DoCoMo's Gamble
Keiji Tachikawa wants to conquer the world by bringing high-speed Internet access and video to cellphones. He got a head start with i-mode. But now the stakes are higher, and some are asking whether anyone needs a phone to do anything but talk
By MUTSUKO MURAKAMI
Keiji Tachikawa has a killer app, and at last he's getting a chance to show it off. Standing on a stage before Japanese and foreign telecoms executives and other guests on the 26th floor of Tokyo's new Sanno Park Tower office building, the president of NTT DoCoMo, Japan's largest mobile-phone operator, takes a cellphone from an assistant. He holds the phone out in front of his face like a mirror. "Can you see me right now?" he asks. A projection screen gives guests a Tachikawa-eye view of proceedings. A video feed of a woman's face, the other person in the conversation, appears on the handset's tiny monitor. Cheers and murmurs of amazement fill the room.
The event is the May 30 official launch of a Tokyo trial of NTT DoCoMo's much-hyped "3G" mobile-phone technology, of which video is a keenly anticipated feature. It's an important moment for Tachikawa, 62, and not just because DoCoMo is the first company in the world to introduce such an advanced service. (South Korea's SK Telecom in October unveiled a digital wireless network with near-3G speed.) The occasion also offers an early glimpse of a strategy that could ruin the company or make it a global leader. "DoCoMo is the only company betting on 3G, and it's a risky play," says Tim Clark, Tokyo strategy director for Web consultancy Ion Global. "But it could pay off big down the road."
Quite simply, DoCoMo aims to give millions of people high-speed Internet access on their cellular phones, via what's known as third-generation wireless technology - 3G for short. To its proponents, 3G is a breakthrough that will change how we use cellphones, giving users "always-on" Internet connections and allowing them to do everything from making video calls to transferring large data files over office networks. DoCoMo is investing $10 billion in the next three years to develop a 3G network and services in Japan, but that's just for openers. By being first to implement the technology at home, DoCoMo is hoping mobile-phone companies in other countries will be inclined to partner up when they roll out their own 3G networks, providing DoCoMo with an overseas revenue stream and more room to grow.
It's a bold vision - perhaps a little too bold for an unproven technology. After early enthusiasm, the rest of the world is having second thoughts about the wisdom of building next-generation networks. Many question their commercial viability, saying the long-term returns won't pay for the huge upfront costs involved and that the so-called killer apps offered by high-speed systems may not be compelling after all. Stock markets are punishing carriers that have big 3G plans. "Investors have now practically written off 3G," says NiQ Lai, director of telecoms research at Credit Suisse First Boston in Hong Kong.
Meanwhile, DoCoMo's efforts to prove doubters wrong with a working version of a third-generation network are not having the intended effect. Technical glitches have delayed the system's commercial rollout, which is now scheduled for October. DoCoMo instead is offering a greatly reduced trial service, available to just 3,300 people in a small area of Tokyo. And forget about Tachikawa's neat demonstration to guests at the launch of the service - named FOMA for "Freedom of Multimedia Access" - at the end of last month. Users don't even get video during the trial. That has to wait until the end of this month because of yet more technical problems.
Still, if any company can pull it off, it's DoCoMo. With an energy that belies the conservative appearance of its white-haired, bespectacled president, DoCoMo has challenged the inertia of Japan Inc. to become one of the world's most successful mobile-phone operators. In the year ended March 31, the company posted a record profit of $3 billion, a 45% increase from the previous year. Much of that success is due to senior executives' un-Japanese willingness to challenge convention. Tachikawa himself, a wireless engineer with a graduate degree from MIT, comes across more as a brilliant scientist than as a corporate drone. "Think drastically and act steadily" is reportedly a favorite motto.
An example of that philosophy in action: the creation of i-mode, the world's first wireless Internet access service. In 1997, Tachikawa, then an NTT vice president, was transferred to DoCoMo to rein in its independent-minded president, Koji Ohboshi (now DoCoMo chairman). Instead of restoring order, Tachikawa was persuaded to back Ohboshi in assembling a dynamic young team to develop i-mode. Launched in early 1999, the service has been a resounding success. Some 24 million people, 65% of DoCoMo's mobile subscribers, are users. I-mode continues to attract 50,000 new customers a day. Tachikawa thinks the i-mode landslide proves the market will support a faster 3G network, because features that are already popular - such as mobile gaming - will work even better. But introducing 3G will force consumers who want the service to buy expensive new handsets costing more than $400. Users may find the service impractically expensive. Downloading four minutes of music, if charged at the same rate as i-mode, could cost 10 times the price of a CD. (DoCoMo says data rates for its new service will be one-sixth their current level.) And mobile phones may be unsuitable multimedia Internet devices because they have small screens and weak batteries. "People won't like to stare at video on a tiny screen for a long time," says Hideo Okinaka, a manager for KDDI, which runs Japan's second-largest wireless carrier. But he says they still may like to download video clips like sports highlights.
Tachikawa counters that 3G's improved speed and capacity will create new markets, particularly in the corporate sector. The technology promises data transfers initially of up to 386 kilobits a second, 40 times faster than i-mode,increasing to 2 megabits a second by 2003. That, says Tachikawa, will attract companies looking to exchange data with workers on the move. A construction company manager interviewed by ASIAWEEK says his firm, one of 700 testing the technology, envisages workers accessing schedule and inventory information by phone. He also expects data and video functions to help in supervising remote construction sites. Tachikawa concedes no one really knows which new applications for 3G phones will succeed. But he points to the fact that some 6,000 companies applied to test DoCoMo's pilot service.
It will take more than an army of eager testers to convince skeptics. Foreign telecoms and Internet companies have suffered in the past year and a half from backing unproven technologies without looking critically at commercial realities. One offender was WAP, an early attempt to reproduce the Web for mobile phones. With slow downloads and limited availability of both content and handsets, the new format impressed neither consumers or investors. Then there's 3G itself. Caught up in last year's tech euphoria, big European telecoms companies bid astronomical sums for licenses to use the radio spectrum reserved for 3G networks. In the U.K.and Germany, $79 billion was spent on the licenses. Then people did their sums and realized the new networks might never be profitable.
The debt taken on by European carriers to pay for 3G networks may well help DoCoMo in its bid to expand its business beyond Japan. Like its European counterparts, the Japanese carrier faces slowing per-user revenues from voice traffic. The company controls 59% of Japan's mobile-phone market, against 18% for its nearest rival. But to keep growing it must find new revenue sources such as data services or from overseas. And unlike debt-ridden carriers, DoCoMo is one fat cat. It has more than $950 million in cash and got its 3G license for free. The company has no problem raising money for new investments, say analysts, because it can easily find buyers for its corporate bonds.
That puts DoCoMo in a stronger position to build a global franchise. The company has been shopping for stakes in foreign wireless players, purchasing 20% of Britain's Hutchison 3G and 15% of Dutch operator KPN Mobile. Late last year, DoCoMo paid $510 million for 15% of Taiwan's KG Telecommunication, with which it plans to develop a Chinese-language version of i-mode. And DoCoMo this January invested $9.8 billion in AT&T Wireless. The two companies plan to develop mobile multimedia services in the U.S. and promote the spread of the 3G technology used by DoCoMo.
For the moment, however, all eyes are on Japan, a crucial litmus test. DoCoMo's initial goals are modest. It aims to roll out a full commercial service in Tokyo in the autumn, extending coverage to the rest of Japan by next spring. The company expects 150,000 subscribers in the first year, a number that is projected to grow to 6 million within three years. By that time, says Tachikawa, the service will be making money.
Some agree with that optimistic forecast. "The corporate market will be very profitable for DoCoMo," says Naoki Ota, a project manager for the Boston Consulting Group in Tokyo. Analysts looking at 3G's prospects in Asia say data downloads will increase operators' per-user revenues, while more efficient data transmission will reduce the costs of running networks.
Tachikawa is unfazed by critics who insist consumers will be satisfied with so-called "2.5G" networks, which offer many of the same advantages as 3G but are cheaper to build. The ex-engineer has already backed one technology - the mobile phone - that has succeeded beyond the wildest expectations. Now his company has a chance to combine it with another - the Internet - to create something new. "It is not a matter of who is right and who is wrong," he says. "It is a matter of what you believe." And whether you are bold enough to bet on your dreams.
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