In gadget-happy Japan, mobile phone carriers unleash dozens of new handsets crammed with the latest features every spring and fall. Apart from offering the rest of the world a glimpse into the hottest applications in mobile telephony, these biannual rollouts are really about luring new customers from rivals—and holding onto current ones in the world's most competitive mobile market. If that means cramming digital TV receivers into handsets, offering music downloads straight from a 3G network, or even a function that can recognize star constellations, so be it.
Yet for all gizmos—and in Japan, there are plenty—the chances of subscribers switching to another carrier are actually pretty slim. At market leader DoCoMo (DCM
), for instance, churn—the proportion of customers leaving for other carriers—was just 0.64% during the three months through June.
This fall, though, such customer loyalty will be put to the test. On Oct. 24 the Japanese government will require carriers to introduce mobile number portability (MNP), enabling mobile phone users to switch carriers without giving up their existing numbers. That's been the norm in most major mobile markets for some time—Singapore introduced number portability in 1997 and the U.S. followed suit in 2003—and hasn't always had a huge impact.
SWITCH COMING. But analysts reckon the results could be bloody in Japan. For one thing, in the months leading up to portability, the churn rate has been even lower than usual as customers have put off switching carriers. Market leader DoCoMo estimates churn will rise by 30% after portability comes in. And even if market share stats don't suffer seismic shifts because of the new policy, the short-term profit outlook is gloomy.
"There's a lot of moving parts, but the squeeze will come in the shape of increasing costs and lower revenues," says Kieran Calder, a telecom analyst at CLSA in Tokyo. That, says Calder, should lower carriers' stock prices.
DoCoMo Chief Executive Officer Masao Nakamura betrayed some of the concerns in the industry earlier this week. Playing down projections that 10 million of Japan's 93 million subscribers will change carriers, he warned rivals not to start a price war.
BIGGEST FALL. "Any company that moves to cut prices to vie with rivals in a brief sales campaign—worrying about winning or losing the battle—does not see the big picture," Nakamura told the Nihon Keizai, Japan's biggest business daily, on Sept. 4. With 51.9 million subscribers—equal to 55.6% market share—DoCoMo has plenty to lose.
Still, it's arguably Softbank (SFTBF
) and its CEO Masayoshi Son, rather than Nakamura or No. 2 operator KDDI (KDDIF
), which have the most to worry about. Having purchased Vodafone's (VODPF
) struggling Japanese mobile business in March for $15.5 billion in one of the largest acquisitions in Japanese corporate history, industry watchers are united in their opinion that Softbank is riding for the biggest fall (see BusinessWeek.com, 3/17/06, "Softbank-Vodafone Deal Rings True").
KDDI THE WINNER? "There will be winners and losers and the consensus is that KDDI will be the winner," says Gerhard Fasol, CEO of Eurotechnology, a Tokyo-based consulting company. "The Vodafone business has problems in Japan." According to a Sept. 1 survey by the Nikkei, 25% of Vodafone's 16.4 million subscribers want to jump ship, compared to 18.7% for DoCoMo and 8.1% for users of No. 2 operator KDDI's AU service. Of those planning to change carriers, 61.1% said KDDI was their preferred destination.
The reasons for customer dissatisfaction at Vodafone aren't hard to identify. Before selling the business to Softbank, and after acquiring the former J-Phone company and brand in 2001, Vodafone made a series of missteps. Big mistakes included attempting to impose handsets designed for global markets on picky Japanese phone users and halving 3G infrastructure investment just as KDDI and DoCoMo were raising theirs (see BusinessWeek.com, 2/28/06, "Can Vodafone Get Through?").
That culminated in declining market share—Vodafone had been neck and neck with KDDI but today has a 16.4% compared to KDDI's 28% of the market—and lower average revenue per customer. While the average DoCoMo and KDDI user pays about $65 a month for his mobile, Vodafone users pay about $50.
SWIFTER RIVALS. Softbank's rivals seem to have jumped the gun on Son since the Vodafone acquisition. On Oct. 1 Softbank will relaunch the Vodafone brand as Softbank Mobile; but DoCoMo and KDDI have already begun recruiting new customers. For example, on Sept. 10, DoCoMo will launch a "MNP Reservation Campaign."
People who apply to DoCoMo and sign the contract before Dec. 31 will be given an $18 credit on their new phone—roughly the same sum as all three carriers are charging customers to leave and take their numbers with them. KDDI and Vodafone are doing something similar, but the challenge to Softbank will be persuading customers to stay at a time when the Vodafone/Softbank brand is in limbo.
Of course, survey results can exaggerate reality. Just because customers tell a questioner they intend to change carriers it doesn't mean they will. What's more, the introduction of number portability in other countries hasn't always had a huge impact.
LEAVE THAT E-MAIL. Internationally, an average of about 5% of mobile phone subscribers take advantage of number portability every year, notes InfoCom Research, although in Hong Kong and Finland the proportion rises to over 15%. And, like its rivals, Softbank will introduce a slew of new phones and has said it will ramp up investment in infrastructure to bolster coverage.
One other factor that may deter a large exodus is that mobile phones in Japan, which don't use the SMS text messaging system, have their own e-mail addresses. But number portability doesn't extend to e-mail portability. That means customers switching carriers will still have to contact all their friends and relatives to inform them of their new e-mail address.
"My prediction is that this will not have any significant impact on the Japanese mobile market without the introduction of some truly compelling new handsets and services by competing operators," says Philip Sugai, a marketing expert at the International University of Japan in Niigata.
UNAVOIDABLE HEADACHES. Still, in the short term, headaches seem unavoidable—and for all parties. Softbank may be the likely loser, but it's unlikely to be the only one. In terms of profitability, CLSA's Calder notes that in other markets, such as Taiwan last year, profit margins fell for three to four months before and three to six months after the introduction of number portability.
One big factor is declining revenue per customer as competition bites. DoCoMo's Nakamura's comments, seemingly aimed at Softbank, highlight industry fears that Son could trigger a price war. Son certainly has before. Feted in Japan for revolutionizing broadband access, he introduced the Yahoo! BB service in 2001, offering broadband for a fraction of the cost of rivals, including KDDI and NTT. If customers start shipping out in droves, analysts reckon Softbank could start discounting.
GOT YOUR NUMBER. Even success comes at a cost. While Japanese handsets may be crammed full of gadgets, customers don't expect to pay anywhere near the full cost for them. Instead, carriers subsidize each handset by about $350. If 61% of the 10 million customers projected to shift to KDDI's AU service following number portability are true to their word, the cost in subsidies alone for KDDI would be around $2.135 billion.
"The problem is that winning in the long term means losing in the short term due to the high handset subsidies," adds CLSA's Calder. "We could see a couple of quarters of operating losses." Add to that increased marketing costs and falling revenues per customer, and number portability could give Japan's mobile carriers some wrong numbers in the months ahead.