippon Telegraph and Telephone Corporation but were abandoned again due to an economic downturn and a sudden decline in the number of telephone subscribers. The outbreak of World War II led to another drop in telephone subscribers, to 468,000. It was not until 1952, after a bill for a public telephone company was passed, that the Nippon Telegraph and Telephone Public Corporation (NTTPC) was formed, based on recommendations issued in a report by the government-run Telegraph and Telephone Restoration Council. In 1953, KDD Ltd. was established to facilitate international telecommunications, and international telegraph and telephone business was transferred to this company.

Postwar Demand for Telecommunication Services

As Japan began to recover after World War II, the demand for telecommunication services increased. In 1953, NTTPC's first five-year expansion project of telegraph and telephone started, leading to an increase in the number of subscribers from 1.55 million to 2.64 million. Fueled by consumers' needs and advances in telecommunications technology, by 1963 the number of subscribers had increased to 9.89 million. As NTTPC's domestic market grew rapidly, NTTPC began to expand into the international market, although at this time technical cooperation was the extent of NTTPC's international involvement.

Within Japan, the demand for telecommunication services continued to grow. By 1972, the number of telephone subscribers had reached 20 million, and despite the demand caused by such enormous growth, NTTPC saw two of its aims realized in 1977: telephone services became available nationwide and the company was able to install services as soon as they were required. Automatic dialing also became nationally available, and with the goal of international involvement, an international office was opened in 1979.

NTT Is Partially Privatized: 1985

Moves towards privatization came slowly. Meanwhile, NTTPC began to examine its infrastructure. The second ad hoc commission on privatization in 1981 examined the "public" corporate side of NTTPC and saw privatization as a way of improving efficiency. A third report detailed plans for privatization, reorganizing the company's structure and making independent the data communications systems sector; in May to July 1988, the latter was established as NTT Data Communication Systems Corporation (NTT Data), a wholly owned NTT subsidiary. NTT's corporation law went into effect on December 20, 1984. Nippon Telegraph and Telephone Corporation was newly launched as a privatized joint stock corporation on April 1, 1985, with the provision that the Nippon Telegraph and Telephone Law be subject to revision within five years. On an international level, similar events were taking place in the United States and the United Kingdom. In 1984, the British Telecommunications Bill came into force, allowing the privatization of British Telecom and liberalizing the British telecommunications industry, as competitors such as Mercury were issued licenses to operate. The United States followed a similar pattern in 1984, when American Telephone & Telegraph Company's Bell System was broken up and restructured into seven regional holding companies.

After privatization, the market opened to new carriers to start operations in competition with NTT. In April 1985, three carriers--Daini-Denden, Nippon Telecom, and Teleway Japan--applied for approval to operate as telecommunications companies. One effect of direct competition was that NTT was obliged to make a reduction in long-distance rates and upgrade its services. In July 1985, several new services were launched. A further measure to enhance performance was the restructuring of NTT's business into divisional organizations and the reorganization of the research and development headquarters from four to nine laboratories. NTT's first subsidiary company was launched in April 1985 and marked the opening of a chapter in NTT's history that would lead to the establishment of over 80 subsidiaries. The first was NTT Lease Co. Ltd.; its activities included the leasing and installment sales of terminal equipment.

Privatization Leads to Changes in International Growth

In terms of international activities, privatization allowed NTT slightly more room to maneuver through the creation of subsidiaries that had greater powers abroad. Prior to privatization, NTTPC's overseas operations on the whole had been restricted to participating in international exchanges, sending experts abroad and forming agreements with a number of countries. As early as 1954, NTTPC had accepted trainees from Taiwan, and up to the early 1990s accepted approximately 160 trainees from 60 countries a year. The expert dispatch scheme that started in 1960 has resulted in more than 500 specialists being sent to 54 countries. During the 1960s and 1970s, a whole series of technical assistance programs were arranged between participating countries and NTTPC. Projects as diverse as assisting with the establishment of a training center in Thailand in 1961 or setting up a microwave radio system in Paraguay characterized NTTPC's activities abroad at this time. Kuwait, in particular, was involved in a whole series of projects. A contract was signed in June 1965 between Kuwait's Minister of Communications and NTTPC that led to the launch of a ten-year project.

The setting up of representative offices was another method whereby NTTPC extended its operations overseas. NTTPC's first overseas office opened in Bangkok in 1958, offering technical assistance, and a European base was established in 1965 with the opening of the Geneva representative office. This was followed in 1973 with the opening of NTTPC's London representative office. Prior to NTTPC's privatization, the London office had concentrated on issuing bonds and collecting information. NTT Europe Ltd. was formally incorporated in the United Kingdom in 1989 to encourage cooperation with that country's own telecommunications industry and to help extend global networks for Japanese business users. In similar fashion, the representative office in Brasilia, Brazil, became an officially registered overseas subsidiary company in November 1987. NTT do Brasil Comercio e Representacoes Lomita provides technical assistance and supports international exchange programs to countries in South America, in particular Brazil and Argentina, as well as Mexico. Representative offices also opened in Jakarta, Indonesia, in 1972; in Kuala Lumpur, the Malaysian capital, in 1986; and in Singapore in 1990. After the restoring of diplomatic relations between China and Japan in 1972, NTTPC made a technical exchange agreement with China in 1980, leading to the opening of an office in Beijing in 1985.

NTT had a presence in the United States as early as 1966, when NTTPC employees were sent to New York. In 1970, a branch office was established with the primary objective of forming connections with U.S. carriers, and that went on to play an important role in international procurement. Due to an increase in business, NTT's California representative office was established, and after privatization NTT expanded its U.S. operations, incorporating the two U.S. offices into NTT America Inc. NTT also established exchange programs with several U.S. companies, including NYNEX and Pacific Bell, and a number of equipment purchase agreements were made. In May 1986, a purchase agreement was set up with Northern Telecom in a $250 million deal.

NTT International Corporation (NTTI) was established in the year of NTT's privatization. Starting with ¥3 billion and 150 employees, it had become one of NTT's largest subsidiaries by the late 1980s. Originally established with the aim of providing consulting services related to the telecommunications industry and providing products to overseas buyers, NTTI was able to carry out a number of functions overseas that the NTT Corporation was unable to do because of Japanese regulations. Marketing NTT's products overseas and carrying out market research to see which products would be profitable were two important functions of NTTI. A third was to provide services related to the establishment of telecommunications infrastructures. An example of such work was a development project funded through NTTI by the World Bank in Indonesia. Australia was another country in which NTTI was active, helping to develop a facsimile mail service in 1987. In Finland, NTTI sold large numbers of hand-held computer terminals to a Finnish bank.

The Recruit Scandal: 1988

NTT's fluctuating fortunes since privatization tended to be reflected in the company's share price. In October 1986, the minister of finance invited tender for the initial price of NTT stock before flotation. The initial price decided on was ¥1.97 million. By February 9, 1987, NTT was listed on the Tokyo, Nagoya, and Osaka stock exchanges and was soon to be extended to other Japanese stock exchanges. After shares were floated, they reached a high of ¥3.18 million in 1987 but then collapsed to ¥1 million by the end of 1990. Another contributing factor to NTT's struggles during this time was the infamous "recruit scandal" that hit Japan in 1988, when a number of senior officials were accused of accepting bribes. Scandal hit NTT when its former chairman Hisashi Shinto received a heavy fine and a suspended jail sentence for his part in the illegal activities. The post of NTT chairman was left open until Haruo Yamaguchi was appointed to the post in the middle of 1990. Although NTT corporation law originally obliged the government to hold one-third or more of the total number of outstanding shares at all times and stated that "no foreign nationals or foreign judicial persons" were allowed to possess NTT shares, after some deliberation in October 1990 NTT announced a plan overturning this law. In December 1990, the Japanese government declared that it would start selling 500,000 shares a year beginning in April 1991. In 1992, foreign investors were allowed to purchase NTT stock for the first time.

Launching New Services: Late 1980s

Privatization also forced NTT to examine its operational efficiency and to provide better customer services. On May 23, 1988, NTT Data Communications Systems Corporations was established as a wholly owned subsidiary. Aimed at designing data communications that link hardware with software for financial institutions, private companies, and government organizations, NTT Data also provided training seminars and consultation facilities. It proved to be a profitable part of the NTT group. In 1990, operating revenues from NTT Data increased to ¥306.1 billion. One of NTT Data's major achievements was helping to set up the Tokyo International Financial Futures Exchange System in June 1989. Further recognition came to NTT Data when its IC Card, a card that allowed Nissan car owners to store car history information, won the 1989 Nikkei Annual Products Award. Another significant move was the introduction in April 1988 of INS-NET 64, described as the world's first wide-area commercial integrated services digital network (ISDN). NTT, KDD, and AT&T put together a three-day presentation simultaneously at sites in Japan and New York. Following this, NTT sponsored a global ISDN exhibition, NTT Collection '90. Approximately 40,000 visitors attended this exhibition that demonstrated the capability of ISDN and featured an actual ISDN link-up between NTT, AT&T, British Telecom, France Telecom, and Singapore Telecom.

In the area of international equipment procurement, NTT began to play a greater role. In accordance with the General Agreement on Tariffs and Trade (GATT), by 1990 orders had grown by nine percent to $352 million and included purchases as diverse as digital transmission equipment from AT&T, digital switching systems from Northern Telecom, and pocket bell pagers and cellular telephone equipment from Motorola. Procurement seminars were held at various European sites to encourage European suppliers, as well as in various cities in the United States.

By March 1989, NTT's performance was suffering because of increased competition from other common carriers, the cost of launching NTT Data, and the enforced reduction in long-distance telephone rates. In order to bring about recovery, NTT re-examined its administrative structure and in April 1989 reduced its four-tiered administrative structure to three levels. Another cost-cutting reform was the reduction in staff numbers. At its peak in 1979, NTT had 330,000 staff, but by 1989 the company had managed to reduce this number to 276,000. Not satisfied with this, however, there were further plans for greater reductions in staff.

In an interview with the Financial Times in January 1991, the president of NTT, Masashi Kojima, spoke of some of the problems NTT was facing. Enforced cuts in rates, because of increased competition from other carriers, and a scheme whereby competitors were connected to the network at a rate that reduced NTT's profitability, led to some resentment. President Kojima favored the introduction of a new kind of access charge or fee system to create a fairer market.

In terms of long-term international strategy, Kojima did not have ambitious plans for NTT to play a full international role but favored a specific international strategy that meant installing a network in a country with less developed telecommunication systems. In March 1991, however, discussions were under way for a joint venture between three of the most powerful telephone companies: NTT, the British telecommunications group, and the German telecommunications group Deutsche Bundespost Telecom. This joint venture, called Pathfinder, offered a telecommunications network to large international companies. This presented NTT with the problem of operating internationally while still abiding with NTT corporation law. In an effort to exploit the potential of the European market as it moved towards greater unity, and the markets of Eastern Europe and the countries of the former Soviet Union as they become more accessible, NTT announced in June 1991 the establishment of a new subsidiary in Düsseldorf, Germany: NTT Deutschland GmbH.

In the early 1990s, NTT's plans centered on streamlining its operations in a cost-effective fashion and offering high-quality service to its customers. In an attempt to promote a fair and open market, NTT opened the Fair Competition Promotion Office in 1990. In the long term, NTT stressed the need to develop ISDN technology and to realize the importance of the cellular mobile market.

Indeed, the focus on ISDN and new broadband technologies, as well as mobile phone services, would prove to be cornerstones to NTT's growth strategy. Throughout the 1990s, NTT increased its research and development efforts related to cutting edge technologies. In 1992, it created subsidiary NTT Mobile Communications Network Inc.--now known as NTT DoCoMo--to oversee the sales of its mobile phones. By 1997, NTT controlled nearly half of Japan's cellular market, which was deregulated in 1994.

Deregulation Leads to Reorganization: Late 1990s and Beyond

During the late 1990s, Japan's telecommunications sector was changing rapidly. Foreign companies were allowed into the Asian market, which brought on a wave of increased competition. In December 1996, NTT lost its monopoly on local service. In return, however, the firm received approval to offer international services for the first time. By 1997, it had operating licenses in the United Kingdom, France, Germany, Hong Kong, and Singapore.

As deregulation knocked on NTT's door, company management struck a deal with the Japanese government to reorganize the company while at the same time keeping it largely intact. Reorganization plans were set in motion in 1997 and finalized two years later. NTT became a holding company for three major subsidiaries: NTT East Corp., NTT West Corp., and NTT Communications Corp. Its local phone operations were divided into NTT East and NTT West, while its long distance and international telecommunications operations became part of NTT Communications. As NTT management eyed the reorganization as a rebirth of sorts--an opportunity to make key strategic changes, cut costs, and revamp corporate culture--NTT's competitors viewed the new company just as it had the old one. In fact, a 1999 Economist article claimed that "as rivals see it, NTT continues to dominate local calls, long-distance, leased lines, cellular and data communications, just as it did before the break-up." The same article pointed out that NTT's reorganization in Japan was "nothing like the break-up of AT&T in America during the 1980s, nor the busting of most national telephone monopolies in the 1990s."

Even after its restructuring, NTT held on to nearly a 90 percent share of Japan's telecommunications market. By this time, its cellular subsidiary, NTT DoCoMo also controlled a 57 percent share of Japan's cellular market. Because of its long-standing control over Japan's infrastructure, Internet users in Japan paid an estimated five times more than Americans or Europeans for access. A July 1999 Forbes article claimed that a telephone line installation cost nearly 11 times more in Japan than in New York.

The Japanese government slowly put pressure on NTT to lower its prices. In late 1999, both NTT East and NTT West began offering flat-rate Internet service with an approximate monthly fee of $75. As Japan's Ministry of Public Management, Home Affairs, Posts, and Telecommunications became even more focused on increasing competition in Japan's information technology sector, NTT's close relationship with the government, which brought it many benefits, appeared to be diminishing.

As such, NTT entered the new century intent on maintaining its market share. In 2000, it made a $5.1 billion purchase of Verio Inc., a U.S.-based Internet solutions provider. Meanwhile, NTT DoCoMo had invested nearly $16 billion in global cellular companies that included AT&T Wireless and KPN Mobile in Europe. That plan backfired, however, when shares of many wireless firms in the United States and around the world began falling off. By October 2002, DoCoMo was forced to write off over $13 billion of its investments.

Overall, NTT was suffering due to Japanese deflation, increased competition, and a general slump in the information technology sector. During 2001, the company launched a three-year business plan aimed at restructuring its regional phone companies and shifting focus to integrated cellular and Internet services along with various broadband offerings, including an asymmetric digital subscriber line (ADSL). The company also nixed much of its spending related to its fixed lines and planned to cut back on capital spending by 15 percent through 2003.

In 2002, Norio Wada was named president of NTT. During that fiscal year, the company posted a $6.35 billion loss, the largest ever reported by a non-financial firm in Japan. The company claimed restructuring charges and investment losses were to blame, in addition to continued deterioration of the economy and falling personal consumption. NTT's new leader pledged to position the company favorably in order to benefit from changing demand and new technologies. As competition in the global telecommunications industry continued to heighten, NTT indeed faced a challenging future.

Principal Subsidiaries: Nippon Telegraph and Telephone East Corporation; Nippon Telegraph and Telephone West Corporation; NTT Communications Corporation; NTT DoCoMo Inc. (64.1%); NTT Data Corporation (54.2%).

Principal Competitors: AT&T Corp.; Japan Telecom Holdings Co. Ltd.; KDDI Corporation.

Chronology

• Key Dates:
• 1952: Nippon Telegraph and Telephone Public Corporation (NTTPC) is formed.
• 1977: Telephone services become available nationwide.
• 1985: Nippon Telegraph and Telephone Corporation (NTT) is launched as a privatized joint stock corporation.
• 1988: NTT Data is established as a wholly owned subsidiary.
• 1992: Foreign investors are allowed to purchase shares of NTT for the first time.
• 1999: NTT is reorganized into a holding company with three major business units--NTT East, NTT West, and NTT Communications.
• 2002: The company posts a $6.35 billion loss--the largest loss ever recorded by a non-financial firm in Japan.