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KDDI takes the high-speed lead
Tomomi Sekioka Bloomberg News Monday, July 19, 2004
Its hip phones and low rates leave DoCoMo playing catch-up

TOKYO Mitsuko Abe's KDDI mobile phone can download a 30-second video clip in 20 seconds. The high-speed service costs her a third less than she used to pay to NTT DoCoMo, Japan's biggest mobile phone operator, which pioneered the technology.
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"I switched to KDDI from DoCoMo last month after my daughter showed me how much I could cut my call rates," said Abe, a 55-year-old Tokyo homemaker. KDDI's family-member discount is saving her as much as 36 percent on her monthly cellphone bill.
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After initially trailing DoCoMo in the high-speed wireless market, KDDI - Japan's No.2 mobile operator - has surpassed the unit of Japan's former phone monopoly, winning more than three times as many subscribers to the service. KDDI's shares have risen 18 percent in the past year, compared with a 37 percent drop for DoCoMo.
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KDDI's president, Tadashi Onodera, has helped the company's high-speed service outsell DoCoMo's by offering lower rates and handset extras like car-navigation systems and FM radios - and by focusing on Japan. DoCoMo spent ¥1.8 trillion, or $16.6 billion, from 1999 to 2001 on stakes in overseas partners including AT&T Wireless Services, and wrote off more than half those investments. KDDI has bought no cellphone stakes outside Japan.
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"KDDI kept its eye on Japan while DoCoMo was distracted by its overseas investments," said Naoki Fujiwara, a fund manager at Shinkin Asset Management in Tokyo.
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KDDI's third-generation mobile service had 14.7 million users in Japan, the world's No.3 cellphone market, at the end of June. DoCoMo's competing service, the world's first when it was introduced in October 2001, had 4.58 million. KDDI - whose sales are about half those of DoCoMo - signed up more new overall subscribers for the first time in the year that ended March 31.
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In 2002, KDDI stopped selling new subscriptions to its second-generation service, which offers slower Web access and limited video downloading and targets users who want basic phone services. High-speed subscribers account for more than 80 percent of KDDI's 17 million mobile users. They make up less than 10 percent of DoCoMo's 47 million mobile subscribers, with the rest using the older network.
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In addition to offering perks like car-navigation systems and family discounts, KDDI attracts young users by marketing itself as hipper. The company's designer handsets include one with an oversized keypad designed like a colored checkerboard and a superthin magnesium-alloy body.
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"Our edge over competitors is that we have our finger on the pulse of what customers want," Onodera said at a June press conference. He did not respond to requests for an interview for this article.
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Onodera's bet on advanced wireless services in Japan is bolstering KDDI's profit, which doubled in the year that ended March 31 as the company added subscribers. DoCoMo's profit rose 21 percent, excluding a write-off the previous year for overseas investments. Both companies will report earnings for the April-to-June quarter next week.
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Onodera is close to his goal of cutting debt by half to ¥1 trillion in the four years to March 2005. KDDI had ¥1.2 trillion in debt at the end of March, down from ¥2.2 trillion three years earlier.
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DoCoMo's FOMA high-speed service may be set for a comeback, said Hitoshi Hayakawa, an analyst at Credit Suisse First Boston in Tokyo. The company introduced two handsets this month featuring smart-card computer chips that can be used as electronic money, and plans to roll out two more by the end of July. It's also cutting fees to match KDDI discounts, and the quality of the service is improving to match KDDI's, according to Hayakawa.
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"KDDI's runaway victory is over," Hayakawa said. "People no longer think FOMA handsets have no advantages over KDDI's, and that will stop DoCoMo users switching over to KDDI."
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KDDI's lead over DoCoMo in the advanced-wireless market has already narrowed. At the end of June 2003, KDDI's service had 16 times more subscribers than DoCoMo's. Now, it has three times more.
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Masao Nakamura, who became president of DoCoMo last month, said he aimed to switch half the company's Japanese mobile customers to FOMA within two years. In February, DoCoMo introduced new FOMA handsets with longer battery lives and expanded network coverage to moving trains and the insides of office buildings.
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Nakamura's predecessor, Keiji Tachikawa, was less focused on winning customers at home than on making DoCoMo's wireless Internet technology the worldwide standard.
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"I want to meet any carrier that doesn't want DoCoMo's technology," Tachikawa said in July 2000, after announcing the acquisition of a 20 percent stake in the British mobile unit of Hutchison Whampoa of Hong Kong.
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DoCoMo agreed in May to sell the stake to Hutchison.
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Tachikawa's overseas expansion included minority stakes in six companies including AT&T Wireless, KPN of the Netherlands and Hutchison - and lessened DoCoMo's focus on its home market. In exchange for ownership stakes, DoCoMo supplied its wireless Internet technology to the companies. When their share prices collapsed with the technology bubble in 2001, the value of those investments plummeted.
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As DoCoMo juggled its foreign investments, KDDI introduced a competing third-generation service in Japan in April 2002, six months after DoCoMo's Japanese service debuted. By the end of its first month, KDDI's service had more subscribers than DoCoMo's.
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Part of KDDI's advantage was that the new service used its existing wireless network powered by Qualcomm's code division multiple access, or CDMA, technology.
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DoCoMo's network, built from scratch, suffered startup glitches that caused some users to switch to KDDI. In September 2002, Tachikawa blamed "limited network coverage, unattractive handsets and a lack of killer applications" for stunting the service's sales growth.
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KDDI has stayed ahead of DoCoMo by offering lower rates for its CDMA2000 1X service. The company introduced Japan's first flat fee for wireless data transmission in November 2003, and offers steeper family and student discounts than DoCoMo.
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DoCoMo, which forecasts its first-ever annual decline in sales and operating profit this fiscal year, is fighting back. Last month, the company introduced a flat monthly fee of ¥3,900 - ¥300 cheaper than KDDI's - for data transmission including Web access, downloading music and sending e-mails.
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"The price war is getting tougher," Onodera said last month when KDDI introduced a new ¥2,000 monthly fee for limited data transmission.
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Even as DoCoMo steps up efforts to win third-generation subscribers in Japan, KDDI still has advantages including cheaper handsets and better network coverage, said Hideaki Kurimoto, a fund manager at Meiji Dresdner Asset Management.
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The most expensive handset for DoCoMo's FOMA service sells for about ¥35,000, while KDDI's top-of-the-line handsets cost about ¥25,000.
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"DoCoMo can't regain market share from KDDI unless it cuts the handset price to ¥20,000," Kurimoto said.
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Bloomberg News

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