Oct. 23 (Bloomberg) -- KDDI Corp., Japan's second-biggest mobile-phone carrier, may draw more subscribers by using its lead in music services as a rule change tomorrow lets users switch providers without changing their number.

To combat larger rival NTT DoCoMo Inc., KDDI will sell more music-enabled handsets, make downloading faster and introduce Web sites that let users buy and manage songs on a personal computer. Softbank Corp., the third-largest operator, offers handsets in a discounted package with Apple Computer Inc.'s iPod players.

The carriers are betting investment in music services will pay off as competition in Japan's 8.9 trillion yen ($75 billion) wireless industry intensifies with the number portability rule. KDDI introduced its Lismo music service, which can be used to arrange music playlists on a computer that are then downloaded onto a phone, 18 months before DoCoMo's offering.

``KDDI will probably be the strongest and most aggressive'' operator, said Evan Erlanson, a Hong Kong-based analyst at Bear Stearns Asia Ltd. ``DoCoMo will be playing a defensive game and Softbank will also be on the defensive.'' He rates KDDI and DoCoMo ``outperform,'' and has no recommendation on Softbank.

The rule change comes after the Japanese government last year opened the mobile-phone market to new entrants for the first time in 12 years. Softbank, eAccess Ltd., Japan's third-largest high-speed Internet access provider, and IPMobile Inc. received wireless licenses.

DoCoMo on Oct. 12 introduced 14 new handsets, including 11 that have music-playing and other entertainment functions to protect its 56 percent share of Japan's wireless market. The company, the biggest shareholder in Tower Records Japan Inc., started a service this month to allow phones to work with Tower's Napster Japan online music store.

No `Price War'

Shares of DoCoMo have risen 5 percent so far this year, compared with a 16 percent gain for KDDI and a 47 percent slide in Softbank.

DoCoMo President Masao Nakamura told the Nihon Keizai newspaper in a Sept. 3 interview that 2 million to 3 million users cancel their contract each year. The total may rise by 600,000 to 700,000 in the year ending March 31, he said. DoCoMo has about 52 million subscribers.

DoCoMo, KDDI and Softbank haven't announced any price cuts.

In an online survey conducted by the Nikkei Industrial Daily last month, 8 percent of KDDI's users said they may change carriers after number portability. About 19 percent of DoCoMo's subscribers and 25 percent of Softbank's users said they may switch.

``I can't comment on the net increase for MNP subscribers as we're still monitoring how the market will act,'' KDDI President Tadashi Onodera said at the company's earnings news conference on Oct. 20. ``We won't start a price war but we'll consider it if the others start discounting their fees.''

50 Million Songs

KDDI, which has 28 percent share of the wireless market, said in May 50 million songs have been downloaded from its ``EZ Chaku Uta Full'' service to its high-speed ``au'' mobile phones.

Softbank founder Masayoshi Son, who in April bought Vodafone Group Plc's Japan unit, plans to boost the company's 16 percent market share by improving network coverage.

The company is spending between 400 billion yen and 500 billion yen this fiscal year on its network, doubling the number of base stations to 46,000 by the end of March 2007. DoCoMo has 32,700 relay points and plans to increase that to 44,200 by next March. KDDI has 19,000 and is targeting 22,500.

The operators are making their networks faster and more reliable as subscribers are spending less on voice calling and more on downloading music and other data.

KDDI on Oct. 20 said average revenue per user for data services climbed to 2,000 yen in the fiscal second quarter from 1,890 yen a year earlier. Voice sales fell to 4,700 yen from 5,300 yen, the company said.

Average Sales

The increase in data revenue per user was ``greater than expected,'' Makio Inui, a Tokyo-based analyst at UBS Securities Japan Ltd., wrote in a note to clients dated Oct. 20 after the company's earnings announcement. The company ``is likely'' to increase its average revenue estimate, he said.

KDDI reported second-quarter profit rose 24 percent to 60 billion yen, as it lured subscribers by introducing handsets with music and electronic payments functions. The company kept its full-year profit forecast unchanged at 186 billion yen.

DoCoMo had an operating margin of 17.5 percent in the year ended March 31, compared with 9.7 percent for KDDI, 5.6 percent for Softbank. Companies on the Nikkei 225 Stock Average had an average 9.6 percent.

Japan's mobile phone companies pay distributors and retailers to sell handsets linked with subscriptions on the expectation they will recoup those costs through service fees.

KDDI, which has said it doesn't intend to increase handset subsidies as competition heats up, paid about 37,000 per handset in fiscal second-quarter ended Sept. 30. DoCoMo hasn't disclosed how much it pays, while Softbank said it provided a 44,400 yen per handset subsidy in the first quarter.

To contact the reporters on this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net Yoshinori Eki in Tokyo at o yeki@bloomberg.net

Last Updated: October 23, 2006 00:21 EDT