Financially-troubled Japanese technology company NEC is to sell its Internet service provider (ISP) business, NEC Biglobe , in the near future, according to local media reports. NEC is looking to divest unprofitable and non-core businesses as it turns to its core systems integration business as a means of returning to profit. BMI expects fierce interest for the business from Japan's fixed and mobile broadband operators as well as international service providers.
NEC has yet to confirm or deny reports that it could sell Biglobe, but such a move would not be surprising given that the company has downplayed the business' contribution to earnings in recent years and the fact that the internet service provision market in Japan has become too competitive to sustain Biglobe's long-held business models. NEC recently combined its PC manufacturing business into a joint venture with China's Lenovo Group and has announced plans to exit the smartphone business.
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The latter decision is closely linked to the fate of NEC Biglobe as NEC initially forayed into the ISP business in order to provide a content and access platform for its handsets. Without a viable handset business, the fate of Biglobe - which still has around 3mn registered users and recorded sales of approximately JPY84.1bn (US$866mn) in the financial year ended March 31 2013 - was effectively sealed.
BMI expects expressions of interest to be tendered by Japan's largest ISPs, including NTT Communications , KDDI and SoftB ank . We believe SoftBank - which is in an expansionist phase at present - to be the most aggressive bidder for Biglobe. Although it has approximately 4.28mn subscribers, 2.2mn are served via the FLET'S infrastructure of incumbent fixed-line operator NTT. Acquiring Biglobe's infrastructure and customer base would lessen its dependence on the incumbent, BMI believes, although it is unclear at present how many of Biglobe's customers are themselves connected via FLET'S accesses.
A number of international operators would, theoretically, be interested in acquiring Biglobe, including China Telecom , Vodafone and AT&T . However, it is unclear whether the Japanese government would be willing to sanction significant foreign investment in a major telecoms company. Much would also depend on the outcome of due diligence processes and the outcome of any assessment of Biglobe's directly-controlled assets, particularly infrastructure. Although we do not believe NEC will have underinvested in infrastructure, given its expertise as a systems integrator, its financial troubles may have precluded active investment in key upgrades in recent years.
Although the number of registered internet users in Japan is forecast to stay relatively flat over the next five years, BMI believes the number of broadband subscriptions will continue growing rapidly as more consumers take up accounts with multiple providers to suit their varying home-work and fixed-mobile requirements. We forecast the number of broadband subscribers to rise from 53.58mn in 2012 to 108.94mn by 2017.