When British cellular giant Vodafone Group PLC (VOD) took over Japanese mobile carrier J-Phone Co. four years ago, the deal looked like a sure thing. J-Phone was coming off of five straight years of market-share growth, it had a hip reputation, and it was within spitting distance of second place in Japan's cellular market. Today, that all looks like ancient history. The company's market share has tumbled to 17.8% since peaking at 18.6% in 2003 -- just before the J-Phone name was dropped in favor of Vodafone. Rivals' data services offer download speeds up to eight times as fast as Vodafone's. And in January, Vodafone saw its subscriber base fall by nearly 59,000 customers -- despite the introduction of seven new third-generation, or 3G, handsets since December. "The January subscriber figures were surprisingly bad, and I don't think it's temporary," says Daisaku Masuno, an analyst at Nomura Securities Co. in Tokyo.
Not surprisingly, Vodafone is shaking up management. On Feb. 7, Shiro Tsuda said he would step aside as president of Vodafone's Japanese operation after just 68 days at the helm. Tsuda will become executive chairman, while Bill Morrow, a former chief executive of Japan Telecom (J-Phone's fixed-line sibling) and most recently CEO of Vodafone's British operations, takes over as president. "Morrow can play a coordinating role in the group much better because he knows [the Vodafone board] and has no language problems," says Tsuda, a former exec at leading mobile carrier NTT DoCoMo who speaks little English.
Morrow will have his hands full. In January, Vodafone Japan said it would miss its annual sales target because of delays in rolling out new 3G handsets. Meanwhile, its two rivals are set to release new 3G phones this spring, while Vodafone's next 3G release isn't likely before the summer. Unimpressed shoppers complain that Vodafone's current 3G handsets -- especially those made by foreign manufacturers such as Nokia Corp. (NOK) and Motorola Inc. (MOT) -- don't look cool, and lack the functions of rivals' models. By contrast, the latest DoCoMo phones, all from Japanese vendors, can be used to pay for groceries at convenience stores, while KDDI Corp. customers have downloaded 2 million songs to their handsets in recent months. Vodafone falls short largely because it has tried to introduce a uniform suite of handsets and services worldwide rather than customizing them for Japan. "People here don't want what people in Glasgow want," says Gerhard Fasol, chief executive of Eurotechnology Japan, a Tokyo consultancy.
LEARNING THE HARD WAY
Still, for all of Vodafone's woes, the business isn't beyond redemption. It has 15 million customers in Japan and expects to report $1.2 billion in operating earnings in the year through March. Morrow could help keep those profits strong by working more closely with Japanese handset producers who know the market, or by persuading foreigners such as Nokia and Motorola to develop phones specifically for Japan. "Vodafone is learning the hard way that if you want to succeed in Japan you need to invest in handsets that are pretty much tailor-made to Japan," says Makio Inui, a telecom analyst at brokerage UBS in Tokyo.
The other option, some say, would be to bail out altogether. Vodafone says it has no plans to unload the Japan operation, but Morrow did spend his previous tenure in Tokyo buffing up Japan Telecom, eventually selling it to Ripplewood Holdings Inc. And if a sale is in the cards, there's likely a willing buyer: Softbank Corp. The company has applied for a cellular license and says it will build a system -- but buying Vodafone would be a convenient short cut. "Softbank is desperate to go into mobile, and it would cost a fortune to build a network from scratch," says Tetsuro Tsusaka, an analyst at Deutsche Securities Ltd. in Tokyo. Softbank declined to comment. With the right guidance, the old J-Phone could yet return to its former glory. The question is whether Vodafone will be in the driver's seat.
By Ian Rowley in Tokyo