NTT DoCoMo (NYSE:DCM), Japan's top mobile communications carrier, has been facing some rough competition lately, especially from rivals KDDI Corp. (OTC:KDDIF) and Softbank Corp. (OTCPK:SFTBF), after the government in October 2006 began allowing mobile subscribers to keep their phone numbers when they switch carriers.
Just last week, DoCoMo Chief Executive Masao Nakamura announced that DoCoMo would cut monthly fees by up to 50 percent for family-plan users in order to regain its sales lead and improve its majority 54% market share. Nakamura said that although the plan would erase 20 billion yen ($162 million) from sales this fiscal year, it will still attract up to 5 million new customers. This comes only a couple months after a disappointing earnings report that suggested DoCoMo was being hit by higher sales promotion costs to attract customers. For the full year, its net profit dropped 25% to Y457.3 billion compared to Y610.5 billion in the previous year. Tokyo-based DoCoMo had the slowest subscriber growth last month among Japan's three mobile phone networks and its stock has been outperformed by both KDDI and Softbank this year.
Nakamura has been saying the company needs to focus on broadening its range of services to entice customers and also for DoCoMo to look beyond Japan. He has said they are ready to make a major investment in Vietnam, China or India as part of efforts to offset the saturated cellphone market in Japan. DoCoMo's i-mode service, which includes technology that lets users send email and view online content via mobile phones, has been a major selling point for international expansion. However, potential deals relating to it have gone sour in recent months. DoCoMo had to call off a deal with Hutchison Essar to launch mobile Internet services in India using DoCoMo's technology. Vodafone Group PLC (NASDAQ:VOD) blocked it aggressively by taking a controlling stake in Hutchison Essar.
While the financial hit from the canceled deal was minimal, many of us closely following have called it symbolic of how the company has generally struggled to establish new sources of income. In dropping this deal DoCoMo would only lose small royalties it would have received from use of its technology. But it's a small part of a bigger picture. Nakamura has been continually frustrated in his effort to maximize i-mode technology and its impressive 48 million userbase.
The latest example: just months before DoCoMo bought a 42% stake in Tower Records Japan, TRJ made a deal with Los Angeles based Napster (NYSE:NAP) to form a new separate company in Japan, utilizing Napster's name and digital music technology. Nakamura wanted to cut competitor KDDI's deal with Napster Japan and make it a DoCoMo exclusive service. When DoCoMo took the position, they anticipated that its Napster Japan music service would be ready to launch within a few months, they anticipated that Tower Records main business would grow, and they anticipated that with this new support from DoCoMo, Tower Records Japan would be able to do what they did with their own company Tower Records and buy the remaining American stake of Napster Japan. All of those assumptions proved incorrect. Not only did TRJ's business significantly weaken, but Napster Japan took a year to launch.
Now, DoCoMo is promoting the awakened Napster Japan mobile service, which is suddenly taking off and benefiting competitor KDDI, because they also have a deal with Napster Japan. Along with that, Nakamura is stuck sharing DoCoMo's i-mode enabled music technology profits with both Tower Records, who is 58% independent, and Napster, who holds a 32% stake in Napster Japan - leaving DoCoMo with only a 29% interest. If this mobile music service continues to catch on as the initial response suggests, Nakamura will face certain criticism for not aggressively keeping the music business in-house considering their record number of music enabled phones and ideal in-house technology while across the sea, AT&T (NYSE:T) and Apple (NASDAQ:AAPL) celebrate their success with a relatively small number of music phones and an inferior wireless internet service.
Still, DoCoMo's customers and popular i-mode service have expanded to over 52 million users around the world. The question many are asking is, will DoCoMo's Nakamura get more aggressive or will he continue to squander DoCoMo's resources and leave money on the table.
Disclosure: Author has a short position in DCM
DCM 1-yr chart