Fixed-Lines and DoCoMo Spending Hurt NTT's Profit but Don't Despair Just Yet (NTT, DCM)

Includes: DCM, NTT
by: Steven Towns

See that image to the right of the old telephone? That's the image NTT (ADR: NTT) -- which stands for Nippon Telegraph and Telephone -- is trying to shake free of and instead capitalize on the rising demand for broadband and IP phone service. The Wall Street Journal (Feb.4-5 print edition pg. A5) reported NTT's profit decreased by 32% for the first 9-months of its fiscal year ending in March '06 due to fixed-line subscriber losses. Furthermore, according to Bloomberg, NTT saw profits tumble 58% in the 3rd quarter (ended December 31, 2005) due to increased advertising and marketing spending at its NTT DoCoMo (DCM) wireless unit. Let's take a look at the good, bad, and ugly for NTT.

The Good
    • NTT owns more than 60% of NTT DoCoMo

    • DoCoMo contributes 70% of NTT's profit

    • DoCoMo controls 56% of the domestic mobile phone market

    • Nearly 40% of DoCoMo's subscribers are signed up for 3G representing if anything else, potential growth in 2G to 3G migration as it expands 3G services and as new phones are rolled out

    • DoCoMo is looking abroad (primarily in Asia) for growth and also could profit from foreign handset manufacturers entering the domestic market driving down cost (see MOT)

    • WSJ reports demand for NTT's broadband services is on the rise as the number of optical fiber and ADSL subscribers increased with total subscribers expected to reach 9.27 by the end March; the number of IP phone service subscribers is also increasing

The Bad
    • Marketing costs at DoCoMo hurt NTT in Q3 and most likely will continue to have a negative cost impact due to the first reason under "The Ugly" unless DoCoMo sees a jump in consumer 2G to 3G migration

    • NTT is fighting a losing battle against customers switching to cheaper rivals' fixed-line services and altogether to the competitive mobile phone service provider market (maybe even some welcome cannibalization taking place)

    • According to Bloomberg, NTT's operating profit and sales were down last year, the first time this has happened since it went public in 1987

The Ugly
    • The mobile phone market in Japan is extremely saturated with over 90 million users against a now possibly shrinking and rapidly aging population of approx. 120 million

    • NTT's fixed-line losing battle reminds me of AOL's (TWX) dial-up business: fixed-line and/or dial-up loyalists (do such people exist?) can easily switch to lower cost providers and apparently more and more are, but hopefully in the case of NTT these users are switching to its broadband and/or mobile services

    • Broadband is a potential growth area for NTT but Yahoo! Japan is already the winner with foreseeable future staying power ever since its guerilla marketing of BB snapped up sizable market share while I think NTT was still promoting ISDN

NTT 1-yr chart:

DCM 1-yr chart:

Telephone picture courtesy of BBC News