Eating Asia's Broadband Dust

Sachio Semmoto, CEO of Japanese broadband provider eAccess, is a rare example of entrepreneurial success in the battered telecom business. A voluble man with a quick grin, a fondness for aloha shirts, and a bold manner, Semmoto launched his company in late 1999, right before the telecom bubble burst in the U.S. Where most of the independent carriers that challenged the Bell phone companies failed, Semmoto is succeeding: By March, he expects to have signed up his millionth digital subscriber line (DSL) customer.

The story of broadband provides a telling contrast between what has gone wrong in the U.S. telecommunications business since the passage of the 1996 Telecommunications Act -- and what has gone right in Asia. In the U.S., the Bells invested billions in broadband just as venture capitalists funded numerous DSL startups -- creating huge excess capacity. The Bells' debt ballooned, in part because of their broadband investments, and most DSL startups hit the skids: Even the largest independent DSL provider in the U.S. -- Covad Communcations -- had to endure a restructuring while in bankruptcy protection, which it exited in 2001. U.S. consumers have borne the brunt of such miscalculations: The average American household with broadband now pays $45 a month -- expensive enough to slow growth in sign-ups.

Asian telecom companies, by contrast, arrived at the party relatively late, and partly by luck avoided most of the excesses that have vexed their U.S. counterparts. Thus, established carriers in Asia have cashed in on the broadband craze without blowing through nearly as much money as the Bells did -- even as broadband entrepreneurs have done well enough that some have a chance to prosper. For instance, eAccess is profitable on the basis of EBTIDA -- earnings before taxes, interest, depreciation, and ammortization. "We are the first competitive local exchange carrier (CLEC) in the world to hit that mark," Semmoto boasts.

GOOD TIMING. The biggest winners, though, may be Asian consumers. In many instances, they get DSL access that's 10 to 20 times as fast as that in the U.S. -- for as little as $20 a month. And they've jumped at the bargain: South Korea boasts the highest broadband penetration of any nation, at 58% of households.

Asia's good timing will probably pay off for years to come. By the time Asian companies got serious about broadband they could buy much better gear for as little as 20% of what their U.S. counterparts paid. That accounts for their faster Net access and lower prices -- and quicker adoption by Asian consumers. That in turn has spurred online gaming, which has caught on faster in Asia than in the U.S. -- and helped carriers recoup their infrastructure investments. High urban densities helped hold down those investments, since high-rise networks are cheaper to build than those that span U.S. suburbs.

In many instances, regulation in Asia has also been friendlier to entrepreneurs -- and kept the big state monopolies honest. In South Korea, owners of the large apartment blocks that house 40% of the population also control the telecom equipment in their buildings. That has given upstart carriers an opening, since they can negotiate deals directly with landlords instead of going through Korea Telecom. Thus, the country's leading independent DSL provider -- Hanaro -- has been able so far to compete head-to-head with both Korea Telecom and cable-TV providers. And unlike in the U.S., the big companies aren't hurting. Of the 10 most profitable major telecoms worldwide in 2002, seven were in Asia, according to the International Telecommunications Union.

TORRID SIGN-UPS. In Japan, Semmoto says, the government has enforced regulations that require incumbent phone companies to give new competitors such as eAccess capacity in their central switching facilities at reasonable rates. In the U.S., by contrast, the Bells and upstart carriers traded lawsuits over such arrangements -- and companies such as Covad (COVD)

now accuse the Bells of throwing up roadblocks that impaired their businesses.

The most telling evidence of Asia's advantage may be what happens next. In the U.S., broadband subscriber growth logged 59% last year as carriers have kept prices high to turn a profit. In Asia, where household incomes are significantly lower, the sign-up rate remains torrid (though from a much lower base). As of last June, China had well under 1 million DSL subscribers. By January, 2003, it had close to 3 million, making it the fastest-growing broadband sector of any country in the world. In Japan, the tally has reached 6 million after only four years of serious marketing -- and may reach 12 million by 2004, according to Yankee Group.

Better technology also means bigger revenue opportunities than online gaming. Korea Telecom serves Net-based software for a fee via broadband links to small businesses, an idea that so far has failed in the U.S. "We have enough people on the systems and fast enough networks that the application-service-provider model works even though it didn't in the U.S.," says Sang-Hoon Lee, Korea Telecom's chief technology officer.

"VERY THREATENED." Of course, Asia's phone carriers could still face big problems. The broadband companies have started to offer Internet phone service, for example, forcing the incumbents to face a Faustian choice of ultimately embracing that technology and cannibalizing their still-lucrative phone monopolies or mounting a rear-guard action. "Nippon Telegraph & Telephone in Japan is very threatened with the introduction of Internet telephony," says Izumi Aizu, a principal at Tokyo-based consulting firm Asia Network Research. "They know that the good old days are gone."

No one said the transition to a broadband world would be painless, however. And the situation could be a lot worse: Had they been just a little faster on their feet, Asian companies might have landed on the same treadmill as their U.S. cousins. By Alex Salkever

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