The world’s second-biggest operator by revenues, Japan’s NTT Corporation, is making a fresh drive to acquire new business beyond its national borders, faced with a shrinking domestic market and likely restructuring of its businesses by the government. If it succeeds it will have a significant impact on the high end of the enterprise services market and the business of global operators such as BT, Orange and AT&T.
In recent months both NTT’s international networking services arm, NTT Communications (NTT Com), and its ICT solutions division, NTT Data, have made acquisitions, notably in Europe, to strengthen their enterprise services and solutions (see box p.16). “Service expansion is our target. We have the aspiration to provide global services to global MNCs,” says Takashi Ooi, vice president and senior manager of the Global Solutions Group at NTT Communications. “NTT Com as a whole group is stepping up activities into the global [arena]. This…coincides with the Group’s global strategies.”
NTT Group’s goal has been to double revenues from its global businesses between the 2007 and 2010 financial years. The move springs from the economic and demographic challenges that NTT and other large Japanese companies face in their domestic market. NTT Com’s total operating revenues fell 2.3% to 267.57 billion yen (about 2 billion) for the three months to 30 June, compared with the same period in 2008. Parent NTT Corp’s net profit for the fiscal year to March 2009 fell to ¥538.68 billion (about 4 billion) from ¥635.16 billion (about 4.7 billion) a year earlier; group revenues fell 2.5% to ¥10.416 trillion from ¥10.681 trillion.
Mobile arm NTT DoCoMo is also facing increased competition. In September, DoCoMo gained the fewest number of new mobile subscribers in the country: 66,000 compared to 108,000 for Softbank and 102,300 for KDDI. DoCoMo has a total of 55.19 million subscribers, KDDI 31.23 million and Softbank 21.32 million.
“We have to expand our revenue globally,” continues Ooi. Currently, half of NTT Com’s customers are non-Japanese companies, but it earns just 10% of its revenues outside Japan. “The ratio should be over 50% of non-Japanese companies,” says Toshio Nakai, senior manager of the global sales team at NTT Com. NTT America, one of the group’s largest affiliates, generates approximately US$300 million in annual revenues for NTT Com.
That leaves NTT Communications, like other enterprise service providers, looking to take advantage of demand for connectivity between the Asia Pacific region and Europe and the US. To this end, it has recently bolstered its network capacity and coverage. In May, NTT completed the purchase of Pacific Crossing for an estimated ¥10 billion (US$104 million), giving it a new trans-Pacific fibre link between Japan and the US.
At the time, analysts pointed to the deal as a significant development. “We have not seen many of the traditional carriers opting to become the sole owner of submarine cables in the past few years,” said Alan Mauldin, research director at TeleGeography. “NTT already has a large amount of trans-Pacific capacity spread across several systems. The company expects capacity demand to rise at such a pace that acquiring PC-1 was a cost-effective option.”
NTT Communications’ wholesale service, Global IP Network, provides IP transit to ISPs, enterprises and other large bandwidth users in the US, Europe, Oceana and Asia. According to its Total Telecom World Communication Award entry, NTT Com’s total revenue from its Global IP Network Service is now US$1.2 billion, an 11% increase from 2007/2008.
But it faces some stiff competition. Over the past 2–3 years Indian service providers Reliance and Tata, as well as Singtel and China Telecom, have also been heavily targeting enterprises that want connectivity between Europe, the US and Asia. What’s more, analysts say they have been heralding their services more vociferously than NTT Communications.
NTT Com says it intends to go a step further than other Asian providers by offering solutions and service levels that are at least on a par with the major US and European service providers AT&T, BT Global Services, Orange Business Services and Verizon. “The expansion is from Asia Pac,” says Ooi. “We expect that Chinese and Indian MNCs will be looking to global network [service providers for high-quality services].”
In addition to network connectivity, NTT Com provides server management, content delivery services and the hosting of exchange, voice, video and PCs. “The network is the basic offering. More and more companies are looking for the next phase and not just connectivity. We will see the data centre becoming stronger and some kind of server hosting and private cloud [service being offered by NTT Communications],” says Ooi. “Cloud services are evolving more and more. We are engaged in that field [and are] using [the] capabilities of the acquired companies and [their] expertise.”
In October, NTT Com announced that it will offer, as a cloud-based service, virtual hosting as a free trial service in Japan. The company said it plans to offer commercial cloud-based hosted services in April 2010, “as well as consider offering other hosting services that utilise virtualisation technology to overseas markets”.
NTT Com can already hold its own against the leading service providers when it comes to quality of service, say some analysts. “They have really high standards for SLA…procedures,” says Camille Mendler, vice president, Anywhere Enterprise, Yankee Group. “They have ISO 2000 certification. It’s not trivial to get and it’s a bellwether for how serious they are about service levels and monetising it.”
And it is not standing still. The acquisitions made in recent months by NTT Com and NTT Data are centred on high-end security services and the provisioning of complex software applications, notably SAP. At the end of June, for example, NTT Com announced a deal to buy Integralis, a German IT security solutions provider with revenues of €169 million in 2008.
“All of these acquisitions are not typical of telcos. They are not products but IT services. They are really trying to acquire some large corporate accounts with a different angle,” says Mendler. “It’s the next step beyond commoditised services.”
David Molony, a principal analyst at Ovum, agrees that NTT has “a good story on network performance and network security”. Now it needs to focus on “global accounts structure or a more forceful global accounts approach”, he says.
Today NTT Com and NTT Data operate as separate entities. “Pure applications like SAP and ERP: NTT Data has that expertise,” says Ooi. “We will continue to make investments in data centres and more and more value-added services. Hosting and other areas are a new revenue generator.” NTT Communications’ sources of operating revenues in the year ended March 2009 were voice services 37%, IP (Internet and IP-VPN) 31%, solutions services 17%, data communications 12% and others 3%.
Now there is a possibility that the two divisions may merge as the Japanese government—which still owns roughly a third of the company—weighs up how to restructure the NTT group. Currently, NTT Corp is split into short-distance service providers NTT East and NTT West, NTT Communications, NTT Data, and mobile provider NTT DoCoMo. “The reorganisation may happen at any time,” says Ooi. “In the global arena we work together to approach customers.” A restructuring could help NTT Communications to overcome one of its biggest challenges: the lack of a single global brand for enterprise services.
“The big issue [for NTT] is the clutter of brands,” says Mendler. “They have made judicious acquisitions of quality firms…but I don’t see the total integration.”
What’s more, it is seen as quiet at best when it comes to marketing outside Japan. “The NTT Group may not be so visible,” admits Ooi. However, the company is poised to make a big marketing campaign in 2010 in Europe under the “Your NTT” banner, according to one analyst. He believes NTT is likely to keep its business groups as separate entities “but will brand it all under one roof”.
In fact some significant restructuring has already taken place with an eye to better targeting customers and marketing services. NTT America reorganised earlier this year to create a new entity, the Enterprise Solutions Business Unit (ESBU), bringing together sales and customer support for its global private network services and enterprise hosting businesses.
“When we looked at the customer base we knew there were lots of overlaps between private line and enterprise hosting and there were some inefficiencies,” said Kazuhiro Gomi, CTO and COO of NTT America, in an interview with Total Telecom in August. There is also a need to sharpen NTT America’s focus on a smaller customer base of mid-sized companies that need access to Asia. In 2000, NTT Com purchased US Web hosting services company Verio for US$5.5 billion. Verio gave NTT a tier-1 Internet backbone and hosting capabilities across the US, and today this infrastructure leaves NTT America “in a position to provide…fairly sophisticated cloud services”, says Mendler at Yankee Group. But it also gave NTT Com a business serving SMEs that is spread thinly over a range of sectors, an anomaly it is still redressing.
“Our customer base is really vast, so we are a little stretched,” said Gomi. “I would like to fine-tune our niche, so [we are serving] more of a mid-market area and streamline operations and product lines. If that’s achieved it will be much better from a product efficiency perspective.”
There are signs this US restructuring may be paying off. NTT America counts Twitter among its recent customer wins, for which “it got lots of brownie points” from MNCs, says Mendler. And while NTT America has had to reorganise to redress a tilt towards SME hosting services, the streamlining of the US company reflects a group-wide shift. “The organisations [in the US and Europe] may differ, but the direction is the same,” says Ooi.
Indeed, other analysts point to NTT’s progress in Europe and its network and applications strengths. “NTT Com is emerging as a pan-European managed services player with ICT as well as networking capability,” says Ovum’s Molony in a research note. That poses a potential challenge to companies such as T-Systems. “What’s notable apart from the overall momentum swing away from European telcos is the focus that NTT Com has brought to the market,” notes Molony. “BT’s acquisitions on the continent were all about IT systems integration; NTT’s acquisitions are all about applications [and] SAP in particular.”
NTT Com stresses its acquisitions should not be seen as a focus on a given country or region, but rather should be seen as part of a larger global play, particularly as the company further develops its cloud-based services. “Integralis [for example] has global capabilities to provide security all around the world,” says Ooi.
Going forward, NTT Com will continue to add to its networking services. “We are expanding our layer 2 services in Asia and expanding data services,” says Ooi. “In Hanoi we have a new data centre. Vietnam is an expanding area and we are also in Singapore and Hong Kong. We are starting to have interconnectivity with other service providers and we are developing the strategy of Ethernet services in Asia, but also Europe and the US.”
Additional reporting by Ian Kemp
NTT ACQUISITIONS: EXPANDING HOSTING AND DATA SERVICES
NTT Communications’ two most notable acquisitions this year were German security service provider Integralis and undersea cable company Pacific Crossing Limited. But they are only part of a string of recent investments that illustrate the extent to which NTT is serious about gaining a stronger foothold in global enterprise networking and ICT services.
NTT Com plans to make Integralis’ security services platform available to its customers worldwide. The acquisition follows NTT Data’s purchase in 2008 of a majority stake both in German SAP specialist, Itelligence AG and Cirquent, the former IT consulting unit of BMW.
But acquisitions in Germany should not be read as a particular focus on Europe. NTT Com is also pouring investment into Asia and in particular network connectivity. Pacific Crossing, purchased in May, gives NTT Com a 21,000-kilometre trans-Pacific cable network—originally laid by Global Crossing—connecting the US and Japan, with a capacity of 3.2 terabits per second. In the same month, NTT Com announced the signing of a memorandum of understanding with seven other companies to co-construct the Asia-Pacific Gateway (APG), an undersea cable system connecting Japan, Korea, mainland China, Taiwan, Hong Kong, the Philippines, Singapore, Malaysia, Vietnam and Thailand. The network, which is scheduled to go into operation in 2011, will extend 8,000 kilometres and have a minimum capacity of four terabits per second. In June, NTT Data acquired China’s BNI Systems Corporation, an offshore systems development service company.
This year has also seen NTT Com open new subsidiaries and offices around the world, as well as adding points of presence and opening new data centres—it had 29 data centres globally by August. The company began the year by setting up a subsidiary in Russia. In 2007, NTT and Russia’s Transtelecom (TTK) jointly laid a 500-kilometre subsea cable between Ishikari, Hokkaido in Japan and Nevelsk, Sakhalin in Russia.
In February, NTT Com launched the Yuanqu Data Centre in Shanghai as part of an agreement with China Telecom Shanghai. NTT Com then opened its own data centre in Hong Kong in March, followed by another in April in Vietnam in association with Vietnam Posts & Telecommunications Group. During the same period the company set up offices in Belgium and India and added POPs in London, Paris and Brussels.