DoCoMo Called It Right by Delaying 3G

Investors pounded Japan's telecom giant for postponing third-generation cell-phone service, but a bug-riddled debut would have been worse

By Ken Belson

Investors have been salivating for months in anticipation of the launch of NTT DoCoMo's third-generation (3G) phone service on May 30. Small wonder. The needle on the hype meter for this product is way over to the right, close to where it was with the launch of Microsoft's Windows 95 and Intel's Pentium chip.

So when DoCoMo (NTTDMY ) announced on Apr. 24 that it won't fully launch 3G next month, but will instead do six months of trials before rolling out the long-awaited service, investors punished the company, sending shares plummeting as much as 8%.

Truth is, the markets got it wrong: DoCoMo is saving everyone a lot of grief by avoiding a full-fledged launch with a technology that may be beset with bugs that could end up annoying consumers and investors alike. In fact, DoCoMo is showing unusual prudence.

Here's the problem: Third-generation phones will provide high-speed connections that allow users to listen to music and watch movies on their handsets, a wonderful idea. But Jupiter Research estimates that mobile commerce -- fee-based, downloadable entertainment and other services -- will generate only $5.6 billion by 2005 in Japan, the world's biggest market. That's just one-seventh what Japanese consumers will spend via their PCs. A collapse of DoCoMo's 3G mobile network would give "m-commerce" a black eye and hurt potential revenue.

So hats off to DoCoMo. Instead of chasing the quick buck, the company intends to get it right. "We will be the first in the world to offer 3G, but we want to provide 100% reliability," says DoCoMo spokesman Yuichiro Kuwahata.


  DoCoMo knows all too well what happens when products are launched before all the kinks are worked out. Witness the company's wildly successful i-Mode service, which allows cell-phone access to online content. Launched in 1999, it operates at far slower speeds than 3G, but crashed several times in 2000 because the network could not keep up with bulging demand. That just made users suspicious and angry.

There's another reason for DoCoMo's caution: Ultimately, it wants to market its franchise overseas. Better to get the technology right first. Certainly, other name-brand companies have postponed product launches in the interest of quality -- and they had competitors hot on their heels. Intel Corp. (INTC ), for example, announced a series of embarrassing delays and recalls with the launch of its Pentium IV chips last year, allowing rivals to gain market share. Microsoft Corp. (MSFT ) delayed the launch of its Windows 2000 operating system for businesses by more than a year, even though IBM (IBM ), Sun Microsystems (SUNW ), and Hewlett-Packard Co. (HWP ) had strong alternatives. DoCoMo doesn't face such rivals.

That's not to say there won't be some negative fallout. While DoCoMo takes a go-slow approach, handset makers stand to lose in the short term. The slower commercial launch means inventories are likely to pile up in a weakening production cycle. Matsushita Communication Industrial Co. (MC ) and NEC Corp. (NIPNY ), the two companies chosen to make the first batch of DoCoMo 3G phones, both saw their stocks slide after the news came out. But other phone makers are more sanguine. "We're not limiting ourselves to working with DoCoMo -- we're targeting the global market," says Katsumi Ihara, executive vice-president of Sony Corp. (SNE ), which will set up a venture with Ericsson to make and market cell phones.


  European telecommunications carriers, which paid an estimated $100 billion to secure access to spectrum in hopes of introducing their own 3G services next year, will also get hurt. Since all eyes are on DoCoMo's launch, plans for service in Europe may get pushed back, leaving investors waiting that much longer for a return on their money.

But longer term, DoCoMo and others stand to gain. If DoCoMo launches a glitch-free product, sales will rise faster and earn handset makers more sustainable profits. The delays also allow DoCoMo to prepare its Japanese product for launch overseas, where telecommunications standards differ.

Software providers, too, will benefit from a hiccup-free rollout. Access Co., a leading maker of browsers for Internet-enabled phones, doesn't expect to make money from 3G phones until 2003, when DoCoMo completes its network in Japan. "The number of products we sell will grow as the 3G network is introduced out nationwide," says Toru Arakawa, president of Access, which earns 30% of its revenue from DoCoMo-related products.


  While it fine-tunes its 3G service, DoCoMo can also make a bundle off its existing lineup of phones. The company sells about 50,000 i-Mode handsets a day, far more than the 150,000 3G phones it planned to sell this year. DoCoMo also just released a new set of handsets that use Java software to provide color screens and other snazzy, new applications. Java handsets are about $245 apiece, two to three times more than ordinary phones, so DoCoMo wants to wring the most out of these high-priced machines.

In this era of outsized expectations, DoCoMo has taken the refreshingly honest approach of telling the market not to get ahead of itself. This may not be what investors want to hear, but from a business point of view, such pragmatism is a welcome sign. DoCoMo is betting that a little preparation now will smooth the way later.

Belson covers tech from BusinessWeek's Tokyo bureau

Edited by Douglas Harbrecht

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