August 20, 2001DoCoMo unfolded
Mobile Commerce World
In the deferential tradition of Japanese conglomerates, NTT DoCoMo straddles the Japanese telecommunications industry like a behemoth.
Until recently the company was seemingly comfortable basking in its own anonymity, and as Sean Badal discovers, it probably would have remained so, had not its relentlessly expansionist programme driven it to the forefront of the industry.
Even stripped of all hyperbolic sentiment, DoCoMo's frenzy of acquisitions, partnership programmes and Memorandums of Understanding (MoU) with external organisations have taken many by surprise. "DoCoMo wasn't viewed as a European player until recently. It caught everyone a bit off guard," says Markus Hansen, Vice President of International Equities at investment firm SG Cowan, commenting on the company's international strategy. "It missed out early on, but it's not the end of the game. Technology is its leverage. It has first-mover advantage in wireless Internet activity."
Indeed, DoCoMo only made its first international investment in April 2000 by purchasing a 15% stake in Dutch carrier KPN Mobile, a unit of KPN, for $4.5 billion. While the cost of those investments, Y1800 billion ($15 billion), was unprecedented for a Japanese company, so was the speed with which they were completed - a period of eight months. In less than a year, DoCoMo has been transformed into a global player of enormous clout. "Everyone wants to work with DoCoMo," explains Hansen, "because the company is rich in cash, technically superior, and is satisfied with minority positions."
Further acquisitions followed at a rapid pace. A tie-up in September 2000 with America Online saw DoCoMo obtain a 42.3 percent stake in AOL Japan to become the largest shareholder. DoCoMo also pumped $100 million cash into AOL Japan, giving it a stake in AOL's 440,000 dial-up subscribers - a piffling number compared to i-mode users but a significant captive audience nonetheless.
Naturally AOL and i-mode services in Japan will be cross-promoted. AOL, an organisation that is itself accustomed to rapid strikeouts in the business world, seems to have been caught off-guard by DoCoMo's business acumen. "Even a company that moves as quickly as AOL found that there were times when DoCoMo seemed impatient," comments John Barber, Managing Director of AOL Japan. "They are a very fast-moving company."
Perhaps its most ambitious investment has been a US$9.8 billion purchase of 406 million shares (a 16% interest) of AT&T Wireless, an alliance that will facilitate the rapid establishment and development of 3G mobile communications systems - especially W-CDMA - later this year.
In December it acquired 19% of the biggest Hong Kong operator, Hutchison. It has also purchased a stake in the US-based Voicestream Wireless Corp and in South Korea's largest mobile phone carrier, SK Telecom. In January 2001, it announced plans to raise US$8 billion through a share offering.
However, the deal that has shaken up the European market and sent a nervous frisson through its rivals is DoCoMo's tripartite MoU’s with the Dutch company KPN Mobile N.V. and the Italian telco, Telecom Italia Mobile, announced in January this year. The three organisations have agreed to jointly develop a leading pan-European mobile Internet business that will combine DoCoMo's leading technology, skills and experience in wireless data with KPN Mobile and TIM's collective scale, footprint and local market experience, in order to roll out i-mode services across Europe. The parties expect to launch their HTML-based wireless Internet offering in Europe within the year, initially targeting over 30 million mobile subscribers of KPN Mobile and TIM in Belgium, Germany, Italy and The Netherlands.
The MoU is frightening in its ambitious reach. As an initial step of the alliance, NTT DoCoMo, Royal KPN and KPN Mobile have agreed to set up a joint venture company (the name is unavailable at the time of going to press) that consolidates mobile data businesses of KPN Mobile (Netherlands), E-Plus (Germany) and KPN Orange (Belgium). In addition, there are the smaller affiliated operators - France (Bouygues Telecom), Spain (Amena Mobiles), Austria (Mobilkom), Greece (Stet Hellas), Turkey (Is TIM), Serb Republic (Telecom Srbija), and The Czech Republic (RadioMobil). KPN Mobile and NTT DoCoMo will hold a 75% and a 25% equity interest respectively in the new company.
"Now is a good time to buy into Europe," says Tim Sheedy, Research Manager for European Wireless Communications at IDC. "NTT DoCoMo is more protected than most against the current economic slowdown and the backlash against telcos. It is in a strong financial position - even if they do have to take on the debt burden of European companies. It will affect their credit rating though."
Strong beginnings
So where did it all start? NTT DoCoMo was spun off from the old Nippon Telegraph and Telephone Corporation (NTT) in April 1992 as a provisional parent company named NTT Mobile Communications Network, Inc., its present name. The NTT Public Corporation has always been at the forefront of technological innovation in Japan, offering a number of innovative services throughout the years - paging services, car phones, satellite communications - but it was the extraordinary success of the i-mode service that propelled NTT DoCoMo into the front ranks.
Today, it has capital of 474 billion Yen, of which NTT has a 67% ownership - the other 33% is listed. The company has a total subscriber base of 34 million, making it Japan's largest mobile Internet service by far. In March 2001, NTT DoCoMo reached another milestone of sorts, announcing that its i-mode subscriber base had exceeded 20 million users. Indeed, Goldman Sachs were left blushing as their forecasts proved to be wildly wrong – the investment bank predicted only last year that by March 2002, i-mode customers could number about 10 million.
i-mode is credited with having propelled NTT DoCoMo's share price to around $38,000 - for a market cap that is greater than its giant parent company share price, as well as every other telco in the world. In a time of shrinking margins in cellular, i-mode is believed to be adding about $13 in monthly revenues per subscriber.
The Japanese giant is currently in the throes of new evolutionary patterns. Despite an initial setback in April this year - when the company admitted that technical glitches meant a full commercial launch of its 3G service would have to wait until October - it is still on course to provide the world's first W-CDMA 3G service. The run-up to the launch, however, has been fraught with difficulties.
3G warnings
Speaking in March, NTT DoCoMo's President, Keiji Tachikawa, warned against high user expectations for 3G, stating that the service will not be widely used by consumers for some years. Said Tachikawa "I would like everyone to change their view of 3G. Initially it will be for business users, so there won't be a mass market."
His comments follow in the wake of the announcement by J-Phone, Japan's third largest mobile phone operator, that it too would delay the launch of its 3G service as a result of a postponement in the standardisation of European technology.
DoCoMo estimates 3G services will take until March 2004 to reach less than one-third of i-mode's current base of 20 million, or about 6 million subscribers. It expects just 150,000 subscribers in the first year, when coverage will be restricted to three main urban areas - Tokyo, and the neighbouring cities of Yokohama and Kawasaki.
IDC's Sheedy believes that Tachikawa's comments belies hard business decisions "This is about product positioning. i-mode missed out on the business sector, where it was overtaken by rivals such as J-Phone. 3G services are therefore being targeted at a new and different market."
DoCoMo's trial launch has seen users report various glitches with the devices. The claims include a battery that ran out within a day, handsets that went out of range within the service area, dropped calls, and an occasional freeze, in which the phone stops functioning and has to be turned off then on again. The release of a planned allotment of 1,200 video-enabled Matsushita handsets was also delayed by one month. Keiji Tachikawa, President, has dismissed the problems, saying any such innovative service was bound to run into teething problems.
Michiko Mori, a spokeswoman for DoCoMo, confirmed that the company expects only 150,000 people to sign up for 3G in the first year, indicating that the company is not expecting mass production of 3G handsets. In March, Reuters reported that despite the growing hype surrounding the launch of DoCoMo's 3G services, handset manufacturers and DoCoMo are likely to focus more on existing i-mode services, which sell 50,000 to 60,000 handsets every day, and that one of the reasons DoCoMo is keen on getting the 3G service off the ground is that its bandwidth capacity is becoming tight, particularly in urban areas.
Challenges
In Europe the company faces equally daunting challenges. In a recently published UMTS report, the investment firm Durlacher stated that 'we doubt whether i-mode will be as successful in Europe as in Japan. We expect it to face an uphill struggle to get a slice of the European mobile Internet revenue as it requires the adoption of new types of handsets, new system infrastructure, robust pan-European partnerships, and services and applications that will differentiate it distinctly from those that will already be available in the European market. To differentiate, the joint venture must focus on advanced services. We believe that it is unlikely that European MNO's will adopt a walled garden approach, the route taken by NTT DoCoMo in Japan. This means that the joint venture will need to adopt an approach that is fundamentally different to that of NTT DoCoMo. What will bring the joint venture a significant advantage is the fact that by the time UMTS comes to the European market, NTT DoCoMo will be one of the few players with commercial experience in 3G network services.'
In addition, European market sentiment wasn't exactly helped by the comments made by Toshio Okihashi, Head of Strategy for DDI Corp.'s mobile business, Japan's second largest wireless company, when he said that some European mobile operators may go bankrupt because of the billions of Euros spent on new licences. Okihashi believes that 3G services would not provide the increase in revenues European operators need to recoup their licence fees and that European operators would require customers to double their spending on mobile calls to claw back their investments in 3G licences. He told Reuters that European operators needed to consolidate, and that companies such as France Telecom, Deutsche Telekom AG and BT should look at merging their mobile companies with other operators.
So what does the future hold? NTT DoCoMo is hardly likely to turn into a superannuated giant. The organisation's history delineates a clear commitment to technical innovation, excellence in marketing and a strong desire to keep shareholders happy. In its 'Vision 2010' document, DoCoMo itself acknowledges that the mobile communications market is starting to show signs of slowing down. Nevertheless, it is already looking to provide a second tier of features, and to encourage and stimulate growth. Its judicious use of all its resources will see it eminently positioned to take advantage of the challenges ahead.
The Rise and Rise of NTT DoCoMo
March 1959 - Maritime telephone service (offered by NTT Public Corp.)
July 1968 - Paging service (offered by NTT Public Corp.)
December 1979 - Car telephone service (offered by NTT Public Corp.)
May 1986 - In-flight public telephone service (offered by NTT)
April 1987 - Mobile telephone service (offered by NTT)
April 1991 - Ultra-small cellular phone ‘mova’ (offered by NTT)
August 1991 - Provisional parent company established
November 1991 - Provisional subsidiaries established in eight regions
April 1992 - Provisional parent company named NTT Mobile Communications Network, Inc., its present name. Names of eight regional subsidiaries changed to present names at the same time
July 1992 - Sales activities in mobile communications business transferred from Nippon Telegraph and Telephone Corporation (NTT) to NTT Mobile Communications Network Inc. NTT Mobile Communications Network Inc takes over NTT’s mobile operations
February 1993 - Number of cellular phone subscribers to NTT DoCoMo exceeds 1 million
March 1993 - Digital service for cellular phones (800 MHz)
July 1993 - NTT Mobile Communications Network, Inc. transfers sales activities in mobile communications business to eight regional subsidiaries
April 1994 - Wireless-PBX (Private Branch Exchange) System launched
April 1995 - Digital cellular phone 9.6 kbps high-speed data communications service
March 1996 - Satellite mobile communications service launched
April 1996 - Number of cellular phone subscribers to NTT DoCoMo exceeds 5 million
July 1996 - INFONEXT pager service (display of Chinese characters)
February 1997 - Number of cellular phone subscribers to NTT DoCoMo exceeds 10 million
March 1997 - Packet Data Communications service
August 1998 - Number of cellular phone subscribers to NTT DoCoMo exceeds 20 million
February 22, 1999 - i-mode service launched
March 2000 - Number of cellular phone subscribers to NTT DoCoMo exceeds 30 million
March 2001 - i-mode subscriptions top 20 million
April 2001 - May 3G launch scaled down to trial service
July 2001 - i-mode subscriptions top 25 million
October 2001 - Full 3G commercial launch?
i-mode - a snapshot
More than 800 companies are currently providing information services through i-mode. This is a twelve-fold increase from the 67 firms that signed on with the service at the time of its launch. In addition, there are about 1500 official i-mode Web sites including 60 compatible sites, along with another 40,000 independent sites.
February 22, 1999 - i-mode service launched
June 28, 1999 - users exceed 0.5 million
August 8, 1999 - 1 million users
March 15, 2000 - 5 million users
August 6, 2000 - 10 million users
November 22, 2000 - 15 million users
March 4, 2001 - 20 million users
July 1, 2001 - 25 million users
DoCoMo Why the success?
By cleverly taking advantage of the unique characteristics of the Japanese market and using a smart overseas strategy, DoCoMo has built itself an almost unassailable lead in the world of wireless services.
In Japan DoCoMo has an approximate 60% market share, three times that of any rival, and offers the most sophisticated services for consumers. The company has made recent investments in several mobile markets in Europe and America, while its Japanese competitors are taking money from operators in those self same markets who seek participation in, and knowledge of, the Japanese wireless phenomenon. Analysts expect worldwide consolidation amongst networks, resulting in five or six big players. This investment game is being played at a time of depressed stock prices for operators in the rest of the world. DoCoMo, however, without any debt from acquiring 3G licenses in its home territory, continues to shine in the light of i-mode.
i-mode has become an all-encompassing wireless brand and is the generic term for the entirety of DoCoMo's wireless services. It uses technologies no better than, and in many cases poorer than those found in other wireless markets. Nevertheless technology still gives DoCoMo a critical lead in two areas. Broadband 3G networks, forced by capacity saturation and poor voice quality, will be rolled out in Japan years before other markets. Advanced handsets, now featuring Java - almost a year ahead of other countries, are the true enablers of wireless services in Japan, and will amaze Western consumers. They are produced according to DoCoMo's own specifications by its manufacturing partners, themselves eager for overseas expansion.
DoCoMo's business model, more so than standardised technology, is what has spurred growth in Japanese services. European telcos are envious of DoCoMo's ability to dictate handset specifications and have yet to gain the confidence to create an open and active market for wireless services. DoCoMo passes 90% of premium service fees direct to developers, rewarding popular content and applications. Throughout the rest of the more liberalised wireless world content aggregators and publishers battle to extract any revenues from telcos for their nascent wireless services, yet developers receive little for their efforts and are further removed from the wireless consumer.
Leveraging on a vibrant consumer marketplace, handset and content development community, DoCoMo's advantages are not likely to diminish significantly even as foreign telcos nip at its heels on home territory and as third parties play an ever greater role in content. Foreign players need more than an i-mode programmer to play in this game.
Ian Morrison and Thomas Meyer are consultants with Synapsx. Based in South East Asia, they advise telcos, entertainment companies and advertising agencies on their wireless strategy. Email ian@synapsx.com