DoCoMo vs. A Mouse That's Roaring

As KDDI grabs subscribers with sleek handsets and low rates, the leader is starting to stagger

NTT DoCoMo Inc. (DMC ) isn't accustomed to sitting in second place. The company has long dominated the Japanese cellular market, and today boasts 56% market share, twice that of its rival, KDDI Corp. And while other carriers were struggling to offer any kind of wireless data services, DoCoMo five years ago rolled out i-mode, an always-on connection to the Internet that was an instant hit, allowing users to e-mail, shop, and bank online all through the medium of their handset.

So imagine the discomfort that DoCoMo's executives are feeling in the wake of news that for the 11 months ending in February, KDDI signed up 2.4 million new subscribers, vs. DoCoMo's 1.6 million. "For three years, we struggled to get a good market perception," says Hideo Okinaka, a vice-president and general manager for KDDI. "This is the first time ever that DoCoMo failed."

Even more embarrassing, KDDI's success has come in the sort of advanced data services that are supposed to be DoCoMo's specialty. In 2001, DoCoMo launched the world's first third-generation cellular service with great fanfare. And 3G, you remember, was supposed to usher in superfast transmission of voice, data, and video, creating a high-speed wireless Net that would make the earlier cellular age look Jurassic. Customers, though, avoided DoCoMo's 3G offering because of high prices for the service, clunky, expensive handsets, and spotty coverage even in key locations like the Tokyo subway. DoCoMo "has been struggling," says Kazuyo Katsuma, an analyst in Tokyo with J.P. Morgan Chase & Co. (JPM ). "The service level has been so poor."

KDDI'S GOLD MINE. Meanwhile, KDDI, an industry also-ran created in 2001 through the merger of three smaller companies, flew in under the radar two years ago with a slower but less buggy data offering called AU that quietly built momentum. Consumers liked AU's sleek handsets, longer-lasting batteries, and fun services such as easy video mail and song downloads. Then last fall, the cocky KDDI stunned the industry by offering a fixed-rate monthly tariff of about $40 for unlimited use of AU's data services. DoCoMo costs much more. As a result, KDDI today has 13 million high-speed subscribers, compared with DoCoMo's 3 million.

KDDI'S AU service is a gold mine. The company's net profit is forecast to jump 80%, to $996 million, on sales of $27.3 billion for the fiscal year that just ended in March. Lehman Brothers Inc. (LEH ) estimates profit will surge $1.7 billion this year. Not that DoCoMo is a slouch: It earned an estimated $5.9 billion on sales of $49 billion for the year. But investors like KDDI's story better: Its shares are up 79% in the past 12 months, vs. a decline of 1% for DoCoMo.

Now DoCoMo is launching a counterattack. In February, the company began expanding the network coverage of its 3G service, called FOMA (for Freedom of Mobile Multimedia Access). And in March, DoCoMo announced it will offer a monthly fixed rate similar to KDDI's. This represents a major shift for DoCoMo, which grew its i-mode business by charging users based on the amount of data they send. That worked well when people were mostly sending simple e-mails. But as consumers send more data -- from downloading photos to sharing videos and games -- the pay-as-you-go model costs too much.

Keiji Tachikawa, DoCoMo's president and chief executive, is also pushing his speedier technology. Yes, KDDI is ahead, but only "if you call their technology 3G," he says. In fact, KDDI uses a system called CDMA2000 1x, which it claims is 3G. Tachikawa says his technology -- which at up to 384 kilobits per second is nearly three times as fast -- is the real 3G, based on a standard called Universal Mobile Telephone System (UMTS). The new fixed rate is helping FOMA pick up steam. On Mar. 31, DoCoMo announced that it had a total of 3 million FOMA subscribers, with 1 million having signed up in February and March alone.

And Tachikawa is looking beyond wireless communications. DoCoMo is working with Sony Corp. (SNE ) to offer phones with "smart cards" embedded in the handsets that will allow DoCoMo subscribers to use their phones to buy such items as train and cinema tickets or restaurant meals, usually by passing the phone-with-smart-card over an electronic sensor. "We can't depend totally on the [mobile] traffic business any longer," says Tachikawa. "We have to collaborate with other industries."

Analysts think DoCoMo is on the right track. Goldman, Sachs & Co. predicts FOMA will add 7 million subscribers in the coming year. And KDDI has stumbled lately. The company started up a new high-speed service, called Win, offering speeds comparable to those of FOMA, but the service has fallen short of its goal of 450,000 subscribers by the end of March.

It's a fierce dustup, and one with big implications. The much-heralded age of 3G has been so slow to arrive around the world that no single standard has emerged to dominate. The slugfest between DoCoMo and KDDI is a real-time test of two standards in the marketplace, and carriers the world over are watching with keen interest. Even as they battle in Japan, KDDI and DoCoMo are trying to outflank each other on the global front. KDDI is advising China Unicom Ltd. (CHU ), the second-largest mobile operator in China, on its 2G network, which may help it win business if Unicom gets a license to operate a 3G network based on CDMA2000 1x. DoCoMo is waiting to make its China move. It expects Chinese regulators to award at least one 3G license to one of the country's state-owned operators that's compatible with DoCoMo's 3G technology. Then DoCoMo will be the natural choice to team up with that carrier.

China isn't the only game. In tandem with local telco partners, DoCoMo is heavily promoting its i-mode service in Europe and has 2 million subscribers, most of them in France, Germany, the Netherlands, and Spain. And DoCoMo owns 20% of 3UK, a 3G carrier controlled by Hong Kong-based Hutchison Whampoa Ltd. The Hutchison service has been a bust in Britain and the industry is abuzz with speculation that DoCoMo, having written off the bulk of its $1.74 billion investment, may sell its stake back to Hutchison and team up with British rival mm02 PLC. Tachikawa denies the rumors.

In the meantime, DoCoMo has set up labs in Beijing and Yokosuka, Japan, focusing on the next generation of high-speed wireless service, dubbed 4G. By the end of the decade, 4G could offer speeds up to 100 times faster than 3G. But if the past is prologue, Tachikawa had better keep looking over his shoulder for KDDI.

By Bruce Einhorn in Tokyo

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