Can Vodafone Get Through?
The mobile provider has lost market share, but it seems to finally be getting the message from Japanese customers
When British mobile carrier Vodafone (VOD) dispatched Bill Morrow to Tokyo in early 2005 to run its Japan operations, they handed the American one tough salvage job. Having acquired the old J-Phone handset business in 2001, numerous missteps by Vodafone had left the unit in a free-fall. It was, and still is, getting trounced by rival KDDI's (KDDIF) AU mobile phone unit -- a brand with which Vodafone was level pegging in Japan three years ago.
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KDDI and No. 1 mobile carrier NTT DoCoMo (DCM) have simply out-hustled Vodafone by coming up with cooler designs and must-have services. AU has attracted plenty of buzz with a high-speed music download service, for instance. Such marketing slip-ups have stung. "Vodafone in Japan has focused on [listening to] its headquarters rather than Japanese customers," says Kazuyo Katsuma, an analyst J.P. Morgan Securities in Tokyo.
MAKING CONNECTIONS. Today, however, there are signs that Vodafone is making some headway in Japan. Morrow told reporters at a gathering on Feb. 27 that the fiscal year beginning in April would be a year of growth. "We're making very good progress with the turnaround," Morrow said. "The transition from 2G to 3G is going well, we've seen a greater range of handsets, much better content, a stronger network, and our [new] tariff plans have been well-received."
Since his arrival, Morrow has certainly stopped the bleeding. In January, 2005, Vodafone lost 59,000 subscribers on a net basis, an alarming figure. This January, by comparison, it pulled in 17,600, after signing up 63,700 subscribers in December. That has pushed total subscribers above the 15.1 million mark.
Another sign of progress: Vodafone now has more than 2.5 million 3G customers -- 16% of its total subscriber base. That compares with 500,000 a year ago after launching a dozen new 3G phones in Japan last year. Vodafone is also investing in infrastructure to improve reception quality.
More new tailored handsets and services should help. A new flagship phone from Sharp, shown off by Morrow today, is certainly a step up from Vodafone's current offerings in Japan. The 904SH is the world's first to include a VGA LCD screen, which has four times the resolution of the current generation of cell phones. The phone, which goes on sale in April, also includes face-recognition security software and Bluetooth technology to enable multiple game-playing and messaging with people within a 10-meter range.
STAR SEARCH. If all that weren't enough, a new motion sensor function means the phone can even recognize constellations if pointed skywards. "Our legacy of innovation is beginning to return," says Morrow. "Customers will see the value of this phone." Vodafone also confirmed that it is working on a handset for Japan capable of receiving digital TV and a mobile phone-based virtual community called V-Town.
All of which should come as a relief to Vodafone shareholders. Last year Shiro Tsuda, a former executive at DoCoMo, lasted only 68 days as president of Vodafone's Japan operating before Morrow was dragooned into Japan. Tsuda was made chairman. Three missteps landed Vodafone in a world of trouble, analysts say.
First, Vodafone halved its Japanese capital expenditure in 2002, when its rivals hardly let up. The company also damaged its fortunes by trying to sell handsets designed for the global market to tech-savvy Japanese users, and it delayed rollout of 3G handsets (see BW, 2/21/05, "Vodafone's Bad Connection in Japan").
INTENSE COMPETITION. Still, for all the progress, analysts maintain that Morrow's job is one of the toughest in telecommunications. After all, when Vodafone acquired J-Phone its market share was on a par with AU. Today, Vodafone's share is 16.7% vs. 24.1% for AU and 55.8% for market-leader DoCoMo.
What's more, the competitive dynamics of the market are getting far tougher. Starting in November, customers will able to change carriers but keep their existing phone numbers. That could be bad news for Vodafone. "My position is that KDDI's AU [will be the winner]," figures Tetsuro Tsusaka, analyst with Deutsche Securities in Tokyo.
For another, DoCoMo and AU continue to raise the bar. AU, for example, launched a music-playing phone in February that includes a 4 GB hard drive and can store 2,000 songs. Since January, DoCoMo users have been able to use their phones to pass through turnstiles at railway stations. And if that weren't enough, the Japanese government has also approved entry for three new carriers in 2007, including Softbank. Vodafone is vulnerable because Softbank is likely to offer a low-cost alternative service -- and Vodafone customers who spend less per month than either AU or DoCoMo may be more likely to favor an even cheaper carrier.
SALES CALL? That's leading to speculation that Softbank could even acquire Vodafone's Japan arm as short cut to acquiring mobile customers. Softbank is said to be keen if the price is right, while Morrow has a history of selling. On his last job in Japan, he buffed up Japan Telecom (a former sibling of J-Phone) before it was sold to private equity firm Ripplewood Holdings and then later to Softbank. "It would be completely naïve to think that one of the folders on his desk isn't selling the business," says Kieran Calder, an analyst at CLSA in Tokyo.
Of course, if Morrow can engineer a recovery, reports questioning Vodafone's commitment to Japan may prove exaggerated. Analysts say Vodafone's Japan business remains profitable -- it made $237 million in the year to March, 2005 -- and Japan is a great source of new technology. J-Phone was the first company to enable phone users to e-mail photos, while the Vodafone Live Internet service now used in 59 countries originated in Japan. "I don't think Vodafone [in Japan] is dead by any means," says CLSA's Kalder. Morrow will hope to keep it that way.
With Kenji Hall in Tokyo
Rowley is a correspondent in BusinessWeek's Tokyo bureau
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