BUSINESSWEEK ONLINE : JANUARY 17, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY

Amazing DoCoMo (int'l edition)
The company's wireless Net phone service is all the rage in Japan--and just might conquer the world

There are a few things a Japanese teenage girl doesn't leave home without: her six-inch platform shoes, some touch-up toner for her hair color of the day, and her i-mode phone.

Come again? Everyone in Japan knows ''i-mode'' stands for a white-hot cell-phone service from NTT DoCoMo. The company name is a play on the Japanese word for ''anywhere,'' and the service lives up to that moniker by giving subscribers across Japan cheap and continuous wireless access to the Internet.

Europeans, too, can tap into the Net from their cell phones. And thousands of Americans get similar benefits using Palm VII devices from 3Com Corp. But all these systems must establish new dial-up connections each time a user wants to go onto the Internet. With i-mode, users are always connected--as long as they can receive a signal and their batteries are charged. Through this persistent link, subscribers get a full panoply of Web-based goodies: e-mail and chat, games, online horoscopes, calendars, and customized news bulletins. All told, i-mode subscribers can navigate among 4,000 specially formatted Web sites.

In coming months, the rest of the world will be hearing a lot more about i-mode--the service, the company that provides it, the stock, and the amazing individuals who helped create this phenomenon. Here are a few quick reference points: Since the company was partly spun off from NTT, Japan's former telephone monopoly, in 1992, DoCoMo has become:

--Japan's hottest stock. We're talking a Berkshire Hathaway-level share price. In dollars, DoCoMo has soared from $13,000 a share to $35,000 since June;

--the world's most valuable cell-phone company, with a market cap of about $335 billion;

--the largest single-country cell-phone operator, with a total of 27.1 million Japanese subscribers;

--the most advanced wireless Net access service on the planet, period.

''NTT's i-mode is the only network in the world today that allows you [continuous] access to the Internet via a cell phone,'' says Bill Joy, chief scientist at Sun Microsystems Inc. More than 3 million Japanese have signed up, which means DoCoMo is now on its way to becoming the largest Internet service provider in Japan. ''DoCoMo has surprised a lot of people in the U.S.,'' says Nelson R. Sollenberger, division manager for wireless systems research at AT&T Labs in Florham Park, N.J. ''We haven't seen anything like these numbers for any general wireless data service.''

MASS MARKET. No wonder so many Japanese see DoCoMo as Japan's symbol for New Age innovation--the last, best hope to make Japan a contender in the global Internet derby. In the U.S., companies such as AT&T and Motorola Inc. are dickering over technical standards, the amount of bandwidth required for mobile data applications, and whether wireless Web surfers will prefer smart cell phones or palmtop computers. In Japan, DoCoMo has jumped far ahead, showing the world that there is already a mass market, with millions of consumers who don't care that the technology isn't perfect.

In the future, DoCoMo plans to take on the likes of Vodafone AirTouch, AT&T, and British Telecom in markets around the world. Indeed, if the mobile Internet lives up to expectations, DoCoMo could evolve into the world's mightiest wireless giant. But for that to happen, DoCoMo must prove that its new services and business models have staying power. Right now, i-mode lets users perform all kinds of cool tricks. In Silicon Valley or Scandinavia, friends can't swap pictures of their pets on sleek, 90-gram cell phones. Japanese do that every day.

But pet tricks won't give DoCoMo a permanent edge over fierce global rivals. Already, European and U.S. cell-phone moguls are greedily eyeing Asia's potential market of 3.3 billion souls. In November, Vodafone and British Telecom announced plans to launch a next-generation mobile service with Japan Telecom, a local carrier in which they both hold stakes.

FAMILY TIES. Keiji Tachikawa, DoCoMo's charismatic chief executive, doesn't appear to be alarmed. He plans to fight the competition through a network of friendly alliances--a strategy that will likely include taking equity stakes in companies based mainly in Asia. Tachikawa is betting that hostile takeovers of the sort Vodafone has pursued will be a turn-off in Asia. Shunning those tactics, DoCoMo plans to woo Asian operators with funds and state-of-the-art technology.

Tachikawa has plenty of cash to power his expansion. DoCoMo's 1999 operating profits are expected to hit $5 billion, on revenues of $36 billion. Perhaps more important, DoCoMo represents a potent legacy--one that was once referred to as Japan Inc. Through the 1970s and '80s, NTT and its family of powerful equipment suppliers--Fujitsu, NEC, and Hitachi among them--embodied some of Japan's most successful industrial policies.

This government-led industrial model looked like a liability during Japan's long recession. But today, newcomers like DoCoMo and its tightly knit content, equipment, and service suppliers can draw on those old family strengths. Giant NTT still owns 67% of DoCoMo. The market cap of both companies combined makes a hostile takeover unthinkable. At the same time, a stratospheric valuation could be currency for DoCoMo's own M&A designs down the road.

For Japanese makers of mobile equipment and handsets, hard hit by recession, things haven't looked this promising in years. The local wireless market is expected to be worth $100 billion by 2003, vs. $18 billion in 1999, according to the Mobile Office Promotion Assn. About 60% of the 2003 tally will be generated by wireless Internet services, excluding hardware.

Today's head start could hand Japan a leadership role when the mobile Net goes global. DoCoMo's innovators would reap licenses on standards they hew. And their umbrella of Internet content suppliers and equipment makers would get a leg up in global markets. Japan has long lagged behind the U.S. in PC and Internet penetration, largely because of a lack of familiarity with the keyboard. But personal electronics are another story. This is the country that gave the world the calculator, the Walkman, the pocket TV, the Game Boy, and the camcorder. Millions of Japanese grew up playing video and pocket computer games--the so-called push-button generation. Many are now migrating to Net-ready cellular handsets, often bypassing home computers altogether. They form a perfect testing ground for new Net appliances.

HEADHUNTING. DoCoMo hasn't always been a hot property. In fact, it languished for years inside giant NTT. In 1992, when DoCoMo was partially spun off, few NTT staffers wanted to be assigned to the mobile carrier. At the time, the market was closed, subscription fees were costly, and the phones weighed as much as lunch boxes. What's more, a new technology known as personal communications services (''handyphone'' in Japan) seemed poised to push aside other types of digital cellular systems.

But in 1994, the postal ministry liberalized the cell-phone market, domestic competitors with names like DDI, IDO, and TU-KA blossomed, and prices for digital cell phones plummeted. DoCoMo's army of engineers--many inherited from NTT--fought the upstarts by developing the world's smallest cell phones, sharing the specifications with handset makers such as Fujitsu and Matsushita Communication. DoCoMo also blanketed the country with its branded retail shops and came up with a mascot called DoCoMo-chan.

All the while, as DoCoMo's conventional digital service was blossoming, DoCoMo's first president--Koji Ohboshi--was searching to extend the company's business beyond voice to data communications. That task fell to electrical engineer Keiichi Enoki. He did what few Japanese managers dare to do--headhunt. His first catch was Matsunaga, a senior executive at Recruit, a publisher of job information, who had a track record of hatching successful businesses. With her help, he lured the third main team member, Takeshi Natsuno, a supercharged Internet entrepreneur who was running one of Japan's early online startups.

MOBILE MODEL. After several months of brainstorming, the trio targeted wireless Internet access as the next big thing. DoCoMo engineers built a ''packet-switched'' network alongside their existing digital cellular network. With packet systems--as opposed to circuit-switched phone networks--there is no need for each user to receive an exclusive radio channel. That means many users can access the network at the same time. The packet model also reduces costs, since charges are based on the volume of data sent and received.

Takeshi Natsuno devised the business model to make this system work. First, he dictated that i-mode should serve as a portal site and lined up content providers that users could access directly from i-mode's menu bar. Then he set up a billing method whereby DoCoMo would reap a commission for the services rendered by this first tier. Other content owners would be encouraged to code their Web pages for i-mode as well. But only those belonging to the licensed first tier could be accessed by the menu bar. ''People say the Internet has to be free, but we're charging for it,'' says Natsuno, 34. ''This is a model for the mobile Internet that others now want to emulate.''

Tachikawa, president and chief executive since 1998, insisted on a cheap pricing plan to guarantee the widespread adoption of i-mode. Subscribers pay about 4 cents to send a 250-character message, and half that to receive a message of the same size. Tachikawa also insisted that the functions be as simple as possible. ''I can access DoCoMo's share price in just two clicks,'' he says.

The 60-year-old president arrived at DoCoMo with the right credentials. In addition to a PhD in engineering from prestigious Tokyo University, he has an MBA from Massachusetts Institute of Technology. An NTT executive for most of his career, he was responsible for drawing up several of NTT's long-term policy plans in the 1980s. He communicates with all DoCoMo personnel directly by e-mail--a practice still rare in Japan. He also manages to keep up with American baseball--he's a New York Mets fan--and football.

But nothing Tachikawa ever said or did has rocked the roof like i-mode. Since the service was launched in February, subscribers have been signing up at a rate of 450,000 a month. By the end of this fiscal year, in March, the number should hit 5 million. If the rate keeps accelerating, i-mode could match America Online Inc.'s subscriber base of 21 million next year.

TOONS AND NEWS. I-mode has already become an addiction for millions of Japanese. The ''i'' stands for information--something young Japanese hunger for. Teens keep their handsets on round the clock and conduct rapid-fire exchanges of messages until their batteries give out. Students and young adults post passport-style pictures online, which can then be viewed or downloaded to their i-mode handset screen. Bandai Co., the maker of Tamagotchi digital pets and animated films, operates a popular cartoon service, and some 600,000 subscribers pay about $1 a month for access to the site.

Hiroaki Takahashi, a 30-year-old tuna trader, switched to i-mode two months ago and uses it to catch up on news during his nightly commute. Rehito Hatoyama, 25, who works for a major trading house, constantly checks his handset for the latest hits on the music charts, share prices, and soccer game results. ''I want to access information instantly and anywhere I go,'' Hatoyama says.

In its first year of operation, i-mode is on track to post more than $100 million in revenues. That's small potatoes compared with sales of basic cell-phone services. But Tachikawa estimates that a user base of 5 million would generate $1.5 billion in fees from subscriptions, transmitted data, and a 9% commission DoCoMo charges for handling the billing for Web content providers.

The success of i-mode sets the stage for DoCoMo's next big act--an evolutionary advance known around the planet as 3G, for third generation. In essence, it is a set of wireless protocols that will enable vastly higher communications speeds. While the final standards have yet to be hashed out in America, Japan and Europe have committed to an approach called wideband CDMA, which will let users view streaming video and a host of other new Net applications at a blinding 2 megabits per second by 2003--compared with just 9.6 kilobits today.

In one sense, this migration may seem to neutralize DoCoMo's current advantage. After all, Europe and America will also jump to the new 3G protocols. And the new services will be much flashier than anything you can do with today's i-mode phones. But Tachikawa insists that DoCoMo will be able to carry its services and expertise along to the next generation, without exorbitant costs. All the excitement over DoCoMo today is ''just the beginning,'' says an excited NEC President Koji Nishigaki. ''Everyone will be on i-mode in three years.''

To protect its lead, DoCoMo keeps up a brutal research pace. At a state-of-the-art research facility in the Yokosuka Research Park, southwest of Tokyo, about 700 engineers are testing transmission equipment, cellular phones, palmtops, and car navigation systems based on CDMA, which stands for code division multiple access. The technology was developed by the U.S. military and commercialized first by Qualcomm Corp. But DoCoMo enhanced the basic platform with its own, homegrown mathematics. And it got a big endorsement when Europe leaned in the same direction. Ultimately, Tachikawa hopes to convert other operators to DoCoMo's wideband CDMA system, inside and outside Japan.

By proselytizing for W-CDMA around the world, Tachikawa hopes to extend i-mode's reach without having to resort to takeovers. Recently, he negotiated a friendly deal to purchase a 19% stake in Hutchison Telecom, Hong Kong's largest cellular operator. Hutchison is expected soon to announce plans to adopt the i-mode service, and later on DoCoMo's 3G system. In hopes that others might follow suit, DoCoMo is also conducting 3G tests with operators in Malaysia, Singapore, and China, to be followed by possible investments.

CONVERTS. But Tachikawa is not ignoring the West. Last March, he struck a deal with Sun Microsystems to incorporate the company's Java program in i-mode handsets coming out in the fall, as well as in the 3G devices scheduled to go on sale next year. In October, Tachikawa and Microsoft President Steve Ballmer agreed to set up a joint venture, called Mobimagic, to develop wireless data services for the business market in Japan. If the new features and services take off in Japan, Tachikawa hopes to transplant them overseas. In November, DoCoMo opened two U.S. subsidiaries in Silicon Valley--one for research and development and the other for promoting Japan's W-CDMA standard.

Some of DoCoMo's closest collaborators are already converts. Microsoft, for example, is doing most of its pioneering wireless data work with DoCoMo in Japan, says Ballmer. ''And I hope that will migrate back to the United States as our wireless infrastructure improves,'' he said in a recent speech in Tokyo.

As the mobile Internet takes off, DoCoMo will have to fight off competitors while entering new markets. Merger mania is already sweeping through the wireless world--much of it inspired by visions of the mobile Internet. The last few months have seen a flurry of alliances and mergers, such as MCI WorldCom Inc.'s buyout of Sprint Corp. last October. Britain's Vodafone AirTouch PLC is maneuvering to take over Germany's Mannesmann. The pressure from such massive consolidation could make competitors even more aggressive.

DoCoMo isn't immune at home. Rivals DDI Corp. and IDO Corp., which account for 27% of the cell-phone market, are merging their cellular operations to push a cellular standard that differs from DoCoMo's. The two are now introducing a packet network for a mobile Net service that will compete against i-mode.

For now, however, DoCoMo has latched first and best on to the mobile Internet, a technology with far greater potential than the other portable-electronics markets Japan has conquered. Calculators and camcorders do not carry with them an entire set of complex, Internet-based services, complete with new business models and lush venture-capital funding. All these and more come with the mobile Internet. Thanks to DoCoMo, Japan is out in front of the great land grab.

By Irene M. Kunii in Tokyo, with Stephen Baker in Paris

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