NTT DoCoMo took it square on the chin this week, announcing it would book extraordinary losses of 573 billion yen against its investments in three major foreign partners, KPN, AT&T Wireless, and Hutchison 3G. The company cited the slowdown in the global telecommunications market, and it would be natural to suspect the Sanno Park Tower strategists are back in their corner, applying ice and stitching wounds. Industry watchers, meanwhile, are having a field day. hOWEVER, this week’s write-down represents mere pachinko pocket change for DoCoMo, and, as potentially one of Japan’s (and by extension, the world’s) most profitable companies, the carrier is well on its way to creating something that the Europeans are still trying to sort out: a functioning W-CDMA network.
The Financial Times wrote: “The revaluation is an admission by the Japanese operator that the environment for 3G is not likely to improve significantly in the near term.” ING Securities analyst Hitoshi Hayakawa was quoted by SiliconValley.com as saying, “You cannot ignore the risk that it will be hit by more valuation losses from its overseas investments,” and, in The South China Morning Post: “Analysts pointed to other problems such as mounting competition in its increasingly saturated home market,” adding that, “3G, despite its promise of high-speed Internet connections and futuristic services such as video phone calling, has been stubbornly slow to take off.”
While it’s obvious that much of the criticism of DoCoMo and 3G is valid given a short-term, quarter-to-quarter financial view, we think that a lot of folks are missing the point. Namely, 3G is, first and foremost, about the voice network, and that’s why DoCoMo’s strategy is a 3G-focused, long-term global plan. Back in July 2000, Ray Tsuchiyama, principal in the Tokyo office of Tegic (now owned by AOL), wrote an opinion piece (“Deconstructing Phone Culture,” see link below) in the American Chamber of Commerce Journal.
His viewpoint, while directed at the genesis of i-mode and why the mobile Internet took off in Japan, was right on the mark in terms of how 3G itself is unfolding. Tsuchiyama stated:
In 1997, frightening scenarios were aired about the collapse of the Japan-only PDC digital network by 2001. Too many subscribers were making calls simultaneously, which meant that available ‘time slots’ fell short of demand. To expand capacity in the mid-1990s, NTT DoCoMo had to spend over $6 billion in infrastructure costs (base stations, switching centers, software). Even after that buildup, by the late 1990s NTT had more consumer complaints about voice quality and dropped calls. Advertisements by DDI and IDO for new cdmaOne (Code Division Multiple Access, developed by San Diego-based Qualcomm from military spectrum-hopping research) handsets stressed better voice quality. For one scary period, as NTT DoCoMo lost market share, it faced the dilemma of having to borrow even further to expand an infrastructure based on decade-old PDC technology. The entire network would be obsolete before the debts were paid off. The company then noticed that Japanese cell-phone users were changing handsets at a phenomenal rate—every eight months on average. It embarked on a program to entice subscribers to use more data, rather than voice, on its existing network. The objective was to buy time, while postponing investment in a completely new infrastructure.
In other words, for DoCoMo, provision of data services (i-mode et al) has only ever been a way to maintain, boost, and enlarge the voice revenue and profitability base, whether that’s in Japan or elsewhere. So to with 3G. DoCoMo doesn’t have a master plan to put i-mode’s Hello Kitty-data downloads into every teens’ hands from Seattle to London (although that would be a tidy contribution to the revenue pot if it works out). Rather, the carrier is trying to make the expanded voice and roaming capabilities of W-CDMA 3G a widely used global standard that enables the Japanese carrier ? and Japanese infrastructure providers ? to participate fully in the global telecoms industry. To date, Japan has been a highly-regulated, overpriced island unto itself, as Tsuchiyama explains:
In stark Darwinian terms, [Europe's] decision to move to GSM was a godsend for firms like Ericsson and Nokia, outfits dozing quietly near the Arctic Circle that reinvented themselves as global technological and marketing organizations. Both firms followed the GSM flag wherever it was unfurled, achieving success in Europe and then Asia. In the early 1990s, Japan decided against GSM. Instead it adopted the Japan-only PDC (Personal Digital Cellular—a variant of TDMA) standard developed by NTT. (The US, as part of its open-market policy, would add GSM to its wireless-standards basket.) Europeans claimed that Japan excluded GSM so as to nurture its own telecommunications firms. The Japanese complained that the European club shut them out (even now, Japanese manufacturers have barely 10 percent of the European GSM handset market). Some claim, though, that if Japan had adopted GSM and deregulated its telecommunications market faster, Japanese manufacturers would have had to adapt quickly and, like the Nordic firms, could have achieved greater success. Even Sony President Nobuyuki Idei has said that without greater competition in the Japanese telecom market, “Japan would have a warped computer and telecommunications industry.”
Make no doubt about it: DoCoMo is committed to 3G for the foreseeable future ? 10, 15 years out. The global downturn in telecoms is a mere bump in the road, and profits and cash flow generated right here at home from the existing i-mode and voice services will continue to fuel the overseas strategy. In retrospect, the late 1990′s decision to create i-mode is even more prescient.
In a report to investors this week, Tokyo CSFB telecoms analyst Mark Berman wrote: “We welcome the write-offs given that the major overhang to DoCoMo shares, and what has been a major reason behind the recent plunge in DoCoMo’s share price, will now be lifted. It is a non-cash charge, and thus will have no impact on DoCoMo’s strong cash flow… it should enable DoCoMo to book record net profit next fiscal year, and even possibly to become the most profitable company in Japan. At the end of March next year, DoCoMo will have completed the bulk of its 3G build-out in a year that it will be generating about Y200bn to Y300bn of free cash flow.”
In other words, this week’s write-down represents mere pachinko pocket change for DoCoMo, and, as potentially one of Japan’s (and by extension, the world’s) most profitable companies, the carrier is well on its way to creating something that the Europeans are still trying to sort out: a functioning W-CDMA network.
Those back-in-their-corner DoCoMo strategists mentioned earlier don’t have to rework strategy at all. They just have to keep doing what they’ve done so far. Watch while NTT DoCoMo “a made-in-Japan success story” evolves into one of the world’s top-tier telecoms players, thanks, in large part, to i-mode.
How Japan Became a Leader in Mobile Internet: Deconstructing Phone Culture [.pdf]
– Daniel Scuka