Cable Operators Roll Out VoIP
in Japan, But Trail DSL Rivals

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By Alan Breznick

Alan Breznick, a veteran business journalist, is editor of Television A.M. and Cable Datacom News.

If North American cable operators doubt the wisdom of moving into the IP telephony market sooner rather than later, all they need do is gaze across the Pacific at Japan.

As in the U.S., several large Japanese MSOs are starting to roll out voice-over-Internet-Protocol (VoIP) service to their high-speed data customers. Industry officials estimate that just over 50,000 cable customers, a small but growing fraction of the nation's 2 million-plus cable modem subscribers, have signed up for voice service so far. Projections call for cable operators, who have also been active in circuit-switched telephony, to add up to another 200,000 VoIP subscribers by the end of next year.

But that's where the similarity between the two markets ends because cable operators trail DSL and other rival broadband service providers by a wide margin in Japan, thanks at least in part to the industry's late start in introducing VoIP there. Softbank Broadband, which offers the DSL-enabled Yahoo BB (short for broadband) service, has already notched more than 3 million IP telephony customers for the market-leading service and is shooting to reach 5 million by the close of 2004. Plus, Japan's leading phone companies, which are deploying both DSL and fiber-to-the-home (FTTH) technologies, have signed up about 100,000 VoIP subscribers and aim to corral 500,000 to 700,000 by the end of next year.

"DSL basically rules the nation," says Daniel Newman, market analyst, communications, for IDC Japan in Tokyo. "The cable providers are lagging everyone else."

Newman projects that the Japanese VoIP market, which now has about 3.5 million users, will more than double in size to 8 million to 9 million by the end of 2004. He then sees the market expanding to roughly 20 million by the close of 2007. "We're expecting the vast bulk to be DSL users," he says.

Industry officials and analysts blame cable's lagging performance in Japan's surging VoIP market on several key factors. For one thing, they note, basic cable penetration is far lower in Japan than in the U.S., with cable operators claiming just 12 million to 13 million of the nation's 47 million homes, or slightly over 25% of total TV households. In contrast, U.S. cable penetration stands at a solid 67% of TV homes.

"The overall growth rate for cable television is pretty low," Newman says. "Cable is just relegated to being in second or third place." In fact, he notes, right now FTTH is "actually gaining more users per month than cable."

For another thing, cable operators are smaller, far more fragmented and thus less powerful in Japan than in the U.S., due to tight government regulatory restrictions on cable franchise size. As a result, there are hundreds of different, mostly small cable companies in a nation with a land mass no bigger than the state of California.

Finally, Japanese DSL providers are acting much more nimbly and aggressively than their cable rivals. Unlike the American DSL market, which is dominated by the four regional Bells in the States, the Japanese market has many independent startups competing against the big phone companies and cable operators for broadband users. DSL prices also tend to be lower than cable-modem prices in Japan, unlike the general market dynamic in the U.S.

"The big difference is that the DSL players are much more aggressive in building out their markets," Newman says. "In the U.S., it's still very much a cable-led market."

Thanks to such developments, Japan now has more than 4 million DSL subscribers and is projected to close the year with 5 million. In contrast, cable operators ended the first half of the year with 1.6 million cable modem customers and are expected to close 2003 with no more than 2.4 million.

Despite these factors, there is still hope for cable in the emerging Japanese VoIP market. Such large cable operators as Jupiter Communications (also known as J-Com), Japan's biggest MSO, are scrambling to catch up by rolling out broadband data and voice services now. Most are relying on @NetHome, a third-party data provider originally run by the defunct Excite@Home Corp. and since taken over by J-Com.

"With cable TV subscriber totals in Japan passing the 12 million mark this year, some of the country's leading cable operators are really beginning to emphasize cable telephony services," In-Stat/MDR said in a recent analyst report on the Japanese market. "Several other Japanese cable operators have stated that they are interested in providing cable telephony service once IP-based cable telephony services become more mature."

J-Com and the other MSOs are belatedly hoping to convince Japanese consumers that cable-delivered IP telephony offers more bang for the yen. J-Com, the largest Japanese cable player in telephony, now has about 400,000 circuit-switched phone customers.

"They (DSL providers) have the advantage in market penetration," says Jonathan Reid, director of business development for Syndeo Corp., which supplies its flagship call management server and media gateway controller to J-Com and other Japanese MSOs for VoIP service. "However, we (cable) have the advantage in market infrastructure. We have the ability to offer more features over our platform."

Industry analysts agree that the situation could improve for cable, particularly if J-Com and @NetHome can step up their broadband deployment. "If the economy is strong, the stage has been set for some good deployment," says Julia Mermelstein, a senior consulting analyst for ABI Research in New York. "Two thousand and four should be a good year."

If nothing else, the early Japanese cable VoIP results show that the technology works just fine. In spite of some initial problems with system interoperability between the different phone networks and with embedded multimedia terminal adapters (E-MTAs), Reid says, the cable plant is now smoothly handling IP telephony calls.

"The solution is deployable and it works for a significant number of subscribers," he says. "We're over that hump… There's been nothing really different that's been a showstopper."

As VoIP gets started in both places, there are many differences between the U.S. and Japanese telephone markets to consider. Starting with price, telephony offerings are much cheaper in Japan than in the U.S. Reid estimates that Japanese consumers pay as little as a third of the average American price for their phone service, at least partly because of greater competition.

The regulatory mandates of the two nations differ greatly too. For example, Japanese phone carriers don't have to meet the same federal regulatory regulations covering emergency calls and electronic surveillance to offer primary-line service.

In a third major difference, Japanese VoIP providers don't have the same concerns about providing dynamic quality-of-service (QoS) to customers. Reid says there's so much excess bandwidth in Japan that providers don't have to worry about data transmission delays and traffic bottlenecks, as they do in the U.S.

Finally, even more than Americans do, the Japanese adore electronic gadgets. Reid says part of IP telephony's appeal to Japanese consumers is that it allows them to use video phones, which have plunged more than 50% in price in the past year to about $200 apiece.

"The main drivers in Japan have been things like video phones," he said. "All of our clients in Japan have video phones for residential as well as business use."

Thanks in part to these characteristics of the Japanese market, VoIP services based on Session Initiation Protocol (SIP) technology have proven to be the most popular there. While Syndeo's software also supports such protocols as PacketCable™ NCS and MGCP, Reid says, 12 of its 18 Japanese cable clients primarily rely on SIP because of its greater flexibility, cost efficiency and breadth of applications.

In contrast, American cable operators have mostly shied away from SIP so far. Instead, they've preferred to go with NCS, a variant of MGCP defined in the PacketCable specification that adds quality-of-service (QoS) guarantees on the access network, particularly for primary-line service.

Despite all these differences between the two markets, Reid sees enough similarities between Japan and the U.S. to believe that what works there could succeed in the States as well.

One key lesson, he says, is that consumers will subscribe to a technically somewhat-less-than-ideal VoIP service as long as the price is low enough. In Japan, cable operators and DSL providers are both keeping the price of voice down, bundling VoIP with other services and sometimes even offering it as a free element of their product packages.

"The takeup has been very aggressive," Reid said. "Customers will take up voice services when they're cheap and they won't ask too many questions."

Another lesson is that cable operators don't need to put QoS guarantees in place before they start offering VoIP service. As with cell phones, Reid says, consumers are not necessarily looking for near-perfect quality, at least not right away. "You certainly don't need PacketCable to go in, deploy and get customers," he says.

In addition, Reid says, the Japanese experience proves that SIP-based IP telephony service, often dismissed as second-rate by U.S. cable critics, may actually be good enough for most consumers. As a result, he and other Syndeo executives see U.S. market starting to shift towards SIP services. Indeed, in early December, two more small MSOs - CableAmerica and Mid-Hudson Cablevision -- signed deals with Vonage Holdings to offer its SIP-based service to their cable modem subscribers. The two joined two other smaller cable operators -- smaller MSOs, Advanced Cable Communications and Armstrong Cable - that notched earlier agreements with Vonage.

"Now we're beginning to see some signs of SIP emerging among our clients in the U.S.," Reid says. "I think we will see a lot more movement toward SIP."

But that doesn't mean the rise of SIP will bring about the fall of PacketCable. Not by any means.

"I think PacketCable will stand as is," Reid says. "I think they'll just introduce a SIP standard in the U.S."

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