Thursday, June 3, 2010

AT&T divests its domestic Japanese business

Claudio Castelli, Senior Analyst and Mike Sapien, Principal Analyst, Ovum.

JAPAN: AT&T has announced that it will sell its domestic outsourcing services business in Japan to Internet Initiative Japan (IIJ). The company is looking to reduce its focus on domestic customers in Japan, where it faces competition from well-established local players, and concentrate on its MNC customers and global services. Like its announcement to sell Sterling Commerce to IBM, this is another example of AT&T shedding some businesses to tighten its focus on certain MNC customers and prospects.

Narrowing the focus on MNCs
This recently announced deal with IIJ didn't come as much of a surprise to us. A rumor emerged last December that AT&T was going to sell off the Japanese outsourcing unit, which was previously acquired from IBM. Such a move is well-aligned with AT&T's plans to focus its international operations on certain MNCs rather than domestic business in countries outside the US.

AT&T’s strategy for global services over the past three years (and continuing in 2010) has been to focus on a segment of MNC customers where it can be more competitive and profitable, and to increase spending by each of these customers with AT&T in order to create a longer-term relationship.

These customers also tend to have significant US operations, which provides AT&T with the opportunity to leverage its own network to benefit from lower access costs. According to AT&T, while this approach has resulted in an 80% decrease in the number of customers supported (outside the US) since 2006, it has also doubled total revenues and increased the number of connected sites by more than 50% during the past two years.

The sale does not involve AT&T’s global infrastructure for MNCs in Japan, which includes four global network service nodes, remote access infrastructure, an Internet Data Centre, and international subsea cable capacity. Through this acquisition, IIJ will be mainly assuming or taking over local WAN services, which are provided to approximately 1,600 domestic corporate customers.

Shifting the priority to emerging markets
AT&T has been concentrating its investments and efforts on markets with higher potential for growth, such as India. This divesture seems to be just another step resulting from a change in its market investment priorities and continued MNC profiling.

Back in October 2007, AT&T decided to combine its 12 Asia-Pacific markets and Japan into one region under a new organization, downgrading Japan's previous status as a region. At the same time, India became a separate region for AT&T under a new organizational structure, reflecting the growing importance of this market.

In spite of recent major regional MNC deals in Japan, such as Sumitomo Chemical and Nippon Yusen Kabushiki Kaisha, the Japanese market doesn't present great potential for growth. Japan will continue to be an important market and AT&T will continue serving MNCs there; however, this reduced local presence will affect its capability to attract Japanese-headquartered MNCs, which may be an acceptable trade-off for AT&T.

The agreement creates a network partner and wholesale customer
One of the major by-products of this agreement is the creation of a new wholesale customer for AT&T. IIJ should also be a large Japanese wholesale customer, with requirements for global network and external reach into other regions, which AT&T can provide – especially back to the US.

Furthermore, given the announced sale price for the business (versus the revenue), this divestiture should improve AT&T’s bottom line in the region.

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