DSL Prime: The Uncertain Finances of Masayoshi Son

As Masayoshi Son asks the world financial markets for $2 billion, his company's finances remain curiously complex and opaque.

by Dave Burstein DSL Prime [December 19, 2003]

Yahoo BB looking for $2 billion
Japan passes 10 million early December
On November 30th, Japan had 9,911,306 DSL subs, adding 320,000 in November. At that rate, Japan became the first country to reach 10 million around December 10th. Yahoo BB was responsible for 154,000 in November, again beating NTT.

Nomura is going to the Euro market for half a billion in Softbank equity and a billion and a half in Euroyen convertibles. That drove down the stock price heavily, along with doubts in the press. Some, like HSBC, predict Softbank is near failure. That prediction has been made many times in the past and Softbank has always pulled through. Goldman Sachs in Tokyo, with much better sources than I have, also backs them up.

I compared notes with a reporter in Tokyo, pointing out Softbank's billions of dollars of holding in UTStarcom, Yahoo U.S., and others that are highly liquid. He pointed to some unusual transactions, including securitizing modems, and we both agreed accurate information on Softbank's finances is very hard to develop.

That said, much of what Son is saying checks out. Costs do go down dramatically with volume, and the costs of adding services like VOD to his existing (very robust) network is amazingly low. All the equipment costs are plummeting. DSLAMs are under $40/port, VOD servers perhaps $50/stream, digital settops under $100, backbone routers down to about $1 per subscriber, etc.

Putting the settop, VoIP, modem, and Wi-Fi in a combo box is bringing down costs rapidly, and I chaired a session at VON where the chipmakers specifically covered how they are integrating with that in mind. Peering arrangements that bring down Internet transit costs are spreading, the same for VoIP minutes.

Those cost drops (which Softbank has pursued aggressively, according to modem suppliers) make plausible Son's claim high acquisition costs are his primary remaining hurdle, and he could move to profitability simply by cutting back promotion.

eAccess, a public company with over a million Japanese DSL customers and consumer prices not that different than Yahoo BB, is already reporting a profit.

My best understanding from the other side of the planet is that NTT was smart enough to see the threat of VoIP, and is taking enormous losses (both direct and self-cannibalizing) to try to push him into bankruptcy. So it makes sense for Son to raise cash for a defensive cushion. But Softbank bonds are certainly not a sure thing.

Nortel, ECI's new big brother
Nortel fills product hole with hot DSLAM
Nortel lost almost a billion dollars buying Promatory not long ago and trying to sell DSLAMs. They never won the Verizon second source contract or others they expected. So they dumped the division, leaving an enormous hole in their product line. They will distribute ECI's unit, presumably with better entree to many customers.

Selling for $40/port in volume, ECI's Hi-FOCuS 4 is a third generation DSLAM and performance leader, which also services FTTP. Connectivity and backplane are designed for fiber rates, and specifications are non-blocking at most DSL speeds. They hoped that passing OSMINE would gain entree to the U.S. Bells, although 800,000 ports to Chunghwa in an open bid is the only announced sale. FT and DT, current ECI customers, are also evaluating the unit, which has just begun to ship.

All DSLAMs soon will offer ADSL2+, some flavor of VDSL, 25 percent+ more reach from improved chips, IP/BRAS control, and testability, including the upgraded Alcatel. What distinguishes the third generation is that it's non-blocking to high levels of traffic, with a backplane and internal structure with 8-10 times second generation DSLAMs. Nearly no service provider needs that today, but if more than 10 percent of users want on-demand video, or HDTV demand grows as I think it will, older units will choke.

Copyright 2003 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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