"We Have to See If Users Find Value"

Delighted that so many consumers want to test its 3G phones, NTT DoCoMo CEO Keiji Tachikawa is cautiously optimistic about seeing profits by 2004

NTT DoCoMo (NTDMY ) CEO Keiji Tachikawa cuts a smooth figure as he strides confidently into a conference room on the 43rd floor of the company's Tokyo headquarters. These days, he's quite a busy man. On May 30, his company started testing the world's first third-generation (3G) cellular-phone system. Nearly 150,000 Japanese have applied for the 4,500 handsets available for the four-month trial service. DoCoMo will use the test run to iron out bugs and set prices before the commercial launch set for Oct. 1.

Such demand means no headsets for DoCoMo employees, not even Tachikawa. But that's fine with him, he says. Recently, he sat down with BusinessWeek Tokyo Correspondent Ken Belson to talk about the company's 3G strategy. Here are edited excerpts from their conversation:

Q: Why was there so much confusion when you announced in late April that there would be a trial service, rather than a full, commercial launch?


In our previous announcements, we said we would start with limited coverage, but we never mentioned the number of users. We decided to limit the number of users. We made this decision based on our recent experience with the recall of Panasonic 503i series phones and Sony's similar model. It wouldn't benefit anyone if we released so many products at once and had to recall them. With a typical phone, there are 30,000 items to test. With i-mode, there are 100,000 items, and with 3G phones, there are 200,000. The portal sites are also out of our control. In this environment, it's never possible for us to completely ensure 100% compatibility with our handsets and these sites.

Q: Since the 3G test period started on May 30, there have been reports that the batteries run out faster than normal. Are there snags?


If users frequently download colorful [graphic-intense] items, the battery will run down faster.

Q: Are you sticking to your forecasts for 150,000 users by March, 2002, and 6 million users in three years?


The number of users in the first year could be higher. According to our forecasts, the number of subscribers in our first year will not be significant because the phone service is limited to the 23 wards of Tokyo. But we don't know if 150,000 is too small. We just have to provide the service and let the market decide.

Q: How about the pricing of your 3G services?


From the supplier side, we should be able to recoup our investments. We leveraged on our research-and-development activities to slash our costs, so the third-generation phones will cost less than second-generation phones.

From the users' perspective, the question is whether the benefits of image communications can match users' expectations. From the suppliers' perspective, the phones carry a large amount of information and we normally would charge more, but we have to see if users find value in it. In the initial phase, we think business customers...will have more buying power and can justify the cost more easily.

In September, we'll announce the pricing. And since these phones are more sophisticated, they will be more expensive, but we will provide various package plans that bundle some free minutes.

Q: Do you still expect to go into the black in four years?


We have simulations for the next six years, where we calculate the depreciation costs and pricing assumptions. There are many parameters, but we think we can make single-year profits in fiscal year 2004 and recoup our investments starting in fiscal year 2005.

Q: How close are you to a linkup with SK Telecom (SKM )?


We concluded a memorandum of understanding with them, and we are talking with them to provide global roaming. But I have certain conditions when I try and find partners in Asia. One is the country has to have a heavy economic exchange with Japan. Second, the telecom policies have to be clear-cut. And third, there has to be a telecom operator that uses the W-CDMA standard we use. In Korea, two companies have been selected, but in Singapore, Malaysia, and the Philippines, no company has been selected, so we have to wait. China still has to finish preparation for entering the WTO.

Q: Sony recently recalled 420,000 handsets. What is the impact of this decision?


Sony made the handset, but we have the responsibility for checking and selling them, so we are both responsible. Sony might have to reproduce handsets...and we expect some financial losses, although they won't be significant, given our overall business. The damage to our corporate image is more significant and hard to quantify.

Q: When will you launch 3G overseas?


Our partners have to decide their our own business plans, and [then] DoCoMo would make the systems for them. Hutchinson 3G UK will be able to roll out the service first, because their management team is eager to roll out and they already selected vendors and are ready to start the network construction.

Q: Japan's Fair Trade Commission ruled in December, 2000, that NTT should break up its holding company by 2003. What's your feeling on this?


It is inappropriate for the government to interfere with the management of a private company or to debate the notion of a holding company. I'm not sure it makes sense to dissolve the NTT holding company to stimulate competition in the market. Breaking Microsoft into different parts is understandable. But if you break up NTT according to this logic, you should also break up Citigroup.

Edited by Douglas Harbrecht

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