Hiroaki Kobayashi

Back to Contents of Issue: May 2000

Hiroaki Kobayashi
President and CEO, Tokyo Metallic Communications Corp.
Hiroaki Kobayashi must love obstacles. First he tried to force NTT -- NTT! -- to let his upstart ISP Tokyo Metallic Communications offer ADSL over its network. He succeeded, incredibly, but that was just the first high hurdle. Next come the technical challenges of offering "metallic" communications -- DSL uses copper telephone wires -- over NTT's increasingly fiber-optic network, and then there's handling the competition quickly filling up the new space he helped create.

Kobayashi has the right background: a Keio University alum with a major in economics, he founded Paradyne Japan in the early 90s. After AT&T bought Paradyne, Kobayashi founded Sonet International. Today, with 10-plus years in Japan's telecom industry, he's regarded as a leading figure in the field, particularly in xDSL.

Winning the right to run DSL over NTT's network is a major achievement: years from now it may be looked back on as the beginning of Japan's true Internet boom. By offering customers affordable, flat-rate, high-speed Net access, Kobayashi is forcing NTT to respond to the competition -- this month the telecom titan is reducing prices on its ISDN service, and more price reductions are likely.

ADSL's long-term survival in Japan is uncertain: the technology can cause interference with ISDN communications, the service areas and prices are subject to NTT's whims, and the copper networks that it runs over are being ripped out and replaced with fiber as part of a government initiative. But that's not stopping Kobayashi from using it to shake things up today.

Yaeko Mitsumori sat down with Kobayashi to find out more about his strategy and outlook. [Interview conducted in Japanese.]

Tell us about ADSL.
The ADSL business has a long history. Before I started this business, I was at Paradyne, a subsidiary of AT&T Corp. AT&T Paradyne invented a chip for ADSL in the early 1990s. It was the start of ADSL services. After a decade, we were able to launch our services at last.

How will you expand your service areas?
We are already providing our services in two areas in Tokyo. Soon we will launch the same services in four other areas. After that we are planning to expand inside the Yamanote Line by the end of 2000. There are 34 NTT branches within the Yamanote Line. We will launch services placing our ADSL devices at each of these 34 NTT branches. Since we are allowed to provide our services only on an experimental basis, we cannot increase the number of our subscribers much yet.

When will you be able to launch commercial-based services?
A government study group focusing on ADSL service is scheduled to release a final report in June. We expect that we'll be able to launch commercial-based services following the report.

How many subscribers are you expecting to get?
NTT said that each operational company (NTT East and NTT West) will provide services to 1,000 subscribers in the experimental services. We will provide our services to 10,000 subscribers. (1,500 per area.)

When you launch services at the 34 branches inside the Yamanote Line, how many subscribers are you expecting to get?
We are planning to provide our services to 5,000 users at each branch area. But I don't mean our firm will be able to provide our services to such a big number of subscribers very soon. It might not be until this coming fall before we will be able to launch services at those 34 branches. But we have already launched negotiations with each of the 34 NTT branches.

Once the government gives you the green light, will NTT open its facilities to you?
The MPT last year told the international community that NTT should let ADSL operators co-locate ADSL devices at NTT facilities and open its MDF switches to other carriers. I don't think our business will fail because NTT will not allow us to use its facilities. I feel everything is moving positively.

I heard that your firm is using both Annex A and Annex C modems. [Annex A modems are more popular in the States, but due to spectrum overlap they may interfere with ISDN in Japan. Annex C modems supposedly won't cause interference, but cost more.]
We are using both Annex A and Annex C. ISDN services have been more widely used in Japan compared with, for instance, in the United States. So there are some concerns that the new ADSL services may interfere with conventional ISDN services. That's why the government standardized Annex C, which was designed not to impose any serious impact on ISDN communications. But in fact there are many unknown issues, such as what kind of impact ADSL has on ISDN when the service is used around the clock. In order to clarify the impact, we will use both formats. Basically we will use Annex C in the areas where interference is possibly strong. I heard that other ADSL operators, such as NTT and KDD, are using or are going to use Annex C modems only.

What is the price gap between Annex A and Annex C modems? It sounds like Annex C modems are more expensive than Annex A ones.
Annex C was developed for use in the Japanese market, and is, therefore, useless in the United States. From an ADSL carrier's point of view, it is better to bring in Annex A systems from the US market because they are less expensive. Today many makers are manufacturing both format devices.

What is the target number of subscribers?
It's hard to say. NTT has roughly 900,000 ISDN subscribers and 7 million users for regular phone services in Tokyo. In total, around 8 million subscribers are in Tokyo. We will be pleased if we can get 10 percent of them, or 800,000 subscribers. But it's a tough job for us to construct such a great number of systems. Even if our engineers construct 1,000 a day, they can complete only 240,000 in a year (assuming they work 240 days a year). If this is true, it would take four years to complete 1 million systems. We are now seeking a way in which we can expand more efficiently. [According to Tokyo Metallic spokesperson Kayo Hirata, for the first several months engineers will visit each new subscriber and set up their systems for DSL. After that the company will use a door-to-door delivery service to send users the gear and instructions they need to set up their systems themselves.]

There are other carriers planning to launch ADSL services. How do you differentiate yours?
We welcome competitors. When there was only one electronics store in Akihabara, not so many went there for shopping. But because many others came in and a shopping street was created, the town began to attract many shoppers. Our business is similar. We actually prefer that many other carriers enter this market and rapidly expand their ADSL networks, rather than us being the only player, constructing our system gradually.

But how can you differentiate your services then?
To attract more customers, operators have to provide their services sooner, in wider areas, and at lower prices. In order to provide services at lower prices, we have to purchase ADSL modems at lower prices. But more important, we should construct an efficient backbone network. Because we have been conducting an experiment with ADSL technology in Ina City in Nagano Prefecture since 1997, we have the know-how to efficiently construct the backbone network. No one else has done this. Only we have that know-how right now.

ADSL users are required to pay NTT ¥800 monthly as a usage fee for the copper. According to some reports, that amount is a tentative agreement.
We are continuing negotiation over the fee. We are now examining why and how the price is decided at ¥800. I heard that the usage fee is $4 to $5 in the United States. I hope the issue will be settled in June.

What would be reasonable?
I think ¥400 to ¥500, the same as the United States. Users of NTT's networks are paying fees for using the whole NTT network already. It is not reasonable for NTT to collect additional fees even when users use a higher spectrum.

Does NTT need to apply special maintenance when the higher spectrum is used?
NTT is maintaining its copper wire networks regardless of the ADSL services. If its copper wire tends to become deteriorated sooner, or mice tend to bite them more, when the higher spectrum is used, then the firm might need to collect additional fees. I've never heard about that.

According to the tentative agreement, NTT will notify ADSL operators five years before eliminating any copper networks.
The present ADSL service does not work through optical fiber networks because it was developed for running over copper wire. So we requested that NTT give us five years advance notice before it scraps the copper networks to replace them with optical fiber.

So what will you do five years after that?
There are many choices. For instance, we can rent the optical fiber from NTT.

Do you think copper networks will diminish eventually?
Right. Copper networks will diminish gradually. But for the moment there are copper networks available and we can use them for our business.

How many more years do you think copper wire will exist?
There are large gaps in the data transmission capacity between copper wire networks and optical fiber networks. Optical fiber networks can provide much higher transmission speed, but are more expensive. On the other hand, ADSL can provide speeds 10 to 30 times greater than the present system at quite reasonable rates. Because of this, users may think they do not need to subscribe to the expensive optical fiber. When this happens the lifespan of copper wire networks will be prolonged and the era of optical fiber networks will be postponed. VDSL, for instance, can provide services at 26 or 52 Mbps.

I heard that your firm is planning to launch an experiment for VSDL services in Ina City soon.
We have a plan. When VDSL is used, users can receive motion pictures over copper networks. In the United States, there is tendency for people to continue to use copper wire. In Japan the impact of the FTTH project [replacing copper with fiber, sponsored by the government] may have an impact on the shift from copper wire to optical fiber networks. But the FTTH project is expensive. I believe the copper wire era will continue for a while even in Japan.

Do you think optical fiber will eventually take over xDSL?
I am sure that the speed of DSL services will be accelerated. But optical fiber is an option for users. When prices for optical fiber become as low as the present telephone services, then users of optical fiber will increase. Even in the optical fiber network era, NTT should not be given reign to dominate the market. Without any competitors, a free market will not develop.

Do you mean that Tokyo Metallic may launch its own optical fiber network business?
We may do so. But for the moment, we will focus on the copper wire business. We should use what we have available now.

What do you think about NTT's recent announcement to reduce the ISDN fixed rates to ¥4,500 (and ¥2,900 for limited areas)?
It's nothing. ¥4,500 for 64 kbps is not inexpensive. In addition, their customers still need to pay for Internet access fees for ISPs. Even if the ISPs charge for unlimited use at a low price of ¥2,000, the total price will end up being ¥6,500. On the other hand, we are providing 640 kbps at ¥6,300. But we are not satisfied with our current pricing. We may be able to provide 1.5 Mbps services at ¥5,500 per month in the future.

Can you provide 1.5 Mbps service with your present system?
We have to strengthen our backbone. Otherwise we may inconvenience our customers. But in Nagano Prefecture, some carriers are providing 1.5 Mbps services at ¥5,500, including Internet access charges.

Are you planning to expand your services nationwide?
Yes. As a first step, we have established Osaka Metallic. We would like to launch services in Osaka as soon as possible, although it seems that it will take several more months. We will not use NTT facilities like some ADSL operators. We are determined to compete with NTT. [At NTT branches, ADSL operators may either use the telco's devices or bring in their own. NTT prefers the former approach, which gives it more control.]

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