DoCoMo - The Japanese Wireless Telecom Leader: The Tsunami in Trouble

In May 2002, NTT DoCoMo (DoCoMo) Inc., Japan's largest

mobile phone company, announced a net loss of ¥ 116.19
billion1 and a goodwill write-off of ¥ 624.6 billion for the
fiscal ending March 2002. Though the company registered
an increase in operating revenues from ¥ 4,669.37 billion
in 2000-01 to ¥ 5167.14 billion, the revenue growth was
stated to be well below its company expectations.
Company sources attributed this to the general decline in
Average Revenue Per User (ARPU) for voice services and
slower growth in new cellular subscribers across the
country (Refer Exhibit I for DoCoMo's financials and ARPU
data).

DoCoMo's announcement did not come as a major surprise

to industry observers, as media reports had been
forecasting losses for the company since early 2002 itself.
What was noteworthy about this development, however,
was the fact that the company was largely believed to be
performing exceptionally well in the recent past. The fact
that DoCoMo had roped in as many subscribers as the
leading US-based media company AOL, but much faster,
was often cited as a proof of Japan finally waking up to the
challenges of the 'new' economy.
Analysts claimed that DoCoMo was paying the price for its aggressive overseas expansion drive
during 1999-2002, in the form of these losses. DoCoMo had to take a huge write-off in its books
on account of a decline in the value of its foreign investments and the slump in the global
telecommunications market in 2001. While some analysts felt that DoCoMo should revamp its
global strategy, a few others said that the company should take measures to increase ARPU. In
the words of Hironobu Sawake, an analyst at J P Morgan (leading global financial services firm),
"The question is whether we can see a rise in profitability."

DoCoMo announced that its commitment towards globalization was intact. The company also
brushed off analysts' view that the focus should be on increasing the ARPU. Instead, it announced
that it would focus more on 3G (Refer Exhibit II for a note on 3G) initiatives (developing and
launching more innovative and new 3G technology products). While DoCoMo was still lauded for its
well designed and executed strategic and marketing game plan that had helped it build a huge
subscriber base over the years, these developments had raised many doubts about its future
prospects and its ability to turn itself around.

Background Note

DoCoMo's history can be traced back to 1949, when the Ministry of Communication in Japan was
split into the Ministry of Telecommunications (MTEL) and Ministry of Posts (MPosts). A few years
after its formation, MTEL was renamed as Nippon Telegraph and Telephone (NTT). NTT operated
as a legislative monopoly for telecommunication operations in Japan. The Ministry of Posts and
Telecommunications acted as a regulatory authority for NTT's operations. According to reports,
NTT took all accolades for rebuilding the Japanese telecom infrastructure after the Second World
War.
NTT ran a monopoly regime in Japan till the 1970s.
However, in the 1970s, the Ministry of International Trade
and Industry (MITI) began pressurizing the Japanese
government to break the NTT's monopoly, claiming that
the convergence of communications required the opening
up of the regulatory regime in the country.

This argument picked up momentum in the 1980s when

US politicians also began exerting pressure on Japan to
open gates for foreign players. This was largely because
Japanese telecommunications players were free to enter
the US telecom market right from the 1970s, while the
strict regulatory norms of Japan continued preventing
foreign players into Japan.

In the late 1980s, Japan finally decided to reform its

telecom regulatory framework to allow the entry of foreign
players into Japan's telecom market. To reduce its
monopoly in the telecom sector, NTT's mobile
communication network was spun-off in 1992 to form
DoCoMo (initially named as NTT Mobile Communications
Network, Inc.; the name DoCoMo was adopted in 2000).
NTT had a 67% majority stake in DoCoMo, while the remaining was held by the public. Kouji
Ohboshi (Ohboshi), associate vice president of NTT's Chugoku Telecom division, was made the
CEO of DoCoMo. DoCoMo began its operations in July 1992. Having inherited the wireless
communication business of NTT, DoCoMo was primarily involved in offering various wireless
communication devices and services.

The initial product portfolio of DoCoMo included mobile phones, car phones, maritime phones, in-
flight phones and pagers. DoCoMo formulated its policies in line with this corporate philosophy of
creating a new communications culture (Refer Table I for DoCoMo's basic management policies).

With the entry of foreign players like Motorola into the Japanese cellular phone market, the
number of subscribers increased from 2.13 million in 1993 to 31.4 million in 1997. However, as
the competition intensified, DoCoMo registered a drastic decline in sales during 1992-94. To
sustain its position in the market, the company in October 1993, decided to stop taking rental
security deposits on handsets. Following this, in April 1994, DoCoMo launched its own handsets,
and encouraged its customers to purchase these handsets rather than renting them, and reduced
the initial subscription fees.
This strategy resulted in a substantial increase in its
subscriber base. In December 1996, the company
eliminated the initial subscription fees for its service
altogether, which further triggered the subscriber base
growth. On account of its focused initiatives and the
growing demand for mobile telecom services in Japan
during the mid 1990s, DoCoMo emerged as the market
leader by 1997.

However, during the same period, the company sensed

that there was little differentiation between the products
offered by various mobile players in Japan. Apart from this,
feedback from its customers showed that the growth rate
of voice services (1G - first generation technology) was
gradually declining.

DoCoMo thus realized the need to shift to a higher-level

technology, to differentiate its services from those of its
competitors KDDI2 and J-phone3to sustain its growth in the
market. Following this, the company began focusing
heavily on Research and Development (R&D) to develop
advanced second generation (2G) wireless products.
These initiatives gave rise to the development of 'DoPa' - DoCoMo Packet transmission service,
i.e., communication of data through mobile phones. Launched in March 1997, 'DoPa' enabled
customers to receive or transmit data in packets. The service was charged on the basis of the
volume of the packet. The launch was followed by yet another initiative of the company, the '10
Yen Mail Service', which allowed customers to send an email of upto 1000 words, through their
mobile phone, for just ¥10.

Though the 'DoPa' initiative met with reasonable success, DoCoMo found itself still under threat
from its competitors KDDI and J-Phone. To further derive competitive advantages, the company
gave free reign to Keiji Enoki (electrical engineer in NTT) to develop a unique, value-adding
wireless product. The company also brought in outside talent like Matsunage Mari (a former editor
for a classified ad magazine) and Natsuno Takeshi (an Internet expert) to create a new wireless
product. In February 1999, on account of the rigorous R&D efforts, DoCoMo launched I-mode, a
revolutionary product, which changed the market dynamics overnight.

I-mode was the first instantly accessible mobile Internet service in the world, which made the
Internet available on the phone without the need to dial-up (Refer Table II for details regarding
the functioning of I-Mode). I-Mode was offered as an optional service to DoCoMo's customers and
provided access to over 15,000 websites, which were specially adapted to be viewed on their
handset screens.

This enabled subscribers to perform many Internet functions such as exchanging e-mails, checking
stock quotes, getting maps, viewing train schedules, buying movie tickets, making online
purchases, downloading new ring tones or playing games.

I-Mode: DoCoMo's Success Story

I-Mode became an instant success, resulting in a phenomenal growth in DoCoMo's subscriber

base. The fact that the usage of the Internet was still in its infancy in Japan till then worked to the
company's advantage. I-Mode resulted in a huge surge in DoCoMo's profits in the very first year of
its launch. According to reports, on an average, I-Mode generated 30% higher revenues per
subscriber as compared to DoCoMo's phones that provided only voice services. In 2000, the
company reported a net income of $ 2.4 billion, a 39% increase from the previous year.

To leverage the success of I-Mode, DoCoMo announced its plans to develop third generation (3G)
services in late 1999. The company also announced its global strategy to establish itself as a
global player expanding its operations outside Japan. Under this strategy, DoCoMo planned to take
up minority stakes in less evolved cellular companies worldwide to establish itself as the first
global cellular telecommunication giant.

By November 2000, DoCoMo had invested up to $16 billion in overseas cellular companies. This
was in the form of minority stakes in Hutchison Telecom (Hong Kong), KPN Mobile (Netherlands)
and 3G UK Holdings (Refer Exhibit III for DoCoMo's partners). Though these minority stakes did
not yield much profit to the company, they served DoCoMo's primary aim in gaining international
footage through them. As part of the investment agreement, these companies agreed to roll out
DoCoMo's I-Mode and 3G mobile services.

Submitted by:
Shobhit Bhatnagar
MBA Second Semester
Section B