There's No End to DoCoMo's Wireless Hangover

As mobile stocks keep falling, the carrier takes another big hit

Flashback to 2000: Intoxicated by the success of their i-mode mobile Net service in Japan, NTT DoCoMo (DCM ) execs were looking abroad for new growth opportunities. By November, 2000, the Japanese operator had invested nearly $16 billion in four overseas cellular companies, including KPN Mobile in Europe and AT&T Wireless (AWE ) in the U.S. In exchange, those carriers agreed to roll out i-mode and DoCoMo's version of third-generation, or 3G, mobile technology. As the foreign partners built up their data services, the thinking went, they would provide DoCoMo with a steady stream of intellectual-property revenues from i-mode and 3G patents. Even better, DoCoMo would benefit as the partners' share prices continued skyward.

Things haven't turned out exactly as planned. By last March, following the plunge in wireless-stock valuations, DoCoMo had written down $7.7 billion of its investment. Then, on Oct. 2, the company announced it would take another $4.7 billion hit after closing its books for the half-year ended Sept. 30.

There has been little benefit from technology sales, either. So far, i-mode has been slow to take off outside Japan, with fewer than 150,000 European subscribers using the service, compared with the 35 million Japanese who use i-mode to surf the wireless Web and zap photos and short messages to one another. AT&T Wireless won't say how many AT&T subscribers it has for its version of i-mode--dubbed m-mode in the U.S.--but the service hasn't generated much buzz. Moreover, DoCoMo's 3G technology, called W-CDMA, is still in its infancy, while a rival standard called CDMA2000 is gaining ground. "DoCoMo's partners must be saying: `Thank you for your charity,"' says Hiroo Seki, a telecom analyst at UBS Warburg in Tokyo.

DoCoMo's investors aren't in the mood for charity. Although DoCoMo expects $8.3 billion in operating profits this year--up 10% from 2001--on sales of $44 billion, its share price has fallen by 40% since April, to $1,650. That's largely due to DoCoMo's battered global portfolio and the disappointing launch of its Japanese 3G service, which in its first year has attracted only 135,000 subscribers. DoCoMo says that in coming weeks it plans to scale back its target for March, 2003, originally set at 1.4 million users.

The global debacle has been an embarrassment for CEO Keiji Tachikawa. Indeed, observers say it may be the main reason he was passed over for the presidency of DoCoMo's parent, Nippon Telegraph and Telephone Corp., in July. Still, Tachikawa insists DoCoMo will stay the course. "We'll proceed with our overseas operation in line with our original strategy," he says.

AT&T Wireless is DoCoMo's biggest headache. It bought into the U.S. company in November, 2000, near the height of the bubble, forking over $9.8 billion for a 16% stake. At the time, it seemed like an ideal way to gain a foothold in a promising market as AT&T (T ), now America's No. 3 mobile carrier, wanted to adopt DoCoMo's i-mode and 3G technology. But since then it has written off 80% of its AT&T investment. KPN Mobile is also struggling. One big problem: Many consumers view i-mode as an interim technology that will soon be superseded by 3G. "It will be tough to persuade people to get an i-mode handset when so much has been said about 3G," says John Tysoe, mobile-industry analyst at WestLB Panmure in London.

What's the solution? Investors are clamoring for DoCoMo to rethink its overseas adventure. The consensus seems to be that DoCoMo should pull out of KPN Mobile, where the write-downs now effectively value the company's investment at zero anyway. Ditto for AT&T Wireless, whose share price is in free fall. Investors may be more forgiving of Hutchison 3G UK Ltd., in which DoCoMo holds a 20% stake. Hutchison has just kicked off its new 3G service in Britain. "They should put their investments behind them and get on with 3G," says Mark Berman, director of equity research at Credit Suisse First Boston in Tokyo. In any event, it looks like DoCoMo's heady global vision will remain little more than a dream.

By Irene M. Kunii in Tokyo, with Kerry Capell in London and Steve Rosenbush in New York

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