KUTIC Insights

NTT’s vision for an ultra-efficient, AI-driven, photonic future

The vision behind IOWN

IOWN (Innovative Optical and Wireless Network) is NTT’s ambitious initiative to replace today’s internet infrastructure with something entirely new. But why? NTT argues that the infrastructure we have now is nearing its limits in terms of speed, power consumption and scalability. IOWN aims to address this with three pillars:

1. “All-photonic network’. NTT wants to make a world where optical signals are used from end to end. This means there will be a massive reduction in energy use, as well as much much faster data transmission speeds.

2. Integrating real and digital worlds with “Digital twin computing”. Japan is obsessed with IoT, and NTT wants to create a virtual model of the Earth where real-time data from sensors continuously update simulations - enabling accurate forecasting, testing and policy planning.

3. Cognitive foundation: NTT wants to have an AI-powered layer that dynamically controls network resources and services, so they can adapt to what they need without human input.

This all sounds black-mirror esque - but what are the benefits of doing this? There are three main reasons. First is Energy efficiency. NTT claims IOWN can reduce power consumption by up to 100 times. Then we have latency. The company claims that IWON could have latency delays of less than 1 millisecond, which is vital to better autonomous driving and remove robotics. Finally we have capacity. The IOWN network could support up to 125 x more data traffic than current networks.

Whose involved? NTT is leading the charge, but recognizes the need to have players from different industries involved to allow for seamless integration, so they created the IOWN Global Forum, including Intel, Sony, Microsoft, Ericsson, NEC and others.

Is the tech sound?

Upon first look, IOWN might sound like another vague “next-gen” label that telecom giants love to advertise, but underneath the branding, the tech stack that NTT is attempting to build represents something far more radical, since IOWN is not just about making networks faster or cheaper, but it is about fundamentally reimagining the cognition behind internet infrastructure. And NTT continues to bet real R&D dollars, and a chunk of its corporate identity, on making this vision a reality. So the question isn’t whether it’s technically interesting, or if there’s enough commitment behind it, it is whether the idea is grounded enough to matter, and if there is fundamentally an end-customer who would be interested.

In terms of the tech side, the claims are bold. All of NTTs claims (100x energy efficiency, sub millisecond latency, 125x data capacity) hinge on full-scale implementation of unproven systems. To reach these goals, they need to create optical switching at the device level, real-time digital twins of the social system, and a cognitive layer that makes context-aware decisions across ecosystems.

But what's promising is the quiet approach they’re taking to this. With how revolutionary of a project IOWN claims to be, there is not as much media coverage on it as there should be. Instead, NTT is taking the approach that Japanese companies tend to take - quietly laying the groundwork before going mainstream. 4G, fibre optics and mobile payment systems all had Japanese fingerprints early on, and IOWN could be another one of these projects that can have massive payoffs in the future. Comparing IOWN with Google cloud’s industrial digital twin platforms, which are already deployed in factories, or Huawei’s 5.5G roadmap, which is aggressively commercial in orientation, IOWN seems to be playing the longer game.

The other promising trait is the involvement of chip-makers, cloud platforms, device manufacturers and governments through the IOWN global forum. On the assumption that participation is not symbolic, this could be the sign of NTT building the groundwork for something with real-world applications.

On the other hand, the telcom industry is full of innovation at the moment, and it is interesting to consider if such a risky, industry changing choice is the right way to go. With the massive R&D and capEx commitments that these projects require and the little margins that telecom companies make, overcommitting to a project could be a surefire way to destroy a company. Here are some projects that competitors are investing in.

• Softbank: AI Infrastrcture. Softbank has always been interested in AI, and now one of their capex intensive projects is a large-scale AI data center at Sharp’s Sakai plant in Osaka, which used to be a display panel production facility. Softbank has been in discussion to invest aprox 100 billion yen in Sharp Corp, aiming to acquire part of the Sakai plant. However, disagreements over the terms have made the feasibility of the investment uncertain

• Rakuten Mobile: Advancing open RAN technology. Rakuten Mobile, through its subsidiary Altiostar, is pioneering open virtual radio access network (vRAN) technology. This approach allows for the integration of equipment from multiple vendors, promoting flexibility and cost-effectiveness in network deployment

• Softbank x KDDI: There is a joint project between KDDI and softbank through their joint venture 5G Japan corporation, which includes jointly building out a total of 100,000 base stations each by 2030, aiming to reduce capEx costs by 120 billion JPY for each company.

The CapEx and Financial Pressure

How much does it cost to recreate the internet’s backbone in a country like Japan? IT turns out quite a lot. NTT’s CapEx for FY23 was 2.87 trillion JPY, a 6.8% increase YoY, with most of it concentrated in NTT DoCoMO, NTT East, and NTT West - the groups directly responsible for fiber network buildout and wireless backbone upgrades. This marks a steady uptrend of capEx since FY19, reflecting NTT’s push toward both 6G readiness and IOWN foundational infrastructure.

However, the CapEx is rising faster than revenue and free cash flow, which questions if the investment is sustainable. In FY23, NTT generated 3.6 trillion JPY in operating cash flow, but after deducting CapEX, free cash flow came in at just over 700 billion JPY. There was also a dividend payout of nearly 500 billion JPY, leaving FCFAD just over 200 billion JPY. If CapEx continues to increase, NTT may need to either cut shareholder returns, or issue more debt, both of which isn’t favorable given the rising rate environment, and increasing shareholder return focused activism in Japan.

In terms of debt load and financial risk, NTT is already carrying net-interest bearing debt of around 7 trillion JPY, with a debt-to-equity ratio of 0.57 and an interest coverage ratio of around 20x - which is safe for now. However, if there is any major increase in borrowing CapEx could drag the coverage ratio down, especially if the core cash generation from telecom starts to slow.

NTT’s core mobile segment (DoCoMo) remains its cash cow, with over 1 trillion JPY in operating income. Meanwhile NTT Data and NTT Com are profitable but operate in more competitive, lower margin IT service markets. That said, DoCoMo’s profits are gradually shrinking due to price competition and mobile subscriber saturation.

On the bright side, the Japanese government has been vocal about supporting NTT in advanced technology R&D. NTT is likely to benefit from soft funding, R&D tax breaks and direct project grants.

Should investors believe in the IOWN dream?

NTT just made NTT Data a wholly owned subsidiary with a 2.37 trillion yen investment and even rebranded from “Nippon telegraph and Telephone” to simply “NTT”. It also announced a new round of stock buybacks. In a way, whilst NTT tries to rebuilt the internet, they are also rebuilding themself. So where’s this money coming from? How much is being allocated to IOWN? And how much government support are they getting?

I know nowhere near enough to make a definitive call yet - I still need to learn more about the broader telecom landscape. But it feels like the industry is entering a pivotal decade for the industry. Mobile subscriber growth is slowing, CapEx is ballooning, and companies need to choose between incremental innovation and transformational bets. IOWN may be the boldest of these bets but with NTT’s scale and political support it’s hard to bet against them.