Japan Telecom stumbles into the red


In contrast to its fixed-line business, Japan Telecom's wireless unit remains in good health

By CNN's Kristie Lu Stout

TOKYO, Japan (CNN) -- Fixed-line woes have forced Japan Telecom into the red, posting a half-year net loss of 5.2 billion yen ($42.41 million) compared to a 6.9 billion yen net profit a year ago.

Japan Telecom, which is now controlled by Britain's Vodafone, has relied on its mobile unit J-Phone to lift its earnings. But that wasn't enough to offset the poor performance in its fixed-line business.

"Conditions have changed drastically," Japan Telecom President Haruo Murakami told a press conference. "For the second half, we still are facing many risk factors."

Fixed-line price war

For the full year to March, the parent company forecasts a 2 billion yen consolidated net loss compared with a net profit of 10 billion a year earlier.

Japan's telecom sector once enjoyed artificially high fixed-line rates, but deregulation has forced the nation's telecom players to compete with each other at cut-rate prices.

"The fixed line business is a poor business to be in right now," said Kork Boodry, Tokyo-based telecom analyst at Kresdner Kleinwort Wasserstein.

Telcos worldwide are reporting investment write-downs and a general slowdown in spending, but Japanese telcos must also contend with added pressure from the government to open access and lower rates.

NTT, once the incumbent monopoly, was forced under a trade accord last year to open its network to competitors.

In another move to introduce more competition, Japanese telecom authorities introduced the "Myline" calling system earlier this year. "Myline" allows users to pre-select their calling carrier of choice.

"The 'Myline' service is a bundled, discount service," said Gartner Group analyst Kenshi Tazaki. "So for example, NTT can increase their share in that bundled service, but on the other hand the prices are decreasing."

For the full year to March, Japan Telecom forecasted a 2 billion yen consolidated net loss compared with a net profit of 10 billion yen a year earlier.

To climb back into the black, analysts say telcos including Japan Telecom may have to undergo significant restructuring to cut costs.

"Carriers didn't take cost reduction seriously," said Boodry. "As revenue started to fall for voice services, they didn't cut employees."

Mobile business lift

The mobile side of the business, however, remains in good health.

"Put simply, J-Phone is very healthy," said J-Phone President Daryl Green.

Green told reporters in Tokyo that the company's new camera-equipped handsets helped boost average revenue per user (ARPU) for data services up 500 yen from a year earlier to 1,000 yen.

Combined first-half ARPU was 7,900 yen, the same amount posted the previous year.

Vodafone has expressed disappointment with Japan Telecom's money-losing fixed-line business, but denies rumors that it plans to sell it off to focus on wireless.

Analysts expect Vodafone to launch a major overhaul of Japan Telecom in the next few months, starting with the replacement of President Haruo Murakami, who will become chairman next year.

"The consensus is that Vodafone will eventually divest itself of the fixed-line business," said Boodry. "Vodafone is a wireless business and has no interest in fixed-line."

Japan Telecom shares closed at 395,00 yen on Wednesday, before the half-year earnings announcement.