Look Out, DoCoMo--Someone's Gaining on You

In Tokyo's trend-setting Harajuku district, one piece of street gear is essential: a late-model, Web-enabled cell phone. The twentysomething crowd favors NTT DoCoMo (NTDMY ), the country's biggest wireless carrier and developer of i-mode, the world's first commercially viable wireless Net service. But chances are that the orange-haired teenagers hanging out in this youth mecca sport handsets from J-Phone: True, J-Phone's net service is more cumbersome than i-mode. But hey, J-Phone costs less, and the handsets boasting color LCD screens are just as cool as anything DoCoMo has to offer.

Harajuku represents the front line in the war pitting DoCoMo, with its 60% share of the cell-phone market, against two upstarts. First, there's KDDI Corp.'s Au Group, currently the No. 2 mobile operator, and J-Phone, in last place. Yet it's probably only a matter of time before J-phone becomes DoCoMo's chief rival. That's not just because of its growing popularity with fashionable teenagers, or the snazzy advertising that has raised J-Phone's profile. The mobile operator is about to become a part of the empire of Britain's Vodafone Group PLC (VOD ), the world's largest wireless conglomerate. Vodafone just inked a deal to raise its 26% stake in J-Phone to 46% by buying out British Telecommunications PLC's (BTY ) shares in both J-Phone and its parent, Japan Telecom. The alliance gives J-Phone access to Vodafone's deep pockets. "Thanks to Vodafone, J-Phone now stands a good chance of becoming No. 2 in Japan," says Andrew Cole, head of global wireless at Adventis Corp., a Boston consultancy.

It makes strategic sense for Vodafone to invest in Japan, which is conducting a nationwide experiment in living with the mobile Web. Since J-Phone and Au launched their own rival services to DoCoMo's i-mode, Japan's mobile Net population has reached 36 million. This competitive free-for-all has spawned more than 40,000 mobile Web sites that will check subscribers' horoscopes, trade stocks, and even alert shoppers whenever they pass their favorite boutiques. Vodafone can learn plenty from Japan and apply the lessons to its own struggling efforts in the wireless Web in Europe.

In the past year alone, J-Phone's J-SKY mobile Net service has boosted its subscriber base sixfold, to 6.7 million. It launched the first map-downloading site one year ago and was also first on the market with handsets boasting built-in digital cameras--all the better to zap favorite snapshots to your friends and relatives. "We may not be the biggest, but we've got the No. 2 slot in brand recognition after i-mode," says Rick Timmons, who was sent over by BT to oversee the J-SKY business. By his account, the carrier has 50% of the teen market, 25% of those in their 20s, and 15% of those age 30 to 39.

MORE DIALING. There's no guarantee that Vodafone's hefty gamble on J-Phone will pay off. The teen market can be fickle. DoCoMo's Takeshi Natsuno, who oversees i-mode's content, maintains that many J-Phone users switch to DoCoMo once they enter the workforce. "J-Phone is popular simply because it's cheap," he says. What's more, J-Phone users need to dial up to access the Net, unlike DoCoMo's always-on service.

These are worrisome issues, considering that Vodafone is paying $5.3 billion for BT's stake. Moreover, Seiji Sanda, head of a Tokyo cell-phone billing service company, warns that there could be a clash of cultures if Vodafone attempts to exert control. "This will not be another Nissan, I assure you," says Sanda, referring to Renault's managerial takeover of the Japanese auto maker. "The more the gaijin [foreigners] try to exert influence at the top level, the more Japanese management will resist." On the other hand, the Vodafone connection could be a godsend for J-Phone. Highly dependent on the youth market, the company needs to develop business applications. Here it can use a hand from Vodafone, a company that grew big, in large part, by tailoring services for corporate customers. With its ample funds, Vodafone is also expected to help improve J-Phone's infrastructure, starting with a switch to an always-on connection.

DoCoMo, meanwhile, boasts 36 million voice customers, some 60% of whom also subscribe to i-mode. But J-Phone is about to become part of a global empire, centrally run by an aggressive British team. In comparison, DoComo is buying minority stakes in carriers around the world to win footholds in local markets--a timid strategy that avoids controlling non-Japanese telcos. If DoCoMo hopes to build up a heavyweight global presence of its own, it may be time to start taking lessons from Vodafone.

By Irene M. Kunii in Tokyo

    Before it's here, it's on the Bloomberg Terminal.