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DoCoMo's "New Business Model"

By Bruce Einhorn NTT DoCoMo (DCM) has long been one of the world's wireless pioneers. In the late 1990s, the Japanese outfit launched the most successful cellular Internet service, i-mode, followed by one of the first commercial third-generation (3G) networks in 2001. But in the past few years, DoCoMo stumbled as it tried to launch its high-speed service while competing with upstart rival KDDI.

Last fall, KDDI challenged the industry leader again by announcing plans to offer lower-cost high-speed service, charging a low, flat monthly rate. Now, DoCoMo is following suit (see BW, 4/19/04, "DoCoMo vs. a Mouse That's Roaring"). I recently spoke to DoCoMo President and CEO Keiji Tachikawa about the KDDI threat, DoCoMo's strategy in Japan, the West, and China, and the future of 3G. Here are edited excerpts from our conversation:

Q: Why adopt the same pricing model as KDDI?

A: It's time to do so. The problem here is that customers can't calculate easily how much it costs to send a photo because they don't know how many kilobytes [there are] per photo. That's part of the reason that customers are demanding a flat-rate scheme.

People can easily tell with voice -- if they talk too long, they will have a high bill. But in the content-delivery service, with high-resolution videos and pictures, your bill could skyrocket without you noticing it. So in order to free users from such concerns, we have decided to have a flat rate.

Q: Isn't this a pretty big departure from the business model that helped DoCoMo become so big?

A: We're confident. We've always been the leader in pioneering new services. Our ambition is not only to increase the traffic on the network but also to create a new business model to add value to our services.

Q: What sort of services do you see DoCoMo launching as a result of the new model?

A: It opens new opportunities: electronic book service, e-commerce on mobile networks. There's new functionality in the handsets. Twenty-five million, or 60%, of DoCoMo customers have camera phones; 20 million have phones compatible with infrared data-access capability; 5 million have phones with two-dimensional bar-code readers; 41 million are using i-mode-compatible phones.

Q: DoCoMo has started a joint venture with Sony (SNE) to develop smart cards in mobile phones. What do you see coming from that?

A: If [the smart card] is embedded in the cellular phone, it can enable a lot of transactions -- functioning as a credit card, employee certificate, security card. This technology will be licensed to manufacturers of handsets, not only in Japan but also abroad. The primary aim is to achieve revenue from licensing fees.

Q: Why go this route?

A: We can't depend totally on the traffic business any longer. We have to find new areas of business. If cellular handsets can play a role in the e-commerce business, we would like to achieve a share of the revenue from this business.

We have to collaborate with other industries -- financial institutions, banking companies, movie theaters, concert halls. We can collaborate with the railway companies to sell tickets, commuter passes on handsets. Of course, also airlines. The cellular phone can be involved with every sort of real-world business in one way or another. The market environment in Japan has already advanced to that level.

Q: DoCoMo boasts that it has 3 million subscribers for FOMA, your 3G service. But your rival, KDDI claims to have more than 13 million customers for its 3G service.

A: If you call their technology 3G, then we may say they're ahead. But they're based on a different technology. The have approximately 13 million subscribers, but most of them are migrators who changed from a previous model within their own customer base. [KDDI's] total subscriber base is 16 million, so they don't have much more to grow. For our part, we have 45 million [total subscribers,] and these will migrate to 3G gradually over time.

Q: What do you say to critics who contend that DoCoMo's 3G launch has been disappointing?

A: Our service commenced in 2001, the rollout started in 2000. The pace of our rollout is much faster compared to peers in other markets. As of the end of March, coverage was 99% of the nation. At the end of March, 2003, it was 90%.

Q: What's next for i-mode?

A: I-mode will evolve further [with services like] video mail on 3G. The functionality of i-mode has been expanding with 3G.

Q: Rumors abound that DoCoMo is looking to get out of its partnership with Hutchison Whampoa's 3G operator in Britain. Are you disappointed about the poor British performance of 3G?

A: I'm very surprised that people like to speculate. People are waiting for something to happen. But in the telecom business, it takes time to materialize things. For us [with FOMA in Japan], it has already been four years. It's a time-consuming business.

Q: What about the rumors?

A: We deny them. Nothing is decided. In any given partnership, if there's a disagreement, the partnership may be withdrawn.

Q: Some critics of 3G contend that the advent of Wi-Fi and other wireless technologies will make it easy for people to avoid using 3G. What's your reply?

A: The number of Wi-Fi subscribers is not very significant in Europe -- and you can easily count the number of Wi-Fi subscribers in Japan. Wi-Fi and 3G and other technologies can co-exist. The usage is different.

Q: What are DoCoMo's plans in China?

A: We're still waiting for the policies [regarding 3G licenses in China] to become clear. We've been waiting since spring of last year. We can't really even think about allying [with a Chinese operator] without knowing to which operator the 3G license will be awarded. It will be nonsense to ally with operators if they're not going to be supporting W-CDMA. We have already created a research lab in Beijing responsible for research and development in 4G. We're doing whatever we can at this point, but we just have to wait. We can't move.

Q: What will 4G be like?

A: The speed will be 100 times faster [than 3G]. Our business will look completely different in 2010. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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