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DoCoMo's Weaker Signal in the U.S.

When NTT DoCoMo agreed to hand over $9.8 billion in November, 2000, for a 16% stake in service provider AT&T Wireless, it was supposed to be just the beginning of a major move into the U.S. The Japanese company -- which many analysts consider the most innovative wireless outfit in the world -- recruited big-name advisers, like Goldman Sachs Group Chairman and CEO Henry Paulson, and looked into taking stakes in other U.S. businesses, say insiders. DoCoMo may even have considered buying control of AT&T Wireless, figuring that the U.S. market was growing fast, and its investments would rise like hot-air balloon (see BW Online, 8/6/02, "DoCoMo Clings to Its American Dream").

DoCoMo (DCM) has had to think again. U.S. wireless subscriber growth dropped from 40% annually to around half that level recently. Service providers have launched price wars, occasionally sending per-minute fees to below costs. To stay afloat, the six top industry players -- Verizon Wireless, Cingular Wireless, AT&T Wireless (AWE), Sprint PCS (PCS), VoiceStream, and Nextel Communications (NXTL) -- are expected to merge into three or four even bigger companies. This turbulence, combined with an onslaught of bad economic news, caused the share price of AT&T Wireless, the nation's third-largest wireless service provider, to plummet. Trading at just $4.70 per share, the stock is off 87% from the $35 per share DoCoMo originally paid for its stake.

TOO LITTLE TO SHARE. Meanwhile, the Japanese concern doesn't derive much benefit currently from its minority ownership, says Alex Trofimoff, an analyst with Sanford Bernstein. Sharing income is out of the question: On July 23, AT&T Wireless reported that its continued operations lost $3 million on revenues of $3.9 billion in the second quarter. By some estimates, it won't turn an annual profit until 2005. Plus, DoCoMo receives no licensing fees for the aid it is giving AT&T Wireless in rolling out services such as sending photos over cell phones. Not that it matters. Data services, though already available, probably won't really catch on with consumers before 2004 -- if then, analysts say.

Now, DoCoMo is scaling back its ambitions. Instead of grabbing more properties in the U.S., it's attempting to figure out how to get the most from the investments it has already made, says Andrew Cole, an analyst with wireless consultancy Adventis, which counsels DoCoMo. It's also trying to minimize its losses.

In April, the Japanese outfit wrote off $6.1 billion in the book value of overseas investments, much of it for AT&T Wireless. That pushed DoCoMo, with $38.9 billion in operating revenues for the year ended March 31, into the red. It lost $876 million for the year. On Aug. 2, DoCoMo announced its operational results, such as customer additions, for its first quarter of 2002, ended in June, but did not disclose its total revenue and income figures.

FEW OPTIONS. Lately, Nippon Telegraph & Telephone, which spun off DoCoMo in 1992, has had to fend off rumors that the wireless operator will be pulling out the U.S. market altogether. On July 26, an NTT exec stated: "We're not actively considering a sale [of our stake in AT&T Wireless]." But investors beat down AT&T Wireless's shares further, fearing that DoCoMo may have to sell its stake, anyway.

Considering how low stock valuations are and how hard it is to find buyers, the sale is unlikely, says Cole. In all likelihood, DoCoMo will have to sit tight, try to make AT&T Wireless a success, and hope the valuations come back up, he says.

"DoCoMo will have to further rethink its strategy," says Royce Holland, chairman and CEO of telco Allegiance Telecom (ALGX) and a former member of DoCoMo's U.S. advisory board. Already, the Japanese concern is looking for U.S. partners who could provide it with new technologies, says Nobuharu Ono, CEO and president of NTT DoCoMo USA, based in New York. So far, however, it has no leads, he notes (see BW Online, 8/5/01, "DoCoMo Clings to Its American Dream".)

SHRUNKEN AMBITIONS. Ono also reveals that DoCoMo's Tokyo office is still trying to decide if it will keep its U.S. advisory board going. The terms of the first board members, such as Paulson and Holland, ended in June, and so far, new advisers have not been recruited, a DoCoMo spokesperson in Tokyo says. The deliberations about dissolving the board, which was set up to help the wireless operator design its U.S. strategy, signals that DoCoMo's big U.S. plans have shrunk. The bottom line: The outfit is "trying to be more prudent and more careful," says Cole.

Its troubles back home are at least partly to blame. The wireless operator's revenues per user are declining. And the quality of communications over its network is getting worse as the number of users increase, writes Yasumasa Goda, an analyst with Merrill Lynch in Japan, in his latest report. Competitors are eating away at market share in Japan (its 44 million subscribers still make it the top player.) More important, the public's perception of DoCoMo as Japan's wireless technology leader seems to be eroding, Goda writes.

The outfit explains the revenue-per-user decline by pointing out that number doesn't include revenue from data services, for instance. "The quality of the network is not in jeopardy," says Ono. "Adjustments are constantly being made to avoid any situation which could potentially inconvenience users." And the company's market share will rise now that it has introduced new phone models, he adds.

DILUTION DANGER. Still, DoCoMo needs to keep an eye on AT&T Wireless. If the latter merges with another service provider, as most analysts and Allegiance Telecom's Holland expect, DoCoMo's 16% stake could be diluted. Then, it could choose to sit tight and risk losing its representation on the successor company's board -- or it could pump in even more money to boost its stake back to 16%. The wireless operator has already injected additional funds after AT&T Wireless acquired service provider TeleCorp in late 2001. Understandably, DoCoMo isn't "crazy" about a merger, either, says Holland.

If AT&T Wireless merges with another player, like VoiceStream, it would become a stronger company, says Trofimoff. It would own more spectrum, which is needed to field voice calls and move data, and enjoy lower operating costs. That should send its share price up eventually. With $2.3 billion in cash as of the end of March, DoCoMo can afford the wait, say analysts. "Usually, Japanese companies have a lot more patience," says Phil Redman, a research director at tech consultancy Gartner.

DoCoMo also has a chance -- albeit a slim one -- of recouping its original investment in 2004. Under their agreement, AT&T Wireless has to roll out a new, superfast data network in 13 of the top 50 U.S. markets by July of 2004. If it doesn't, it would have to pay DoCoMo back all of the $9.8 billion it invested, plus interest, according to the agreement. The buildout will begin next year. And, thus far, the plan is on track, says Phil Osman, an AT&T Wireless executive vice-president who's in charge of maintaining its relationship with DoCoMo.

STICKING IT OUT? But AT&T Wireless's mMode data service, started April this year, hasn't had much success, analysts note, although Osman says the outfit is happy with the launch. If demand for data services is slow, the network's roll out could be pushed back -- and AT&T Wireless might have to pay up. Of course, building out the infrastructure, which would cost up to $2 billion, -- the estimate of Sean Butson, an analyst with Legg Mason -- would be cheaper than repaying DoCoMo, so AT&T Wireless may build the network even if demand is weak. It could also try to renegotiate the schedule with DoCoMo.

A few observers, including Peter Friedland, an analyst with W.R. Hambrecht in San Francisco, believe DoCoMo could sell its stake in AT&T Wireless anyway, simply because the U.S. wireless market's outlook currently seems cloudy. But most analysts believe that's unlikely. "DoCoMo continues to be 100% behind us," says AT&T Wireless's Osman. And given AT&T Wireless's current share price woes, sticking it out at its partner's side may be DoCoMo's best option. By Olga Kharif in Portland, Ore.

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