DoCoMo Gets a Clearer Signal

The phone giant is back in the black, with products galore

A year ago, NTT DoCoMo Inc. (DCM ) looked like yet another Japanese company gone astray. After writing off half of the $16 billion it had invested in overseas phone companies, Japan's No. 1 wireless operator plunged into the red for the first time since its founding in 1991. Its reputation as a leader in innovation took a beating after it was late to offer cell phones with built-in cameras, the latest rage in Japan. And the launch of its much-hyped Third Generation (3G) high-speed mobile service turned out to be a much-publicized flop.

Now, though, DoCoMo is bouncing back. Although the company won't report fiscal 2002 earnings until mid-May, Credit Suisse First Boston Corp. sees a $1.7 billion profit, on sales of $40 billion, vs. a $985 million loss on revenues of $39.5 billion in 2001. Moreover, thanks to booming handset sales, declining capital outlays, and higher mobile revenues, DoCoMo is cash-rich again; it rang up $3 billion in free cash flow for the year ending Mar. 31, analysts say. "DoCoMo is rebounding," says Mark Berman, a telecom analyst at Credit Suisse First Boston in Tokyo. "In another year, it should regain its status as one of Japan's most profitable companies."

The recovery started with a return to basics. After missing out on the initial boom in camera phones, DoCoMo last June launched its first photo handsets, which work on its older, Second Generation, network. Thanks to the flashy design and easy picture and video messaging, DoCoMo has sold 9 million of the phones in the past 10 months. That's more than twice the number sold in the same period by Japan's photo-phone pioneer, J-Phone Co., owned by Britain's Vodafone Group PLC (VOD ).

DoCoMo has lots of snazzy offerings. In April, it is launching a Dick Tracy-style wristwatch phone. And in May, it will release six new 2G camera phones from Sony (SNE ), Sharp, Fujitsu, and Mitsubishi, some offering resolutions of more than 1 million pixels, four times the current level. Users will be able to download images onto a small memory card and print them out at convenience-store kiosks. Another model features a fingerprint-authentication system; the registered user activates the phone by placing a finger on a sensor pad. "DoCoMo is once again setting trends," boasts Takeshi Natsuno, chief of DoCoMo's mobile Net service, i-mode.

Even DoCoMo's 3G service, Foma, is showing signs of life. After launching the high-speed wireless Net service in October, 2001, an overconfident company president, Keiji Tachikawa, predicted Foma would attract 150,000 users in its first five months. By last March, only half that number had signed up, and many customers griped about spotty coverage and bulky phones that ran out of power in just a few hours.

Tachikawa then swung into action, pressuring handset vendors to develop lighter, longer-lasting models and promising to subsidize their development. This March, DoCoMo unveiled a new $250, 3G video phone that weighs just 130 grams and has enough battery power to run for a week. Aggressive ads push the message that 3G offers the cheapest rates for sending and receiving data. Moreover, the network now provides coverage to 90% of Japan's population, compared with just 60% a year ago. All of this has attracted 330,000 Foma subscribers; nearly 140,000 signed up in March alone. "We're at a turning point," says Atsushi Shimazaki, senior manager of DoCoMo's marketing division. He predicts Foma will reach 1.5 million users by next March.

Despite the turnaround, investors remain unconvinced. DoCoMo's share price has bounced back to $2,000 from a March low of $1,700. But over the past year, it has fallen by a third, mainly because of concerns about its overseas business. Late last year, Dutch partner KPN Mobile (KPN ), in deep trouble, asked for a capital injection of $2.4 billion from DoCoMo. Tachikawa, mindful of shareholder worries, rejected the request. But he's still considering a similar plea from Hutchison 3G U.K. Ltd., which uses a 3G standard developed in DoCoMo's labs. Hutchison has asked for $320 million to help bankroll its launch of next-generation services in Europe. A decision is expected by the end of April. "DoCoMo thinks it has little choice but to support Hutchison on the 3G rollout, but the market wonders if it'll ever see a return on the investment," says Hironari Tanaka, a telecom analyst at Morgan Stanley Japan. Tachikawa will remain under pressure until he gets the share price up, but he can take comfort that his customers appear to be satisfied.

By Irene M. Kunii in Tokyo

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