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Facing Up to DoCoMo's Doldrums

NTT DoCoMo (DCM) has long been one of the most innovative players in the global cellular business. The Japanese company led the industry with its iMode data service, and in 2001 it became the first carrier in the world to offer 3G. But these days, with the Japanese cell-phone market nearly saturated, DoCoMo is having trouble finding growth.

Last year, DoCoMo's sales dropped by 4%, to $45 billion, and operating profits tumbled 29%, to $7.3 billion. DoCoMo CEO Masao Nakamura, appointed a year ago, sat down with BusinessWeek editors to explain how the company plans to pull out of its funk. Below are the edited excerpts. (Note: This is an extended version of the Q&A that appears in the July 25, 2005, issue of BusinessWeek's International edition.)

Q: How can DoCoMo get its sales back on track?

A: Last fiscal year, we posted a decrease in revenues and profits for the first time in our corporate history. That's because we provided a hefty price reduction to catch up with our competition. Another reason for the decline in profits was the high cost of 3G handsets.

Now, with regard to the first point, because we've already reduced our prices to a comparable level to KDDI and Vodafone (VOD), we do not have to make a steep reduction any longer. Therefore, that will stabilize our revenues for the next fiscal year, although there are uncertainties because mobile-number portability will be introduced in Japan next year.

The second element is still an issue. The 3G handsets are still expensive. But we are gradually finding a solution to this problem as well. We have already introduced a less-expensive model that has fewer features than the highest-end models. Plus, we've also started procuring more handsets from foreign vendors, including Nokia (NOK) and Motorola (MOT) and the Korean vendors.

Q: Those measures might stabilize the situation, but how do you get revenues growing again?

A: We have to grow the traffic volume -- not voice, but data traffic. If you look at the overall customer base, 80% of our customers are either not using data service at all or only slightly for mail transmission only. Just increasing the usage of those customers by 100 yen a month could provide a huge boost to our revenue.

One possibility is pushing information out to customers in order to get them to use data more frequently. The second booster would be visual communication service such as video phones and live video streaming.

Q: What are you doing to develop that?

A: We are having a hard time convincing customers to take up video-phone conversations. Grandparents might want to talk to their grandchildren over the video phone, but that's about it. Another factor is that until now, the number of customers owning a videophone-compatible handset was limited. So they weren't able to find people to call. But I think we can resolve this issue by increasing the number of subscribers.

Also, some women, for instance, don't want to pick up a videophone call when they're not wearing makeup -- so the first connection will be established by voice. But when they're ready, they will be able to switch over to videophone.

We also have another feature that enables an avatar to replace the caller. A cartoon character can be shown instead, and when you're ready, you can switch over to your own face. But videophone service is not really rooted in the culture yet, so we have to try to further promote this service.

Q: Do businesspeople want to see each other face to face?

A: We still have to work on that. There is a variation that is used by business persons. It's not a face-to-face conversation, but you can show, for example, a video of a construction site if there's a problem.

Q: Given the troubles that you're having getting people to use these services, did you perhaps rush your investment in 3G?

A: We acquired only 1 million subscribers in the first two years after the launch of 3G. Now after four years, we are on a growth track, and currently most of the handsets sold by DoCoMo are 3G.

But the sluggish two years were partly attributable to handsets that were too big, and the battery life was too short. Also, we had to roll out the network from scratch. But I don't really think that we were too early in making our investment. If we didn't start four years ago, we wouldn't be in the position we are today.

Q: Has your vision of the future of mobile telephony changed?

A: A hot topic is the blending of mobile and fixed-line communication service. With the faster speeds of 3G, we are beginning to be able to offer these solutions to corporate customers. For instance, we are offering a handset that combines a cellphone with Wi-Fi. So when the employees are inside the office, they will have a Wi-Fi connection to the fixed network. But once the employees go outside, they will have access via our mobile network with a single phone.

It will be very hard to survive if you are offering only voice. So data will hold a very big key in acquiring customers going forward, and therefore you will need to improve your content line-up, and offer new, innovative data features and services.

Q: What kinds of content are most important?

A: We might see some content in providing education. In Japan, there are courses that people go after school in order to prepare for college entrance examinations, and the quiz could be offered on cellphones so that the children can punch in the answers and save time on their studies. Online auctions are becoming available. There are many other kinds of content that have been offered only on PCs, but those can be modified to be offered on cellphones.

Q: There will soon be new cellular competitors in Japan. How will that affect DoCoMo?

A: Softbank and E-Access have raised their hands to enter the market. They claim that they will be competing on price, and the entry of those companies has changed the DSL market completely.

But in cellular, price isn't the only factor. First and foremost, it is important that you have a good network. Second, you need to offer sophisticated handsets, and your ability to provide good content also matters. So although these players will affect us, I don't think we'll see the same kind of changed landscape that we saw in DSL.

Q: DoCoMo has been relatively unsuccessful outside of Japan. Will you try again overseas?

A: One big strategy is to leverage the iMode platform so that we can increase the number of players who will be using the same handset. That way we can increase the volume of the handsets we buy jointly with other carriers, and bring down the prices.

The second possibility is Asia. There might be some operators who have to roll out 3G networks from scratch, but who will need some financial assistance. So we might seek a capital relationship with those Asian players -- except in China. It is quite difficult to enter the Chinese market as an operator. But three or four 3G licenses may be issued, so I can foresee that there may be demand for a Web-type of service. That could be a chance for us to enter into some sort of relationship.

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