December 2, 2002

Japan's Cellphone Giant Casts a Paler Shadow

OKYO, Dec. 1 — On the face of it, Keiji Tachikawa should have been crowing.

As competitors around the globe struggle to survive, Mr. Tachikawa, the president of NTT DoCoMo, was telling reporters how his company earned a profit in the six months through September. Sales were up, and DoCoMo, Japan's largest mobile phone carrier and second-largest company over all, said it expected to earn $1.5 billion for the full year.

But Mr. Tachikawa's presentation on Nov. 7 was noticeably on edge, and for good reason. Three years after its i-mode Internet-enabled phones took the telecommunications industry by storm, DoCoMo is looking more and more like an ordinary company. Profit fell 95 percent from the comparable six months last year, and revenue grew just 1.9 percent — hardly the expected pace for a company that formerly could not supply phones fast enough to its clamorous customers.

Mr. Tachikawa, who guided DoCoMo through its boom years but is now navigating rough waters, also reduced full-year forecasts.

The causes are simple, yet overwhelming. More than 62 percent of Japanese have cellular phones, so finding new subscribers has turned into a costly battle with DoCoMo's rivals, KDDI and J-Phone. In a weak economy, consumers are increasingly reluctant to pay $400 for DoCoMo's fancy third-generation phones or spend $100 a month downloading bulky audio files. To compete, DoCoMo must cut prices, a humbling concession for a company whose products had always commanded a premium.

At its peak, DoCoMo seemed to be setting an international example by popularizing text messaging through its trademark i-mode phones, turning cellular e-mail into a fine art with its sleek handsets. By linking handsets to the Internet with "always on" service, the company revolutionized the way people used cellphones, making it easy to surf the Net, book movie tickets or play computer games.
Mr. Tachikawa's plan was to take i-mode global. But DoCoMo's international expansion has hit an expensive speed bump. The company pumped $15 billion into mobile phone companies in the United States, Europe and Asia the last four years as part of a worldwide expansion of its phone service. Yet with global stock markets in disarray, DoCoMo has been forced to write off two-thirds of the value of its investments in companies like AT&T Wireless Services and KPN Mobile in the Netherlands.

Worse, DoCoMo's older i-mode Internet-enabled phones have received only a lukewarm reception in Europe. These handsets were supposed to be a warm-up act for DoCoMo's third-generation, or 3G, phones, the holy grail of the cellular market. Because the 3G handsets can transmit data up to 40 times faster than can conventional phones, users can download and send audio files, snapshots and short movies and hold video conferences. The technology will also allow for easier global roaming. Eager to preserve its pioneering image, DoCoMo bulled ahead with its introduction of the world's first third-generation service in October 2001.

It turned into a disaster. Sales are more than six months behind forecast and bugs in the expensive 3G handsets have hobbled service. Callers have found the phones clunky and coverage spotty, a bad sign in this country of finicky consumers. While DoCoMo focused on its floundering 3G service, KDDI and J-Phone unveiled cheaper, snazzier phones that bit into DoCoMo's 58 percent market share, tarnishing the company's pace-setting image.

Humility, though, has never been one of Mr. Tachikawa's strong points. His answers at the November news conference were curt and his gaze icy cold. He would not acknowledge that his company would face delays recouping the 1 trillion yen ($8.2 billion) investment in its faltering new service.

And in response to frequent suggestions that he should step down, in light of the $10 billion in losses his company accumulated overseas, Mr. Tachikawa offered to take a 20 percent pay cut but dug in his heels.

"It is management's responsibility to continue carrying out effective business reforms and boost the company's value," said Mr. Tachikawa, who declined to be interviewed for this article.

The question on many investors' minds is whether Mr. Tachikawa's reforms will be enough to restore DoCoMo's luster. The company's stock, once worth more than that of Japan's largest company, Toyota Motor, has fallen 32 percent this year and 76 percent from its peak in February 2000. The slide has cost shareholders more than $180 billion — losses comparable with those of overseas rivals like Vodafone and Deutsche Telekom.

The declines are bitter medicine for Mr. Tachikawa, a proud engineer. The company will cut its capital investment budget this year by 5.2 percent to compensate for the slower-than-expected expansion of its third-generation network. DoCoMo is also bracing for what it calls the "transition phase from rapid expansion to stable growth" — a euphemism for single-digit growth in the number of new customers.

DoCoMo signed up 1.5 million new subscribers between April and September, a gain of just 3.3 percent. And despite DoCoMo's market-leading content, customers are spending less each month on phone fees. The industry benchmark for measuring this phenomenon — monthly average revenue per user — fell 6 percent, to 8,160 yen ($67.45), in the first half and is expected to dip an additional 180 yen ($1.49) by March.

Per-user revenue is declining partly because Japanese are talking less on their mobile phones and sending more e-mail messages instead. The shift from voice to data is not new. But DoCoMo and its rivals expected consumers to move beyond text messaging and to download more photos, movie clips and songs — larger data files that are more expensive to retrieve. Instead, the carriers are finding that except for a core group of heavy users, most subscribers use their phones minimally.

"The big users buy the phones first," said Jeffrey Lee Funk, author of "The Mobile Internet: How Japan Dialed Up and the West Disconnected" (ISI Publications). But per-user revenue declines over time, he said, "because most new users don't use their phones as much."

Technology fatigue is hitting DoCoMo's rivals, too. J-Phone has sold more than seven million of its so-called sha-mail phones, which have tiny cameras inside so people can snap photos and e-mail them. ("Sha" is short for photograph in Japanese.) Users spend 8,400 yen ($69.40) a month with these phones, about one-quarter more than the average wireless bill. Yet the company's "movie sha-mail" phones, which can take and transmit five-second video clips, have been slower to catch on. And what demand there is has been diluted by KDDI and DoCoMo, which have come out with their own movie phones.

The market's shrug could spell disaster for DoCoMo. Given the high development costs, DoCoMo needs not only to sell more phones, but for users to spend more with them. Meanwhile, KDDI's slower-but-cheaper 3G phones have proved to be a big hit, stealing potential business. J-Phone will start its own 3G network this month.

DoCoMo says the key is luring corporate users to the faster, more advanced services that allow, for example, a salesman to download data on inventory back at a factory.

But with the economy slumping, most managers view these handsets as more extraneous than essential. Through Sept. 30, DoCoMo sold 140,000 3G subscriptions, a goal it had hoped to reach in March. Now the company expects 320,000 customers by next March — a quarter of its original projection.

For now, DoCoMo can afford to wait for its sophisticated phones to catch on. The company is sitting on 356 billion yen ($2.9 billion) in cash, and its parent, Nippon Telegraph and Telephone, is majority owned by the government. Just as important, DoCoMo still holds a large share of Japan's $70 billion mobile phone market, and no one expects that to change significantly.

These assets cannot, by themselves, increase growth, though. Rather, analysts say, good ideas packaged in an affordable way can. The question is when consumers will scoop them up. With DoCoMo's shares in the dumps and sales and profit slowing, Mr. Tachikawa must know that investors are losing patience.