If you dropped by NTT DoCoMo's (DCM ) shop on Chuo Street in the heart of Tokyo's tony Ginza district last fall, you would have understood the buzz over Japan's wireless market. The outlet was so packed that customers had to jostle in long lines for the privilege of signing up for DoCoMo's i-mode mobile Internet service, or to buy the coolest, most function-packed handset. But today, there's plenty of room to browse at will--and some DoCoMo staff give customers the hard sell.
With stunning abruptness, Japan's seven-year cell-phone boom has apparently ended. Shipments of new handsets, which began slipping in June, plunged by 29% in 2001's final quarter. New subscriptions dropped by 17% during the industry's fiscal year ending Mar. 31, to 8.1 million, and Morgan Stanley Japan Ltd. telecom analyst Hironori Tanaka predicts they will fall 30% more in fiscal 2002. DoCoMo President and CEO Keiji Tachikawa admits "the period of rapid growth is over" for Japan's cell-phone business, though he is confident DoCoMo can maintain "stable growth."
But the slowdown could spell trouble for a corporation--and an industry--that has been a rare bright spot in Japan's economy. I-mode subscriptions have fallen especially hard, from an average of 1.9 million monthly a year ago to under 500,000 in February. And the debut of DoCoMo's third-generation (3G) wireless service has been disappointing. DoCoMo is investing $8 billion over the next three years in 3G, which offers high-speed data transmission and video. But as of March, it has signed up only half the 150,000 subscribers it expected. Analysts blame spotty coverage and high cost--$75 monthly on average just for data service--as well as the short battery life of 3G handsets.
What's more, analysts expect DoCoMo will have to write off about half of the $13.5 billion it spent in the past two years on minority stakes in struggling carriers like KPN Mobile (KPN ) of the Netherlands and AT&T Wireless (AWE ) of the U.S. So despite operating profits of $7 billion on sales of $39 billion, it is expected to post a net loss of more than $750 million for the year ended Mar. 31. Parent Nippon Telegraph & Telephone Corp., which has relied on DoCoMo's fat profits, is expected to lose $7.5 billion, a Japanese record.
How could the company have been caught so badly off guard? After all, 54% of Japanese already own a cell phone, and the sector has stalled in the U.S. and Europe. For one thing, Japa-nese execs saw that cell-phone market penetration is still behind the Scandinavian countries, so there seemed room to grow. Revenue per DoCoMo user, meanwhile, shrank 10% last year as people used their phones less. Plus, Japan's young, trend-conscious consumers have tended to buy new handsets twice a year--and preferred high-end models retailing for more than $200. But that obsession cooled as Japan's recession ate into disposable income, and consumers balked at upgrading to 3G.
With a 58% share of Japan's wireless market, DoCoMo isn't about to fade away. Indeed, archrival KDDI Corp. is suffering more. KDDI has a debt load of $13.5 billion, and could be pushed to the brink in coming years if its own 3G service, launched on Apr. 1, flops. KDDI claims an advantage: It says it can charge half as much as DoCoMo for 3G because its service is based on the same CDMA platform it uses for 2G. "We can't lose because we have a big cost advantage over our rivals," says Hirofumi Morozumi, KDDI's head of business administration. But thus far, KDDI has had a hard time matching its engineering prowess with savvy marketing.
This harsh climate will likely ignite a new battle among Japan's wireless operators: competition for high-margin services. "It's time for carriers to start boosting revenue with the business they have, instead of depending on new subscribers for growth," says analyst Tanaka. J-Phone, which is about to pass KDDI as Japan's No. 2 carrier, is scoring with such hot products as its camera phone, which lets users send photos via wireless e-mail. Another promising business is corporate services. Japan Communications Inc. now provides high-speed data service, accessible from wireless laptops, at a cost of $570 for a year of unlimited use. "We're offering corporations what they need, a mobile broadband network," says JCI President Seiji Sanda.
For years, DoCoMo has set the pace for the global wireless industry. Japan's new winners may be those who can quickly chart a new course.
By Irene M. Kunii in Tokyo