New phone player chases NTT lead
BLOOMBERG
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Japanese consumers are about to get a new choice when selecting telephone services - sort of.
Beginning this week, some will begin receiving phone bills from a company calling itself KDDI and marketing a mobile phone service under the "au" brand. A familiar name will also disappear. KDD, the former government monopoly for overseas telephone services whose shares were delisted from the Tokyo Stock Exchange, is no longer offering service.
Filling the gap is DDI, until now Japan's third-largest telecommunications company.
On Sunday Tokyo-based DDI officially took over KDD, the nation's largest international phone company, and IDO, the cellular phone unit of Toyota.
The move comes almost a year after the three companies announced the purchase and marks the first sweeping change in Japan's telecommunications market since the government allowed new entrants in 1985.
The union is aimed at creating a company strong enough to compete with Nippon Telegraph & Telephone (NTT), the world's largest phone company by sales.
Analysts say the key to DDI's success will lie in how well the combined company can market and develop its cellular phone strategy, which lags behind NTT DoCoMo, Japan's largest mobile phone operator in subscriber numbers and recognition.
The rebirth has generated little investor enthusiasm. First there is the matter of brand. The new company's shares are officially traded under the DDI name, though senior executives from the three separate entities have urged reporters to identify the company as KDDI, a name combining the letters found in the existing names of the two biggest partners.
"Our view on DDI, I am afraid, is rather negative," said Tsuyoshi Segawa, general manager of the equity division at Sakura Securities. "We just have to wait and see whether the new DDI will work out according to its scenario."
DDI shares yesterday fell 4.93 per cent, or 35,000 yen, to 675,000 yen, after falling as much as 8.87 per cent. The shares debuted at 690,000 yen, or 2.8 per cent less than DDI's closing price on Friday. The Topix telecommunications index, which includes NTT and NTT DoCoMo, rose 145.35 points to 4,239.12.
Much of the new company's success will depend on the two cellular units formerly run separately by DDI and IDO. The two units combined count 10.2 million subscribers, or 18.5 per cent of Japan's 55 million cellular phone users. NTT DoCoMo has 32 million users, or 58 per cent of the market.
Like NTT DoCoMo, the cellular units offer mobile Internet access and voice calling. Unlike DoCoMo, whose advertisements are a common sight in Japanese subway stations, magazines and even movie theatres, DDI and IDO suffer an image problem, analysts say.
DDI will need to boost subscription levels to regain the confidence of investors who have seen DoCoMo extend its lead as Japan's dominant cellular phone provider, they said.
"To me DDI is like a naughty boy, but I feel like someday he will do something big," said Hironobu Sawake, a senior analyst at ING Baring Securities (Japan). "But it hasn't happened yet."
One of the first challenges for DDI will be in the arena of so-called third-generation cellular phone services. Japan's three cellular phone companies - NTT DoCoMo, DDI and Japan Telecom - will be among the first in the world to offer high-speed Internet access, in two cases as early as next year.
The service eventually will allow data transmission 200 times faster than now, enabling users to watch movie previews, hold video conferences and even download music from the Internet to their handsets.
For DDI, it is a break with rivals NTT DoCoMo and the J-Phone companies, affiliates of Japan Telecom. DDI's rivals will offer the services using technology called W-CDMA, or wide-band code division multiple access. DDI has chosen a competing, rival technology called cdma2000, developed by US-based Qualcomm.
The reasoning is that DDI already uses a Qualcomm-developed standard called cdmaOne for existing cellular services. DDI says it will save money by building the new high-speed network on its cdmaOne networks, although the company has not said how much it expects to spend on the new network.
Still, that will not help DDI roll out its third-generation services faster than its rivals. DoCoMo is planning to be the first, with its services beginning in May. That would also make it the first in the world. Japan Telecom's J-Phone units plan to follow later in the year. DDI will not start its service until the second half of 2002.
DDI defends the move, saying it will be able to offer comparable services to DoCoMo and J-Phone with its present cdmaOne service, which will be able to generate much faster speeds on a nationwide basis by the end of 2002. DDI says that within the year its cell phones will be able to send data at speeds of 144 kilobits per second nationwide. DoCoMo has said its high-speed cellular phone service will generate speeds of 384 kilobits per second in May next year, though the service will be limited to major cities such as Tokyo and Yokohama.
The next question, analysts say, is whether DDI will be able to effectively market its new services. They say DDI's decision to use the "au" brand name for DDI's cellular phone unit and IDO has met with little acceptance from Japanese consumers.
"DDI seems to know how to develop new technology, but it doesn't know how to sell it," said Makio Inui, a senior analyst at Nikko Salomon Smith Barney. "DoCoMo is like an entertainer who can sing and dance. It comes up with new ideas and knows how to make that appeal to consumers."
Past experience shows the road ahead may be tough. Even though DDI's cdmaOne service is known for superior sound quality and higher data transmission capability, it has failed to excite subscribers.
The au division added 14,200 new users in August, while DoCoMO gained 492,000 new users and J-Phone added 102,000 in the same period.
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