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May 17, 2004
DoCoMo: Flat-Rate Data to Boost ARPU?
After the May 7 release of NTT DoCoMo’s full-year FY 2003 financial results, Tokyo analysts, financial consultants, and investment gurus have been churning out a steady stream of opinion and forecasts. After reporting stunning net profits of Y650 bn (about US$5.71 bn), at least some analysts predict the company is on track to return to the Y1-trillion operating profit level in FY 2004, ending 31 March 2005 (have any outside Japan achieved similar?). Among the more interesting gems: 2G average revenue per user (ARPU) was Y7,470 (Y5,570 voice, Y1,900 data; data was 25% of total) in 4Q2004, while 3G ARPU was Y10,360 (Y6,960 voice, Y3,400; data was 33% of total) for the same period. Clearly, 3G rocks! But that’s not all — read on for the predictions on how new, flat-rate data pricing will affect profits in FY2004.
In a report provided to WWJ, one Tokyo analyst told his clients that FY2004 should see 3G subscribers growing nicely, thank you very much. “Despite a series of discounts which will put short-term pressure on both voice and data ARPU,” he wrote, “information disclosed [by NTT DoCoMo] implies that it is reasonable to expect an increase in data ARPU towards the end of FY05, as FOMA subscribers pass 10 million.”
With 3G data ARPU already at Y3,400 per subscriber per month, it’s rather hard to see what more they could want. But, nonetheless, Big D are predicting growth in data revenues. How so with flat-rate pricing due to come online next month?
First, handset subsidization costs will fall. The current procurement cost for 3G FOMA handsets is Y10,000 higher than the average handset selling price, so NTT DoCoMo is absorbing this though higher subsidies (Y40,000 for FOMA versus Y30,000 average for 2G and 3G combined). “But with 7x as many FOMA handsets to be sold over the next two years than in the last two years, it would be highly unusual if production economies of scale did not allow the per unit price to come down,” cited the report.
Further, DoCoMo has been able to keep the average subsidy flat, at Y30,000, through two recent significant handset upgrades, the 2G voice only to 2G voice + i-mode migration in 1999 and the 2G voice + i-mode to 2G voice + i-mode + Java migration in 2001.
OK – fine – this perhaps demonstrates that revenues will rise (because handset subsidy costs will fall), but what about data revenues, specifically?
Here’s the punch: Flat-rate data tariffs can, indeed, boost data ARPU.
Buried deep in the company’s FY results, DoCoMo disclosed that 15% of i-mode users generate data ARPU of more than Y3,900 — the new FOMA flat-rate price point; 85% spend less than this amount. And remember — both 2G and 3G users can access i-mode. But what’s the 2G/3G subscriber split?
Currently, just 7.3% of i-mode subscribers are using FOMA handsets. DoCoMo business planners working deep in the bowels of Tokyo’s Sanno Park HQ building (which actually features a pretty decent Brit pub and a great tempura restaurant so don’t feel too bad for them) are expecting this to increase to more than 20% during the next fiscal year. “It makes sense that high volume data users will be the first to migrate. Data ARPU can rise when the majority 85% who are now spending less than Y3,900 begin to migrate to FOMA,” concludes the report.
Thus what’s key with flat-rate pricing is not that the minimum level is set higher than what the average user now pays, but that it is viewed as a “natural” upgrade to a subscriber’s data plan when he/she migrates to one of the cool new FOMA handsets. And with the Y3,900 price point not that much higher than home DSL pricing (around Y2,200) in the Tokyo market, it’s just likely that more new FOMA users will opt for worry-free flat-rate, boosting DoCoMo’s profits back into the stratosphere.
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