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DECEMBER 1 , 2000 VOL. 26 NO. 47 | SEARCH ASIAWEEK


Matthias Ley for Asiaweek.
Japan's mobile users discover new ways to relate to the Net and each other.

The DoCoMo Generation
Japan's cutting-edge mobile phone company is boldly going international
By MURAKAMI MUTSUKO and ASSIF SHAMEEN

ALSO:
Bandwidth Boom
With new undersea cables criss-crossing the region, ain't seen nothing yet in Asia
• China: A turf war among major telecom players is looming in the world's second-largest mobile market
• Viewpoint: Singapore Telecom's CEO, BG Lee, on the perils of 3G spectrum auctions in Asia

Tazaki Hiroko is, like many Japanese consumers, a little hard to please. The 24-year-old Tokyo secretary can whip out her sleek mobile phone whenever she wants and gaze upon a color image of Hello Kitty. That's something only customers of NTT DoCoMo's i-mode mobile phone service can do. She can also check her e-mail, buy concert tickets, and join an online dating service with her handset. Still Tazaki is not satisfied. "My dream," she says, "is to watch live 2002 World Cup games on my phone, wherever I am."

Rest easy, girl. While Hello Kitty is currently airing on tiny screens only in Japan, DoCoMo is working feverishly to make sure you can watch video feeds of soccer games whether you are in Tokyo or The Hague, Taipei or L.A. It may not happen next year, it may not happen at all. But DoCoMo, using its wildly successful i-mode mobile Internet service as bait, is striking deals with less-evolved cellphone companies around the world in an effort to form the first global mobile telecommunications giant — one capable of delivering so called 3G, or third-generation, information services to handsets on just about every continent.

Over the past 11 months, DoCoMo has announced a series of deals that give the company footholds in several key markets. It is a 20% stakeholder in a consortium including Hutchison Whampoa of Hong Kong that seeks to build 3G networks in the U.K., Germany, France and Belgium (the group has just begun raising money to build an advanced cellular network in the U.K.). In September, DoCoMo sealed a $100-million deal with America Online, the biggest Internet access provider in the world, giving it a source of vast storehouses of online content that could be converted to wireless transmission. It has a technology alliance with South Korea's leading mobile phone company, SK Telecom, and a research facility in Germany.

Yet DoCoMo, which with a market cap of $263 billion is the largest mobile carrier in the world, is only warming up. This week, word leaked out that the company was nearing agreement with U.S.-based AT&T Wireless on a $9-billion deal which could pair the companies in a launch of 3G services in the U.S. within a few years. Oh, and DoCoMo also is among bidders for a 20% stake in KG Telecom, Taiwan's fourth-largest mobile carrier. "Anytime there is a large block of shares in any wireless company for sale around the world, you hear DoCoMo is among the potential buyers," says Kirk Boodry, telecommunications analyst at Dresdner Kleinwort Benson Securities in Tokyo. "DoCoMo's main aim," says Koike Takayoshi, analyst for SG Securities in Tokyo, "is to prepare for the 3G era."

Forging a planet-spanning network capable of delivering wireless content including music and video is an outsized ambition. The only carrier that has demonstrated a similar appetite is Vodafone of the U.K., which has been even more aggressively seeking partners (Vodafone — with a market cap of $239 billion, second only to DoCoMo — recently took a stake in China's largest mobile phone company). The undertaking is extremely risky given the costs of upgrading existing networks to handle futuristic telecommunications traffic for which there is no known consumer demand. But DoCoMo finds itself in a unique position. Three years ago the company, then a lightly regarded spin-off of Japan's giant NTT telecommunications conglomerate, went its own way in the development of a system for transmitting Internet data over its cellphones. While other carriers were struggling with pager-like message services, DoCoMo was creating a system that would operate much like the Internet itself, making it simple for content companies to create sophisticated services including the exchange of text and graphics files and crude animation.


Asiaweek Pictures.


Launched in Japan 21 months ago, the i-mode service has been nothing less than a phenomenon. Subscribers now total nearly 15 million, and the company expects to have 17 million by year-end. There are more than 20,000 content sites, one-fourth of them with revenue-sharing alliances with DoCoMo through which the cellphone company gets a 9% cut of online transactions. Besides being hugely profitable — DoCoMo made $3.6 billion in the six months prior to Sept. 30 — the service has made DoCoMo a model for the rest of the mobile phone industry, the first in the world to show that the Internet and wireless phones could be married successfully. Through a combination of thoughtful navigation design that hides the Net's complexities from users and clever marketing, DoCoMo has changed the way people use their phones. "I-mode came at the right time, in the right place, with the right content," says Boodry. "It has just dazzled everybody."

Not only has it changed the Internet for consumers, DoCoMo is also a beacon for hidebound Japanese corporations struggling to find their way in the new economy. Formed in 1992 when it was hived off from NTT, DoCoMo has been able to operate at least somewhat beyond the bounds of its stodgy parent. When the company wanted to develop i-mode's business model, it did the unthinkable by bringing in outside talent — Matsunaga Mari, a former editor for a classified ad magazine, and Natsuno Takeshi, an exile from an Internet startup. Along with Keiichi Enoki, a non-conformist electrical engineer who is now DoCoMo senior vice president, the pair played key roles in creating i-mode's content-driven service.

Today, Natsuno is executive director of the company's Gateway business and the architect of its global business strategy. An MBA graduate from the Wharton School at the University of Pennsylvania, the 35-year-old exec speaks English fluently and calls DoCoMo's cellphone partners his "friends." He can afford to be chummy. Thanks to i-mode's success, "there is no shortage of wireless companies around the world who are fascinated by what they see happening in Japan and they believe DoCoMo might be able to help them," says Boodry. That gives Natsuno leverage in striking deals that companies such as Vodafone can't match.

And he is not shy about using DoCoMo's first-mover advantage to attract global partners. "Look at this Baby Donald [Duck, the Disney character] on my I-mode phone screen," he says. "No one ever expected this to happen a year and a half ago. Only those who witnessed the shift [i.e. DoCoMo] can imagine what to expect with 3G." While carriers in many countries including the U.S. are several years away from introducing high-speed mobile networks, "DoCoMo alone is very sure of the potential of 3G, because we have already experienced the explosive success of the data business. Our overseas business is to offer our know-how. We cannot give it away free, but we can make a minority investment in interested partners. I think it is a perfect strategy."

That's not bragging, it's just fact. DoCoMo has discovered a formula for making money off the Internet, something few companies have achieved. That's partly because the company has managed to get Japanese, and particularly Japanese teenagers, to pay for specially-tailored wireless content — even if it is only a few dollars a month for the right to use a cartoon character. Some i-mode sites provide crude online games, some sell horoscopes, others stock quotes. There are news services, e-mail, virtual-reality girlfriends. There is even an i-mode language, a growing collection of on-screen symbols called emoji — Japanese for "picture words" — meant to convey messages to other users in a keypad stroke or two.

DoCoMo charges a monthly subscription fee, which gives users access to myriad free sites. The carrier also charges for the amount of data a customer receives, not according to airtime. Users are always connected to the wireless Net as long as the phone is turned on — an advantage over clunky Wireless Application Protocol (WAP) services offered elsewhere that require customers to dial up sites and then wait minutes for connections to be made. Another big reason for DoCoMo's success: it eliminated the sticky issue of online payment that has slowed the growth of e-commerce on the wired Internet. The phone company keeps track of purchases and simply adds them to customers' monthly bills.

DoCoMo would like to introduce i-mode services on a worldwide basis. Earlier this year the company bought a 15% stake in Holland's KPN Mobile; the carriers plan to launch a European Internet portal using i-mode technology and content. But analysts give the company only a slim chance of convincing other potential partners that they, too, should adopt its system. While i-mode offers faster service than WAP, DoCoMo has been held back in its overseas ambitions because the digital transmission standard used in Japan is different from the widespread GSM system. That means i-mode phones don't work anywhere but Japan. "The key to i-mode's success was the packaging," not the technology, says Nicholas Khoo, an industry analyst with Gartner in Singapore. The entire i-mode system does not export well, and according to Boodry, the shift to 3G will erase much of DoCoMo's lead. "It's a whole new ball game," he says.

DoCoMo, however, is positioning itself to stay in front. The company is backing a transmission protocol called Wideband Code-Division Multiple Access (W-CDMA), thought by many to be the network technology that will underpin the shift to third-generation wireless. DoCoMo has already announced it plans to launch the world's first W-CDMA, 3G service in May. The system will be turned on first in Tokyo, with service in other major Japanese cities to follow later in 2001. Mobile network operators in Europe and most of Asia won't be able to get 3G systems running until 2002 at the earliest. In the U.S., the government still must hold auctions to divide up the radio spectrum and make room for 3G.


Finding New Friends
Hong Kong: Dec. 1999: DoCoMo takes a $140 million piece of Hutchison Telecom gaining a foothold in Hong Kong, the world's most cellular-mad market.
Holland: May 2000: DoCoMo's first European venture is a 15% stake in KPN Mobile, the country's biggest. The two companies announced plans for a new European Internet portal using DoCoMo's i-mode content.
Everywhere: Sept. 2000: A strategic alliance with America Online will give DoCoMo access to AOL's English-language content and could help the Japanese win new telecom alliances in Europe and the U.S.
U.K.: July 2000: DoCoMo rebounds from a bidding loss for one of Britain's next-generation licenses by taking a $1.7 billion stake in Hutchison 3G UK Holdings, one of the winners. The two companies join KPN Telecom to form a Triple Alliance to conquer new European markets.
Taiwan: Nov. 2000: KG Telecom, the country's fourth largest provider, is shopping a 20% stake to potential buyers, including DoCoMo. DoCoMo has refused comment.
Australia: Nov. 2000: DoCoMo is part of a consortium led by Telecom New Zealand bidding for Cable & Wireless Optus, Australia's second-largest cellular service.
United States: DoCoMo has reportedly been negotiating a 15%-20% stake in AT&T Wireless. The deal could give Japan a U.S. beachhead — and AT&T extra capital and know-how as it prepares to bid for U.S. 3G licenses.
Instead of hamstringing DoCoMo, the shift to 3G and W-CDMA may give the company a helpful shove. Today, mobile carriers around the world use several different incompatible transmission technologies. W-CDMA could provide a universally accepted platform on which to build a global network where the phones work anywhere. "3G is offering DoCoMo the first global stage that Japan can enter," says Mitsuyama Nahoko, an analyst at Gartner in Japan. Mitsuyama says the company's international thrust could act as a wedge, forcing open new markets for its parent NTT as well as for Japanese cellphone manufacturers like Sony and Matsushita, which have done well domestically but have struggled to gain ground abroad against Nokia and Ericsson. Some see DoCoMo as a kind of information-age Toyota, capable of blitzing the mobile telecommunications business as Toyota did the automotive world in the 1970s. Japan Inc., dispirited by a decade of economic stagnation, could use a new star in the global economic spotlight.

Circumstances may conspire against DoCoMo's rise. Six months ago, when stocks of mobile telecommunications companies were hitting all-time highs, rumors of a deal like the AT&T tie-up would have propelled DoCoMo shares to Jupiter. Today, investors are worried about short-term profitibility and liquidity, not bold bets on the future. On Nov. 22, the day news that the AT&T deal might be imminent hit the streets, DoCoMo's stock plunged 4.5% on concerns that the company might have to issue new shares to pay for the deal.

Not that DoCoMo is debt-ridden — far from it. The company has about $4 billion in cash and a rich parent. NTT owns 67%. But taking a 15% to 20% position in AT&T, the reported stake, will cost more than the carrier can fund from internal cash flow. Iba Yoshiyuki, a Tokyo analyst for the giant Standard & Poors credit rating agency, said he is considering putting DoCoMo on negative credit watch as the company gets "more adventurous" internationally. The move could be a prelude to a downgrading of the company's gold-plated AA+ rating. "As a group, NTT and DoCoMo have the balance sheets and the resources to make a lot of big purchases," says Iba. "Whether that is a right strategy is another matter."

Moreover, NTT is still calling the shots, and the fustier parent could at any time decide to abort the mission. "This is not just a matter of DoCoMo going international," says Khoo of Gartner. "This is about NTT going international." Adds Boodry: "You have to remember this is a Japanese company with an old government-controlled, fixed-line company as its parent. As a stand-alone company, DoCoMo would have been far more aggressive and acquisitive."

For the time being, DoCoMo continues to plot next moves. DoCoMo has its army of 700 engineers toiling away on 3G development. The company reportedly is experimenting with music downloads for mobile devices with Matsushita and Sony. Other services — including, of course, the videophone — are also on the drawing boards. In June, DoCoMo opened an office in Beijing as a base for building up its relationships in China, which in a few years will likely be the world's largest mobile phone market. Analysts say the company has been in talks with China's principal carriers, China Mobile and China Unicom — although partnerships with mainland companies, problematic in the best of times, could be even more troublesome because of the antagonistic political relationship between Japan and China.

Natsuno says he hopes to find more partners willing to start with i-mode services and later make the transition to 3G — making the wrenching process sound like a stroll in the park. "When all of us are familiar with [second-generation systems], we can make the smooth shift to 3G together," he says. "We can make it a real success." And he shrugs when confronted with the prospect that i-mode, the company's trump card, may soon be obsolete. "Oh, everything works that way," he says. More important is that DoCoMo "is making more and more friends every day." When you are trying to build the world's first global wireless network, you need all the pals you can get.

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