Can I-Mode Give This Also-Ran a Lift?

DoCoMo's hot service may boost wireless carrier E-Plus

These haven't been cheery days at E-Plus Mobilfunk. The wireless company, Germany's third-largest, has struggled in vain to gain share against rivals Deutsche Telekom (DT ) and Vodafone Group PLC (VOD ). High startup costs and fierce price pressures have rendered profits elusive: The closely held E-Plus logged sales of $2 billion in 2001 but likely lost money on a net basis, analysts say. To top it off, the company's Dutch parent, KPN (KPN ), wrote down its $17.6 billion investment in E-Plus by an astounding $12 billion on Mar. 14, citing a sharp reduction in value. Ouch.

Yet amid the Sturm und Drang, there's a ray of sunshine. E-Plus just became the first company outside Japan to roll out NTT DoCoMo's (DCM ) wildly popular i-mode mobile service, which boasts nearly 32 million users in its native land. The proprietary system went live in Germany on Mar. 16 with more than 60 content providers offering everything from full-color city guides to sports scores to eBay (EBAY ) auctions. E-Plus hopes to convert 200,000 of its existing customers to i-mode and sign up 400,000 new ones within a year. If it hits those targets, its annual revenue could grow by $180 million and its market share could edge up to 14%. "We are a step ahead of our rivals," crowed Chief Executive Uwe Bergheim at the launch.

That may be, but E-Plus isn't the real center of attention. I-mode's arrival in Europe is a crucial test for the whole telecom industry, which stubbed its toe on the disappointing wireless Internet services known as WAP. If mobile-happy Germans take to the i-mode alternative, it will confirm that Europeans are eager to use their phones for more than just talking and sending text messages. The industry "could really use a success story at this point," says Lars Vestergaard, research manager for International Data Corp. in London. But if i-mode flops, anxious telecom executives and investors will be more pessimistic than ever about the prospects for costly third-generation mobile networks.

I-mode is already a smash in Japan, where schoolkids and executives alike use it to look up information, download cartoons, and swap billions of e-mails. The service runs on an "always-on" mobile network, which greatly improves interactivity. It is also user-friendly, with preselected services and easy-to-navigate menus--a variant of the "walled garden" strategy pioneered by AOL (AOL ). DoCoMo's genius was to price the service cheaply, handle billing for all the participants, and pass back a juicy 91% of revenues to content providers. That's why i-mode now boasts more than 2,000 official sites in Japan.

E-Plus has licensed the i-mode brand and technology from DoCoMo and is mimicking its business model. Users will have to buy a new color-screen handset--the first model from NEC retails for $220. Subscribers will then be charged a $2.65 monthly fee, plus one eurocent per kilobyte of data sent or received, which works out to about $3.50 a month for 300 e-mails and 90 short info requests. Users will be charged extra for premium content, such as live stock quotes. E-Plus is expected to keep about 15% off the top. All told, analysts figure the company should take in about $28 per month per customer.

If i-mode flops in Germany, many pundits won't be surprised. E-Plus cannot afford to throw loads of money at the market. Germans may balk at the pricey new handsets. Users also may be turned off by i-mode's closed design--which has detractors dubbing it the "Betamax" of wireless data.

Assuming the kinks get worked out, however, i-mode could spread quickly. KPN, in which DoCoMo owns a 15% stake, plans to launch the service in Belgium and the Netherlands this spring. It could also run on 3G networks in Britain, Italy, and Scandinavia operated by Hong Kong's Hutchison Whampoa Ltd. (HUWHY ), which also has a tie-up with DoCoMo. AT&T Wireless (AWE ) may launch it in the U.S. later this year. For now, it's the Germans who are voting on the future of the wireless net, one downloaded cartoon at a time.

By Andy Reinhardt in Hannover

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