Deflating DoCoMo

If television programming is a reflection of society, then it should come as no surprise that Japan, a nation of certifiable mobile-phone freaks, will soon be watching a TV drama about a family of itinerant and compulsive dialers. Likewise it should not be surprising that The Cell-Phone Family Show, when it airs this spring, will be sponsored by NTT DoCoMo. After all, the Japanese wireless communications company embedded cell phones deeply into local culture when it launched its phenomenally successful i-mode mobile Internet service, now used by some 30 million Japanese. I-mode’s success turned DoCoMo into a global telecommunications role model, a ringing example of how to hook customers on a new technology and turn a fat profit as well.

Any good TV drama requires that the protagonist suffer setbacks. So it is only fitting that DoCoMo’s once-soaring fortunes have been flagging of late. The fevered rate at which Japanese were signing up for service is slowing, as is average usage. Muscular competitors, including Vodafone, the largest cell-phone com-pany in the world, have stolen away customers in Japan’s $70 billion home market. Meanwhile, efforts to expand internationally, considered crucial to DoCoMo’s future growth, have been hamstrung by uncertain consumer demand for advanced third-generation wireless services and the global meltdown in telecommunications stocks.

The most telling example of DoCoMo’s woes is its inability so far to build on the success of i-modecertainly a tough act to follow. When it debuted in 1999, i-mode was the world’s first network linking mobile-phone users to the Internet. Japanese consumers loved the simple-to-use service and quickly adopted it for diversions such as online gaming, wireless e-commerce and displaying Hello Kitty on their color screens. Unlike clumsy WAP services offered elsewhere in the world, DoCoMo’s proprietary system was a smash, registering 120% growth in new subscribers over the half-year ending Sept. 30. DoCoMo’s profits leaped tenfold in four years; for the last fiscal year, ended March 2001, it posted record earnings of $3 billion. Last year DoCoMo overtook Toyota as Japan’s biggest company, measured by market capitalization. When its share price peaked last spring, DoCoMo was the 11th-largest company in the world, with enough spare cash to buy a 16% chunk of AT&T Wireless, the third-largest mobile phone company in the U.S.

But i-mode is no longer a hot new productand DoCoMo no longer sparkles as one of the few diamonds in Japan’s rough economy. The company is proving susceptible to shrinking growth rates, a syndrome that already afflicts carriers in many markets worldwide. I-mode subscription growth is expected to ease to 46% annually for the fiscal year ending this March, down by one-third from last May. Japanese are not signing up for cell-phone services of any kind as quickly as they were, and those who already subscribe are spending less per month. The slowdown has contributed to a 45% slide in DoCoMo’s share price since last May.

If the entire industry is watching, what do you do for an encore? DoCoMo’s president and head cheerleader Keiji Tachikawa hoped to maintain momentum by moving quickly into high-speed mobile data transmission, so-called 3G networks. The company became the first in the world to offer full-fledged commercial 3G service last fall when it unveiled its FOMA (Freedom of Mobile Multimedia Access) system, a network so advanced it allows phones to download data-intensive graphics, MP3 music files and even to transmit video. But consumer acceptance has failed to match launch-day hype. Third-generation handsets cost three to five times as much as conventional phones. They are clunky, glitch-prone and have a relatively short battery life. Coverage is absent in all but three major cities and there is little content that takes full advantage of FOMA’s capabilities.

Takaharu Sue, a 30-year-old office manager in Tokyo, owns the latest 2G phone from DoCoMo and has no plans to upgrade. “At this point,” he asks, “what’s the point?” Only 42,000 FOMA handsets have been soldfar fewer than the 150,000 the company had modestly projected to move by March. While the company is publicly sticking to its forecasts, Tachikawa recently admitted that 3G uptake “is lower than we expected.”

Without a whiz-bang new technology to distinguish itself from competitors, Japan’s largest company is vulnerable to threats to its dominance of the domestic wireless market. Some 67.5 millionmore than of Japan’s populationalready subscribe to mobile-phone services, and analysts say the market is approaching saturation. Net growth in subscriptions fell 31.7% in December compared with the same month in 2000, after falling 26% in November, according to Merrill Lynch. While DoCoMo holds a 59% market share, competition for new and existing users is fierce. KDDI’s au and Tu-ka services, with 17.7% and 5.7% of the market respectively, offer popular student-discount plans and a phone with a global positioning satellite function. J-Phone, owned by Britain’s Vodafone, has forged the deepest inroads by offering a camera-equipped phone called Sha-Mail. Sha-Mail’s popularity has increased J-Phone’s market share to 17.6%.

To protect its lead, DoCoMo has been forced to spend more in sales commissions and handset subsidies, narrowing profit margins. Compounding the com-pany’s problems is a disturbing dip in the all-important average revenue per user, called the ARPU in industry lingo. Thanks in part to i-mode, Japan’s cell-phone users spend more on wireless services than their counterparts elsewhere in the worldabout $63 per month compared with $53 in the U.S., for example. But recession-weary Japanese are cutting back on spending by going without or substituting cheaper wireless e-mail for expensive voice calls. A shrinking ARPU is one reason DoCoMo expects profits to drop 30% in the fiscal year ending March 31.

The antidote to slower growth and shrinking margins: take your act on the road. Over the past year, the company has gone on a $15-billion shopping binge around the world, snapping up minority ownership stakes in mobile-phone carriers including 25% of Hutchison Telecommunications in Hong Kong, 15% of KPN Mobile in the Netherlands, in addition to the 16% of AT&T Wireless. “Going global is not a good or bad strategy for DoCoMo,” says Shinji Moriyuki, a senior analyst at Daiwa Institute of Research. “It is a ‘must’ strategy.”

There’s more than revenue growth at stake. There’s national pride. Japan’s prolonged recession threatens to relegate the country to second-class status among industrialized nations. By selling its i-mode and 3G know-how overseas, DoCoMo hopes to spread the mobile Internetseeding the market for homegrown Japanese technology and boosting the country’s status as an info-age innovator. “With DoCoMo and i-mode, you’ve got a global brand recognition and excitement over a new product that you haven’t seen since the Sony Walkman,” says Kirk Boodry, telecom analyst for Dresdner Kleinwort Wasserstein in Tokyo. “The whole business community can point to it and say that Japan is still competitive on a global scale.”

So far, however, DoCoMo’s international investments have yielded more red ink than respect. DoCoMo was forced to take a $2 billion write-down for its KPN purchase this past half-year due to the plunge in telecom stocks. It will likely report another hit for its AT&T Wireless investment in the quarter ending March 31. DoCoMo overpaid for its overseas stakes, says Kenshi Tazaki, managing director of consultancy Gartner Japan. “On the other hand, DoCoMo’s stock was valued higher then, too,” Tazaki says. “At the time they had buying power that, with all the problems they currently face, they may not have much longer.”

Persuading partners to adopt DoCoMo technology is proving difficult. Carriers in other countries have been reluctant to spend heavily to upgrade their wireless data networks, fearing their countrymen do not have the same enthusiasm for photo-swapping, game-playing handsets as the Japanese. After spending billions of dollars getting government licenses to operate 3G systems, many debt-ridden carriers have put plans for network overhauls on the back burner. “The whole point of investing abroad was a speedy roll-out for 3G,” says Yasumasa Goda, analyst for Merrill Lynch Japan Securities. “But clearly this is no longer realistic.”

Nevertheless, DoCoMo is pushing ahead. KPN plans to launch its i-mode platform this spring in the Netherlands and Belgium, and E-Plus in Germanya mobile operator owned partly by KPNwill follow shortly thereafter. DoCoMo also announced plans late last month to list its stock on the New York and London exchanges. Tachikawa says listing in New York and London will boost DoCoMo’s visibility on the world stage and increase the liquidity of its shares. The company has hinted that funds raised through the offerings could be used for acquisitions in Asia.

A lot is riding on DoCoMo’s global ambitions. “Our mobile-phone technology is ahead of the rest of the worldfor now,” says Hiroyuki Arai, a member of Japan’s Diet and director of the parliament’s telecom policymaking committee. “DoCoMo is our flag bearer. If the company takes its time getting into the global arena, we will lose our lead to American or other foreign companies. Without that kind of commitment from Japanese companies, our economy will never recover.” That’s drama a mere television show will be hard-pressed to match.