© Christopher P. Wells 1993-1996
CENTRAL DIGITAL/PACIFIC COMMUNICATIONS
The year is 1997. The Ministry of Posts & Telecommunications of Japan ("MPT") has announced its intention to award licenses for two broadband digital communications channels for packet-data communications in Eastern Japan (including Tokyo). These channels would allow the communication anywhere within the region of data in digital form for portable digital communications ("PDC") uses such as warehouse to delivery truck, PC to PC and office to home data transmissions. Each channel will have the capacity to handle over 1,000,000 separate digital communications signals simultaneously and will have authority to tie into international data communications networks including the commercial portion of the Internet. The first channel has been awarded to NTT and NTT has agreed to cooperate with interconnection to its long lines networks (on an equal basis) so that use of the second channel will be feasible.
Two "Baby Bell" companies from the United States lead consortia of U.S. and Japanese suppliers who wish to have exclusive access to this second channel. One company, Central Digital, Inc. ("Central") is the principal telephone company for eight midwestern and central states, while the other, Pacific Communications, Inc. ("Pacific") handles local lines communications for seven western states. The following table compares the basic industry and financial data of the two companies:
| Company | ||
| No. of Subscribers | ||
| Broadband Data Subcribers | ||
| Capital Assets | ||
| 1996 Revenues | ||
| 1996 profits | ||
| S&P Rating | ||
| Broadband System |
Central¹s DSC (Direct Signal Checking) system is slightly more reliable in high volume applications than Pacific¹s ASC (Asynchronous Signal Checking) system but is less compatible with NTT¹s interconnect system (which uses the older ASC technology). MPT has not yet taken a position on which system it would prefer implemented on the second channel in Japan.
MPT must make a decision soon as to which consortium to award the second channel. Neither the Central nor the Pacific consortia wish to attempt to delay the award since the MPT has indicated that NTT will be permitted to commence its service in six months and both Pacific and Central will require at least 9 months to commence their services. Any further delay in the award of the second channel will result in NTT having a dominant lead in the PDC markets in the future.
The MPT has requested that each of Central and Pacific prepare presentations regarding its plans for the Japanese market which address the following topics:
1. The advantages to the public interest which would result from permitting it to operate a second channel.
2. The financial commitment which its consortia is willing to make to the second channel.
3. A description of any undertaking which would be required by the MPT and NTT to ensure the viability of the second channel assuming its system is adopted.
4. The anticipated rate of expansion of second channel services using its proposal and services.
5. Whether it would be possible for the Pacific and Central consortia to jointly operate the second channel.
Representatives of Central and Pacific will be traveling to Tokyo to meet with MPT and NTT representatives prior to the award to persuade MPT and NTT to use their respective systems and to respond to the information requests by MPT. These representatives will be permitted three interviews with such officials for not longer than 10 minutes for each interview.
SECRET INSTRUCTIONS FOR CENTRAL
Top management of Central has been aggressive in using its R&D expertise in specialty telecommunications to expand its operations internationally. The bid to operate in Japan a second PDC channel is its latest effort in this regard. Top management is keen to secure this contract because (i) various Japanese members of its consortium are anxious to participate as suppliers to the anticipated PDC peripheral market in Japan and Central needs their support in other markets internationally; (ii) it desires acceptance of its DSC technology in another major industrial market; and (iii) it wishes to expand its operations generally in the higher margin Japanese market.
The Japan PDC contract is important to Central, but failure to achieve it will not harm the company itself. As its credit rating suggests, it has a very stable business base and is successfully exploiting its franchise in the United States. Top management resents the interference of NTT and the non-transparent bid process implemented by MPT, but has indicated that Central will accept the non-transparent bid process assuming that it is treated fairly in the decision-making by MPT. It does not wish to get the U.S. Government involved in a bidding process, principally involving two United States companies, but would do so if it felt it had been treated unfairly.
Central believes that its DSC technology is superior to ASC technology and brings it a competitive edge over Pacific. This view is shared by its Japanese consortium members, but they are worried about using a system which is different from that being used by NTT and for which interface costs with NTT networks may prove more expensive. The DSC system is significantly more precise in error checking and this makes DSC ideal for data transmission for higher margin financing services, high value inventory control and industrial process control applications. It¹s potential is wasted on more general applications such as retail inventory control and PC to PC communications.
With respect to the 5 points noted by MPT, top management¹s views are as follows:
1. Public Interest. The advantages to the public interest of PDCs are self-evident; stress health and convenience applications; also emphasize advantages of having a world class competitor in the market to improve NTT¹s offerings to the public.
2. Financial Commitment. Central can commit $1 billion to building the required PDC infrastructure facilities including $800 million provided by members of its consortia. Central¹s financial department is not prepared to go beyond a $200 million commitment from Central although additional consortium and private financial support may be available. Central¹s financial planners believe $800 million will be needed within the first two years. Central believes it can raise this much, but is not sure about getting more in the current environment.
3. MPT and NTT Commitment Required. Top management believes that MPT would need to grant the second channel license exclusively to Central for a 20 year period in order for Central to feel that it could recover its investment. The normal statutory term for the license of this type is 10 years (although MPT has never failed to renew a NTT license for telecommunications infrastructure during its post-war history as a Ministry). Central would require a similar commitment for interconnect services from NTT to meet its objectives (although market changes could overtake interconnect needs within a 20 year period). Central, of course, expects to be able to control and exploit its franchise indefinitely.
4. Expansion. Top management expects to implement the basic two-way data communications service within six months, although it does not wish to commit to commence the service on this schedule and would prefer a one year ³window². Ancillary conference, ³databox² and automatic polling services could be provided within 3 years and possibly sooner. Central conservatively expects to have 100,000 subscribers the first year, 1,000,000 subscribers within 3 years, 2 million subscribers within 5 years, and 6 million subscribers within 10 years. The excess it expects to achieve over those goals depends on NTT¹s performance in the market (which it does not expect to be good).
5. Cooperation with Pacific. Central and Pacific are old rivals in the U.S. and international markets. Cooperation with Pacific can only be considered as a last resort.
SECRET INSTRUCTIONS FOR PACIFIC
Top management of Pacific has been aggressive in using its extended experience in managing specialty telecommunications services (rather than merely technology) to expand its operations internationally. The bid to operate in Japan a second PDC channel is its latest effort in this regard. Top management is keen to secure this contract because (i) various Japanese members of its consortium are anxious to participate as suppliers to the anticipated PDC peripheral market in Japan and Pacific needs their support in other markets internationally; (ii) it seeks to have ASC eventually become accepted as the world-wide standard in the second most important major industrial market thereby undercutting Central¹s more accurate (but also more expensive) technology; and (iii) it wishes to expand its operations generally in the higher margin Japanese market.
The Japan PDC contract is important to Pacific, but failure to achieve it will not harm the company itself. As its credit rating suggests, it has a very stable business base and is successfully exploiting its franchise in the United States. Top management resents the interference of NTT and the non-transparent bid process implemented by MPT, but has indicated that Pacific will accept the non-transparent bid process assuming that it is treated fairly in the decision-making by MPT. It does not wish to get the U.S. Government involved in a bidding process principally involving two United States companies, but would do so if it felt it had been treated unfairly.
Pacific believes that while ASC technology may not be as accurate as Central¹s DSC technology, its lower cost (and NTT¹s use of it) makes it more appropriate for most applications in Japan and these factors give it a competitive edge over Central. This view is shared by its Japanese consortium members, but they are worried about using a system which does not have a competitive technical edge over NTT (since this will make it less likely that they will secure certain lucrative ³niche² markets (such as financial data services) which they consider important to the long-term success of the second channel). The DSC system is significantly more precise in error checking and this makes DSC ideal for data transmission for higher margin financing services, high value inventory control and industrial process control applications. However, DSC¹s potential is wasted on more general applications such as retail inventory control and PC to PC communications which form by far the largest market for PDC services.
With respect to the 5 points noted by MPT, top management¹s views are as follows:
1. Public Interest. The advantages to the public interest of PDCs are self-evident; stress health and convenience applications; also emphasize advantages of having a world class competitor in the market to improve NTT¹s offerings to the public.
2. Financial Commitment. Pacific can commit $1.2 billion to building the required PDC infrastructure facilities including $900 million provided by members of its consortia. Pacific¹s financial department is not prepared to go beyond a $250 million commitment from Pacific although additional consortium and private financial support may be available. Pacific¹s financial planners believe $800 million will be needed within the first two years. Pacific believes it can raise about $900 million, but is not sure about getting more in the current environment.
3. MPT and NTT Commitment Required. Top management believes that MPT would need to grant the second channel license exclusively to Pacific for a 16 year period in order for Pacific to feel that it could recover its investment. The normal statutory term for the license of this type is 10 years (although MPT has never failed to renew a NTT license for telecommunications infrastructure during its post-war history as a Ministry). Pacific would require a similar commitment for interconnect services from NTT to meet its objectives (although market changes could overtake interconnect needs within a 20 year period). Pacific, of course, expects to be able to control and exploit its franchise indefinitely.
4. Expansion. Top management expects to implement the basic two-way data communications service within six months, although it does not wish to commit to commence the service on this schedule and would prefer a one year ³window². Ancillary conference, ³databox² and automatic polling services could be provided within 3 to 4 years and possibly sooner. Pacific conservatively expects to have 150,000 subscribers the first year, 1,200,000 subscribers within 3 years, 2.2 million subscribers within 5 years, and 7.5 million subscribers within 10 years. The excess it expects to achieve over those goals depends on NTT¹s performance in the market (which it does not expect to be good).
5. Cooperation with Central. Pacific and Central are old rivals in the U.S. and international markets. Cooperation with Central can only be considered as a last resort.