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Get Four
|  | JANUARY 17, 2006
By Kenji Hall DoCoMo Is Looking Abroad -- AgainThe Japanese mobile provider wants to break into new markets, but it won't repeat the mistakes it made in the '90sNTT DoCoMo (DCM ) knows what it's like to get burned trying to build a global brand. In the late 1990s, Japan's No.1 mobile operator went on a high-profile buying spree overseas, spending billions on investments in U.S. and European companies, including AT&T Wireless in the U.S., KPN Mobile in the Netherlands, and Britain's Hutchison 3G UK Holdings. DoCoMo's idea was to set up a high-speed wireless empire that would give consumers worldwide on-the-go access to the Internet. In theory, it sounds great. But DoCoMo's timing was terrible: The Tokyo telco got blindsided by the tech stock collapse, and it underestimated the challenges of managing such far-flung operations. DoCoMo has since paid dearly for that strategy, writing off some $13 billion -- more than half of its original investment. Chastened, it turned inward and focused on expanding into new businesses at home. LOOKING EAST. Now, DoCoMo is again looking beyond its shores for opportunities. This time, though, it's shopping in Asia, not the West. And it's looking at partnerships with more of an eye toward strategy. On Dec. 15, DoCoMo said it would spend $560 million on a 10% stake in KT Freetel of Korea. Then, on Jan. 4, DoCoMo confirmed reports that it's negotiating a tie-up with the Philippines' biggest telco, Philippine Long Distance Telephones. "We're trying to grab a piece of Asian markets before competitors such as Vodafone do," says DoCoMo Senior Executive Vice-President Masayuki Hirata. DoCoMo's recent dealmaking is part of a plan to spread the gospel of W-CDMA. That technology serves as the foundation of DoCoMo's speedy third-generation, or 3G, cellular network in Japan -- the only market where W-CDMA has gained much traction. With strong cross-border alliances in place, DoCoMo's customers could use their cell phones while away from home. And wider acceptance of the technology could help DoCoMo cut its handset prices as development costs get spread over more carriers. SATURATED MARKET. DoCoMo's overseas ventures reflect the company's increasingly difficult situation at home. Almost every Japanese adult already owns a cell phone, and subscriber growth rates have been declining since 2000. Last fiscal year, DoCoMo's operating profits and sales slumped for the first time since 1998, when the company listed its shares. This year, DoCoMo expects revenues to hold steady at around $42 billion and net profits to drop 34%, to $4.3 billion. It faces growing competition, too. Japan in November approved licenses for three new mobile operators. And this year customers will be allowed to switch carriers and take their numbers with them -- all of which could weaken DoCoMo, particularly in 3G. "DoCoMo can't do much more to sell mobile voice and data, except maybe to business customers," says Gerhard Fasol, president of Tokyo tech research firm Eurotechnology. SMARTER SPENDING. Will DoCoMo be more successful with this new round of foreign investment? It's hard to say. Promoting 3G in Korea won't be easy. Neither KT Freetel nor bigger rival SK Telecom has set up a 3G network that's as extensive as the one for older, 2G phones. That has to happen before DoCoMo can get much from roaming fees and other technology licensing deals or test out new WiBro services -- a technology similar to WiMax in the U.S. -- that are set to start in Korea. But DoCoMo execs vow they won't repeat the mistakes of the past. For one thing, the company isn't spending anywhere near what it did last time around. In fact, its first priority is to win deals that won't require any capital. When money is involved, there's a cap: DoCoMo says it's limiting most new ventures in Asia to less than $90 million apiece. That means there's not likely to be a repeat of the huge outlays of the late '90s. "The key for us is not to rush headlong into anything new," says Hirata. BIG IN JAPAN. Analysts aren't likely to carp as long as DoCoMo doesn't dip too deeply into its massive $5 billion in cash. "If it's spending 10% of its cash on new business, it's not a big deal. But if we start seeing huge spending like before, there will be lots of angry investors," says NikkoCitigroup analyst Toru Hosoi. Another piece of the strategy is to build up licensing deals for the i-mode Internet and data service. Eventually, DoCoMo hopes to cash in on royalties if it can attract more users and get them to use their phones to browse the Net or make purchases online. But even i-mode, a runaway success in Japan since it was introduced in 1999, has struggled abroad. DoCoMo now licenses its i-mode technology to 22 countries from Spain to Singapore, but 84% of i-mode users worldwide are in Japan. Hirata says i-mode brings in well under 10% of overall revenues. "We don't really expect it to be a huge profit maker," he says. "We're more after the cost benefits from having economies of scale for i-mode-enabled handsets." BRANCHING OUT. More promising are DoCoMo's recent moves away from its traditional phone services. Last April it bought a controlling 34% stake in Sumitomo Mitsui Financial Group's credit-card business -- Japan's second-largest -- and now offers several phones that double as debit cards. Then, to get into the growing business for downloadable music and other content, DoCoMo bought a 40% stake in Tower Records Japan for $110 million in November. And on Dec. 22 it spent $170 million on a 2.6% piece of Fuji TV, to secure the rights to beam digital TV broadcasts to cell phones with built-in tuners beginning in April. That should give DoCoMo an edge over rivals KDDI and Vodafone, which both sell phones that can receive analog TV signals but not digital ones. Perhaps DoCoMo's biggest lesson from its earlier overseas foray is that money risked can be money lost. PLAYING IT SAFE. So these days, even as some analysts say DoCoMo should think more creatively about what to do with its cash, it disagrees. Currently DoCoMo devotes most of the money to share buybacks or dividend payments. "It could spend 10% or 20% of that to buy a bank or start a fund," says Nikko Citigroup's Hosoi. "There are many ideas out there. It just has to adopt a more radical mindset." But Hirata says he'll stick to areas that can supplement, not replace, DoCoMo's core phone business. Once burned, twice shy.  Hall is a correspondent in BusinessWeek's Tokyo bureau
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