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KDDI's Weapon Against DoCoMo

By Bruce Einhorn Japanese cellular operator KDDI has long operated in the shadow of its bigger, more glamorous rival, NTT DoCoMo (DCM). While DoCoMo garnered praise for winning customers to its groundbreaking i-mode service and for launching one of the first third-generation (3G) networks, KDDI struggled.

KDDI's cellular network -- the result of a merger of several smaller operators -- had 16.4 million customers at the end of March, less than half what DoCoMo has. But some 13 million of KDDI's customers have signed up for its high-speed service, called au, which uses CDMA 1X, the standard promoted by San Diego-based Qualcomm (QCOM). That's far more than the 3 million that DoCoMo has for its 3G service, dubbed FOMA, which operates on the rival W-CDMA standard.

In the second part of Online Asia's look at the Japanese cellular market (see BW Online, 4/19/04, "DoCoMo's 'New Business Model'"), I recently talked to Hideao Okinaka, the vice-president and general manager of KDDI's au business sector. I asked him about what it's like to be David to DoCoMo's Goliath. Edited excerpts of our conversation follow:

Q: You've done much better than DoCoMo in getting new customers.

A: We launched in April, 2002, and we had 7 million subscribers by March, 2003, and 13 million by March, 2004. And we're still gaining new customers. In calendar year 2003, we added 2.5 million new subscribers. We [were No. 1 in getting new subscribers]. It was the first time ever that DoCoMo wasn't.

B>Q: How do you account for KDDI's success, given how difficult a time DoCoMo had when it launched FOMA?

A: After we launched, we didn't want to sell new handsets based on the old technology. Every single device on our shelves in our shops is 3G. The customer can't find any 2G [second-generation] devices. We centralized the product to 3G, but DoCoMo continued to sell 2G and 3G handsets.

[Because of] the technical maturity of 1X compared to W-CDMA, we were able to launch 1X devices with the same dimensions and same battery life. So, from the customer perspective, there was no degradation. And because CDMA 1X is fully compatible with 2G, a 1X device can communicate with both networks [so we have total coverage].

Q: And how has DoCoMo done?

A: FOMA had smaller coverage. The phones had bigger dimensions and shorter battery life. For DoCoMo, it's something like our situation in 1999-2000. We decided to move to CDMA, which we launched in 1998. For three years, we struggled with getting a good market perception among new customers. After three years, we recovered. The situation DoCoMo is now faced with is something similar. They are on the way to migrate from the old network to an entirely new one.

Q: You shook up the market last fall when you announced your plan to charge a flat monthly rate for au subscribers. Why did KDDI make such a big change?

A: Fiscal year 2004 [ending in March, 2005] is the year for real competition between DoCoMo and us. Both of us are trying to have the advantage. The [cellular] market is going to saturate. There's 62.5% penetration now. We have maybe [15 percentage points] left to grow...we should hurry up to get numbers.

Q: In November, you launched WIN. How is it different?

A: It's the next step from 1X in the CDMA world. It's based on CDMA 1X EVDO -- "evolution data only." CDMA 1X is designed for voice, and you can piggyback data on top of that. EVDO is designed purely for data.

Q: But the response hasn't been so good.

A: It has been a little bit less than what we expected. Our target was 450,000 WIN subscribers by the end of March. We couldn't reach that number, but we're more than halfway there. We had only two handsets, one each from Hitachi (HIT) and Kyocera (KYO). We just launched a third from Hitachi. Also, the concept of WIN isn't fully understood by the average customer. The flat rate isn't fully understood, either. So it will take some time. But even so, we gained 220,000-400,000 new customers in four months.

Q: In Europe and other parts of the world like Hong Kong, 3G operators have struggled. What's one of the big differences between the Japanese and European markets?

A: It's a matter of market acceptance of mobile multimedia services. In Japan, multimedia was so popular on the 2G network. So, from the customer's perspective, 3G means that multimedia capability is improved. But for Europeans, as well as people in Hong Kong and particularly in America, they're not yet used to using mobile multimedia. Operators see 3G as a means to launch multimedia services, so they're trying to do two jobs at the same time.

Q: So what do you see happening?

A: It should be a step-by-step process to get to good market acceptance for 3G. Once the operators succeed in educating customers, then they have a good opportunity to persuade them to switch to 3G. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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