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KDDI, Japan's second-largest telecoms operator, and Tokyo Electric Power, the world's largest private electric power company, are discussing a telecommunications collaboration in a move that would put further pressure on industry leader NTT.

The talks, which are at an early stage according to KDDI, could lead to a joint venture or a merger between the telecoms operator and PoweredCom, Tepco's telecoms unit.

Tepco said on Tuesday that the talks involved all aspects of its telecoms business, which made an operating loss of Y31.9bn ($283,913m) on revenues of Y183bn in the year to March, 2005.

A combined KDDI and PoweredCom would threaten NTT's fibre-optic business, which NTT has been building up to mitigate dwindling profitability in its core fixed-line voice communications business.

KDDI has been an aggressive competitor to NTT in recent years but has not focused much energy on fibre-optic lines, which are expected to become the dominant channel for broadband data communications. PoweredCom, on the other hand, has an extensive fibre-optic network in Tokyo, where demand for fast connections is highest. Tepco also has a separate fibre-optic network but does not offer direct connections to customers.

However, Tepco has so far struggled to build a competitive telecoms operation, in part because its long-term business model is not suited to the rapidly changing world of telecoms, analysts say. In the past, it failed to buy the fixed-line business of Japan Telecom from Vodafone.

“It certainly would increase the threat to NTT,” says Nathan Ramler, telecoms analyst at Macquarie Securities in Tokyo.

The core fixed line business of Japan's dominant telecoms group has been eroded by the ongoing shift to mobile phones and by rivals' discount services that use lines leased from NTT.

Although NTT cut tariffs in response to the new discount services, the group is still expected to lose 9 per cent of its subscriber lines to rival services, said Mr Ramler. “They are getting hit from all sides,” he said.

Rivals have been less successful in challenging NTT's dominance in the market for fibre-optic connections, largely because it is costly and time-consuming to build a network, and leasing NTT's line for the last mile to the customer is still prohibitively expensive.

Consequently, two NTT operating companies dominated the fibre-optic market followed by Usen, a start-up based in Tokyo, and K-Opticom, owned by Kansai Electric Power, said Mr Ramler, citing a market research study.

Tepco is fifth and KDDI is sixth, according to this study. Although PoweredCom has a significant fibre-optic network in the Tokyo area, it does not have nationwide coverage.

KDDI, for its part, has focused its resources on its discountfixed-line service, in part because of the high cost of leasing NTT lines.

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