April 25 (Bloomberg) -- NTT DoCoMo Inc., Japan's biggest mobile phone operator, will probably forecast a second straight annual profit decline as it increases marketing costs to fend off new entrants such as Softbank Corp.

The company may predict a drop in net income to 498 billion yen ($4.3 billion) for the year started April 1, according to the median estimate of 14 analysts surveyed by Bloomberg. Profit probably fell 19 percent to 604 billion yen the previous fiscal year, Tokyo-based DoCoMo said in January.

Japan's 8.5 trillion yen mobile phone market will face its first new competitors in 12 years, forcing DoCoMo and KDDI Corp. to cut prices and spend more to keep market share. Softbank's billionaire founder Masayoshi Son this year agreed to buy Vodafone Group Plc's local cell phone unit, accelerating his push into the market.

``I expect we will see further price cuts over summer,'' said Stephen Hall, who helps manage the equivalent of $572 million at Britannic Asset Management in Glasgow, Scotland. ``Advertising spending will be at the top end of companies' estimates. Customer cancellation rates will clearly increase with number portability, increasing handset subsidy costs.''

Tokyo-based DoCoMo reports on April 28. KDDI, Japan's second- largest phone company, will probably post a 7 percent decline in profit to 187 billion yen in the year just ended after writing down the value of its older network, the survey showed. Net income will probably gain 1 percent this year when the company announces results on April 25.

Softbank, Japan's second-largest high-speed Internet services provider, is due to report earnings May 10.

Shares of DoCoMo have gained 3 percent in the past year, compared with a 53 percent rally on the Nikkei 225 Stock Average. KDDI shares gained 30 percent, while Softbank doubled in value.

`Unpredictable Element'

``The most unpredictable element in DoCoMo's outlook is the customer trend after number portability,'' wrote Nikko Citigroup Ltd.'s Toru Hosoi in a research report on April 20. He has a ``hold'' rating on the stock. ``We don't see any signs to review our rating on its depressed stock price.''

DoCoMo's operating profit, or sales minus the cost of goods sold and administrative expenses, will probably rise 5.8 percent to 830 billion yen for the year just ended, the company reiterated in January. This year's operating profit may fall 1.5 percent to 817 billion yen, analysts said.

Sales may drop 1 percent to 4.84 trillion yen for the year ended, before climbing by a similar amount this year, analysts said. The company said in January that third-quarter profit fell because of increased promotional costs to lure customers to its high-speed network. That month, the number of DoCoMo's high-speed users surpassed KDDI for the first time in almost four years.

`More Aggressive'

``Softbank seems likely to be much more aggressive in strategy and speed of application of strategy than Vodafone,'' Britannic's Hall said.

As of March 31, DoCoMo had more high-speed users than KDDI, with 23.5 million. KDDI had 21.8 million, and Vodafone K.K. trailed with 3 million. High-speed phone users typically spend more on their monthly bills to access the Internet, pay bills and download games.

Average revenue per user, an indicator that measures profitability, probably fell across the industry as people make fewer calls and took advantage of discount services.

To make up for lost earnings, DoCoMo added new features such as electronic payments to allow customers to pay for train tickets and snacks at retailers by swiping their handsets over a reader. The company also said it will become a credit card issuer to generate revenue from commissions.

``It's still unclear how such new features will add to profits,'' said Kazuyo Katsuma, an analyst at JPMorgan in Tokyo, who has a ``neutral'' rating on DoCoMo.

Fixed-Line Losses

KDDI's operating profit probably remained flat at 296.7 billion yen in the year just ended, and will gain 9.2 percent to 315.7 billion yen this year, analysts said. They estimate revenue gained 4 percent in the past business year, and will rise 6.8 percent to 3.25 trillion yen in the year started April 1.

KDDI Chief Executive Tadashi Onodera is relying on earnings from the company's mobile phone unit to offset losses at its fixed-line business.

Earlier this month, KDDI said it will buy Tokyo Electric Power Co.'s fiber-optic networks to become Japan's third-biggest broadband Internet service provider to compete against Nippon Telegraph & Telephone Corp., DoCoMo's parent company. KDDI said in January its fixed-line will probably posted an operating loss of 42 billion yen in the year just ended.

KDDI has also attracted young customers with its full song download service and expanded it to allow users to link play lists between their cell phones and personal computers.

``Strong numbers at its mobile unit will be held back by larger losses at the fixed line business, a repeat of last business year,'' said Britannic's Hall. ``Worryingly, KDDI remains very committed to the fixed-line strategy. There are real risks that the large losses will continue into this year.''

Softbank's Push

Softbank, with Vodafone Japan's 17 percent share, plans to offer new services via its partnership with Yahoo Japan Corp. Vodafone K.K. is the smallest of the three mobile-phone service operators in Japan, and has lagged behind in network quality, prices and handsets.

In the past year, Vodafone K.K.'s Chief Executive Bill Morrow introduced new discounts and handsets to stop customers from fleeing to rivals yet its market share remained at 6 percent of high-speed subscribers as of the end of March.

Softbank's Son said on March 17, when he announced the acquisition of Vodafone K.K., that he is committed to improving the service's handsets, network and content.

Analysts and investors speculate he may roll out similar tactics when he started high-speed Internet services four years ago. To promote his Yahoo BB service, Son gave away modems on the streets and offered price discounts of as much as half on competing networks.

To contact the reporter for this story: Aiko Wakao in Tokyo at awakao@bloomberg.net.

Last Updated: April 24, 2006 19:30 EDT