Ntt Docomo Case Study

NTT DoCoMo i-mode™:
Kouji Ohboshi is a worried man. It‘s early 1999, and NTT DoCoMo‘s Chairman is anxiously waiting to hear how the press conference for i-mode – his company‘s new mobile Internet system – has fared. He has every reason to be nervous. Although DoCoMo is a leader in the Japanese mobile industry, the market is showing signs of saturation and Ohboshi has gambled a large stake of his company‘s future on the development of the new system. The report arrives and his worst fears are realized: the press conference was a debacle. The launch of i-mode couldn‘t have gone worse. With only seven reporters attending, imode‘s extravagant debut had fallen on deaf ears. Those journalists present were among Japan‘s least charitable. With the Internet boom waning, reporters were more skeptical than ever. Mobile Internet services had failed elsewhere so why should they work in Japan? Why not wait, like everyone else, for the third generation (3G) global wireless Internet protocol? Ohboshi knew that unfavorable or – worse – weak press coverage in Japan‘s trend-driven mobile phone market could spell disaster. Had he made the wrong decision to shift the company‘s strategic focus? Were his skeptical colleagues at DoCoMo right? What Ohboshi didn‘t know at the time was that in the weeks to come, i-mode would become an explosive success. Like the Walkman and Gameboy that preceded it, i-mode was to be more than simply a commercial success - it became a phenomenon. What explains this amazing success in Japan? How did DoCoMo turn a highly competitive industry with declining growth potential into an attractive business opportunity?

NTT DoCoMo’s Troubled Birth
NTT DoCoMo was formed in 1992 as part of a partial government break-up of the powerful Nippon Telephone and Telegraph (NTT) telecom monopoly. Formerly NTT‘s mobile phone unit, it was cast from the nest to take over wireless communications sales and operations as an independent enterprise. Kouji Ohboshi, an energetic 60-year-old, was the first CEO of a company whose name DoCoMo is both a play on the Japanese word for ―anywhere‖ and an abbreviation of ‗Do Communications over the Mobile network.‘ From the start, Ohboshi realized that DoCoMo had a tough road ahead. The mobile phone market was over-regulated, transmission quality was poor, subscription fees were costly and mobiles were heavy. Moreover, there was a palpable sense that the market had reached a plateau (Exhibit 1). Japan‘s economic bubble had burst and businesses had cut back mobile phone purchases. To add insult to injury, tough new government rules forbade the fledgling DoCoMo to ask NTT for financial assistance. By the end of its first year DoCoMo was saddled with a ―10 billion yen loss ... and bankruptcy was a serious threat.‖ Faced with a looming crisis, Ohboshi went for broke, setting out to expand the market by bringing cellular phones to the masses. And he did so with a vengeance. During the next two years, Ohboshi invested ¥50 billion – a large sum for a company making a loss – to bring DoCoMo‘s mobile network services to everyday users. His first move was to improve DoCoMo‘s network. In 1993 the company launched its new revolutionary PDC (Personal Digital Cellular) standard, bringing crystal clear calls, fewer interruptions and less background noise. Moreover, PDC helped DoCoMo use its limited allocation of radio spectrum more efficiently. Within a few months DoCoMo‘s PDC standard was adopted by competitor carriers across Japan. By December 1998, it would account for 98.7% of the

Japanese market. (Exhibit 4) Next DoCoMo slashed prices. Its high deposit was abolished in October 1993 and subscription fees were cut in 1996. By March 1999 monthly basic charges had dropped 73%, the average charge for a three-minute call on DoCoMo falling 57.6% in the same period. Once again, the rest of the industry quickly followed suit by cutting fees (Exhibit 3). The lust for market share in the mid-90s drove carriers to continue slashing prices to rock bottom levels, even as monthly average revenue per user (ARPU) continued to sink (while monthly average minutes use remained relatively stable). (Exhibit 5) Ohboshi also attracted new customers by reducing the size of the phones. NTT had one of the largest R&D teams in the telecom industry and DoCoMo maintained close relationships with telecom equipment manufacturers.7 Ohboshi leaned heavily on DoCoMo‘s engineers and its suppliers to reduce the size of phones and extend their battery life. Although DoCoMo was feeling the effects of deregulation, it made the best of the gains offered by the new competitive environment. Within a year of Ohboshi‘s drastic measures, DoCoMo was still Japan‘s largest mobile telephone carrier, and its revenues and net income had soared.8 By March 1999, DoCoMo‘s sales revenue ballooned to ¥3,118 billion with a net income of ¥205 billion, and market capitalization topping out at ¥11.2 trillion – about 60% of the size of its parent company, NTT.

The Wild, Wireless East
NTT DoCoMo‘s emergence, together with deregulation, technological innovation, price reduction and the launch of new services all contributed to the rapid expansion of the mobile phone market to mass users in Japan. In a 10-month period during 1998, the market grew by an estimated 8 million users, bringing the total number of subscribers to 39.8 million in January 1999 – fulfilling 87.2% of Japan‘s total wireless market. (Exhibit 1) Competition for market share in the late 1990s was cut-throat. Deregulation continued apace and by 1998 a flood of large foreign carriers and equipment manufacturers had entered the fast-growing market as the government lifted the last remaining limitations on foreign investment (Exhibit 4). Competition was equally fierce in the drive to offer new services. JPhone shrewdly targeted younger users, launching the first SMS (short message service) and information services via the J-Sky Web package. Using a similar approach, DoCoMo introduced the wildly successful ‗Pocket Board,‘ a well-designed yet inexpensive mobile with email and game functions. By January 1999, the wireless market in Japan had experienced seven years of rapid expansion (Exhibit 1), with every third person owning a mobile phone. Although the size of the market was still small compared to that of fixed lines, its annual average growth rate of 68% was astounding compared to the anemic growth (1.5%) of the fixed line market. Yet despite general optimism in the market, Ohboshi was once again getting nervous.

After Victory, Tighten your Helmet Strap
His marketing background had taught him that, ―fast growth means fast maturity, and faster speed for the market to move from maturity to saturation and then to decline‖. The market was once again moving to saturation both in the number of potential new users and in capacity as available radio bandwidth increasingly limited market expansion. It was time for action. To survive, Ohboshi believed that DoCoMo needed ―to create a new

market, not by adapting to changes but by creating the changes through positively transforming their corporate strategy‖. Ohboshi told his employees that DoCoMo had to shift from simply increasing the size of the voice-based wireless market, to creating new value for customers. Shortly afterwards, in July 1996, the company formerly announced its new strategic focus: ‗from volume to value.‘

Volume to Value
At the heart of Ohboshi‘s ―Volume to Value‖ focus was non-voice-based wireless data transmission. With the explosion of Internet use during the late 1990s (Exhibit 6), DoCoMo realized that the use of e-mail and the web was quickly becoming a cornerstone of everyday life. From new market and social psychology research, Ohboshi was convinced that, ―the daily needs and wants of the people in a mature society like Japan would shift from physical goods to communication, information, knowledge and entertainment‖. Not only did the Internet offer new opportunities for filling customer demand, it also solved one of Ohboshi‘s greatest concerns: an increasingly congested radio spectrum. In contrast to traditional voice conversations that are sent via dedicated spectrum airwaves, Internet traffic is dispersed in small packets across the network to be reassembled at their destination (e.g., a user‘s telephone). If DoCoMo created an alternative mobile Internet network based on packetswitching technologies, it would completely circumvent the burdened voice network. Within a year, DoCoMo was building one of Japan‘s first nationwide packet-switching networks. The mobile computing team was strengthened and soon new products and services were introduced – albeit not very successfully – culminating in 1997 with the ‗¥10 email service‘ (customers could send and receive 2 kilobytes of data for a mere ¥10). Although these early Internet initiatives were not big profit-makers for NTT DoCoMo, they created a new market by attracting customers who had never used cellular phones or e-mail before. As one of the team members involved in developing mobile computing services pointed out, ―Our intention was not to develop and introduce new products into the market, but to create and introduce new ways of using our traditional wireless services.‖

The New Wireless World
In January 1997, Ohboshi asked Keiichi Enoki, a former electrical engineer and DoCoMo‘s new Director of Corporate Sales, to plan and launch a new mobile data communication service for the mass market embodying his ―volume to value‖ strategy. He later reflected: About a year after we started launching new mobile data communication services, revenues from such new services increased to constitute 5%–6% of our total revenues. With detailed marketing research and advice from external consultants, I felt a need to further boost these new services and asked Enoki, whom I trusted, to head a project specifically targeting the mass market. I assured him that he would have full discretion in choosing his staff and in using funds worth 5 billion yen, which is a lot of money.19 Enoki would have his work cut out for him. DoCoMo had a new strategic focus, but after two long years Ohboshi‘s team had yet to match vision with performance. Enoki had to create a winner. He was tasked to develop a mobile phone service that would advance the Internet in the same way the Sony Walkman had advanced the stereo. But how?

―I got the first hints from my family,‖ recalls Enoki. ―At that time, the pager was at the peak of its popularity. My daughter used the number pad as a form of data communication. My son could play a new computer game without reading the instructions. Their ability to adapt to new information technology and its ease of use convinced me that young people would accept a new data service that would give them the same kind of enjoyment.‖ Now a believer, Enoki set out to tackle the new initiative by doing the unthinkable: recruiting new blood from the outside to lead the project. He first called Mari Matsunaga, a senior executive at Recruit Co., a job placement firm. Matsunaga was known for her marketing prowess and dramatic turnaround of Recruit‘s job placement magazine for women into one of Japan‘s hottest titles. She would head the content development team for DoCoMo‘s new service. Enoki then sought out a manager to devise a business model for the new mobile data communication service. He chose Takeshi Natsuno, a Wharton MBA and former head of Hypernet, one of Japan‘s first (and most hyped) net startups.

Developing the Electronic Concierge service
Mastunaga set out to understand how the Internet works. What were the killer applications that provided web users with superior value? In studying the winners – such as AOL (America Online) – she found a positive correlation between the number of Internet users and the volume of content. As content increased, so did the number of users and vice versa. Hence her conclusion: ‗Content would have to be king on the new DoCoMo system.‘ She also recognized that simply putting ‗information‘ on the network would not differentiate the new service from the existing PC-based Internet, nor would it add value to users who were often lost in the sea of information on the web. Matsunaga thus envisioned a service that would function like a ‗hotel concierge‘, where users would be ‗serviced‘ by content providers. If DoCoMo could make it possible for users to access pre-selected websites on the screen of their handset, then they would capture Mastunaga‘s concept of an Electronic Concierge. The team set out to create such a user-friendly portal to serve both as an accreditation of quality for those pre-selected ―official‖ sites, as well as an easy way to navigate the whole wireless web – similar to the service AOL provides its customers. Users could access other ―non-official‖ sites simply by typing in the URL address. Meanwhile, Natsuno devised a business model for the new mobile data communication service based on what he saw as the ―Internet worldview‖ rather than the ―telecom worldview‖. he telecom worldview, according to Natsuno, is a zero-sum approach: carriers determine the standards and the services that can ride on their network, and are not interested in adapting to others‘ technology or in sharing profits with other players in the value chain. Users must accept the infrastructure and services carriers offer them. Conversely, the ―Internet worldview‖ is a positive-sum approach. As the Internet is an open network that can be accessed with various devices (e.g., computers, PDAs) whose specifications are not necessarily determined by either content providers or carriers – all parties are obliged to accept one another‘s technologies and services. In the Internet world, consumers choose the infrastructure they prefer. Specifications are thereby de facto standards determined not by their technological superiority but by the fact that they are so frequently used. In the Internet worldview, Natsuno believed, carriers have to work closely with other players, including information providers, to increase the number of users. This ‗win-win‘ relationship among players within the network became the foundation of Natsuno‘s business model. Accordingly, DoCoMo would not purchase content from providers or equipment from manufacturers but would rather accredit ―official‖ websites and mobile

phones to be used with the new service. Interested partners would share both the risks and the rewards. Although this model restricted DoCoMo‘s role to simply that of a ―gateway‖ to the Internet, as the service attracted more users, the idea went, the network would attract more content. More content would beget more users; more users would beget more content, and so on, thereby creating a virtuous circle where all parties benefit. Natsuno‘s ‗win-win‘ business model would also be applied to the new service‘s billing system. A number of the ―official‖ sites would be subscription-only sites requiring customers to pay fees ranging from ¥100 to ¥300 per month. Under Natsuno‘s plan, DoCoMo would collect all these fees as part of its monthly phone bill, take a 9% commission, and then pass on the rest to the content providers. This service would be attractive not only to content providers who could reduce their internal cost structure, but also to users who would appreciate not having to pay several separate bills. And by giving content providers a means to charge users, imode would ensure that there was plenty of high quality content available. Lastly, Natsuno recommended that the new service adopt existing widely-used technologies. For example, although there were better text languages such as WML (Wireless Markup Language), DoCoMo adopted c-HTML for its new service. With this compact version of HTML, the language widely used to create websites for the PC environment, content providers could quickly, easily and at low cost modify their PC-based websites into a new version to be displayed on the new DoCoMo service. New handsets were also developed that closely resembled existing cellular phones used exclusively for voice communication. Manufacturers were asked to reduce the size and weight of the new handsets while increasing screen size, data capacity and battery power.

The Launch of i-mode
Almost a year had passed since Ohboshi had taken the decision to develop the new mobile data communication service, and pressure was mounting on him to perform. Although NTT DoCoMo had managed to maintain its position as the largest mobile telecom carrier in Japan, the cost of developing the new data service was taking its toll on Ohboshi‘s credibility and threatening the financial stability of the company. Colleagues peering in from outside Enoki‘s group were confounded by the project. ―Why were we wasting our time and resources on unproven Internet phones, instead of concentrating on the still-growing, regular voicebased communication services?‖ they wondered. By late 1998, opposition to ‗Volume to Value‘ was growing and Ohboshi was once again under fire. Enoki and his team finally launched the new service as ‗i-mode‘ on 22 February 1999 – the ‗i‘ representing ‗interactive‘, ‗Internet‘ and the pronoun ‗I‘. Looking at the phones, a user would notice little difference from the latest models, except for a slightly larger liquid crystal display and the central feature: the i-mode button. This connected users to the Internet, where they could send and receive e-mail, access sport scores and weather, read the news, and download pages from the web. The new i-mode handsets were priced from ¥35,900 to ¥42,800, about 25% more than regular phones (see Exhibit 15 for comparison with other goods/services). Users were charged ¥300 per month to access the i-mode network, and another ¥100 to ¥300 to access any of the subscription-only sites. Unlike regular mobile services, users were charged by the volume of data transmitted to their mobile phones rather than the length of time on the network. For instance, it would cost ¥0.3 per packet transmitted, and ¥4.2 to send (¥2.1 to receive) an email of up to 250 characters. Data transmission over mobile phones would become increasingly important for DoCoMo‘s bottom line: as revenue from voice calls continued to fall — from an average of

$100/subscriber per month in 1997 to $65 in 2001 — data revenue amounting to an average of $17 per subscriber/month would increasingly fill the gap. Initially 67 content providers participated in the new service, with sites ranging from banking to Karaoke.27 In the days that followed, dozens of ―unofficial‖ sites sprang up, even though they were excluded from DoCoMo‘s official portal. A venture company developed a search engine for unofficial sites just 11 days after the launch of the new service as their number reached 190 (twice as many as i-mode official sites) within two months. i-mode was aggressively promoted through DoCoMo‘s nationwide network of shops. A howto book on i-mode was also published, followed by over 100 books and magazines within a year. The number of subscribers exploded reaching Natsuno‘s ―critical mass‖ of 1 million users by August 1999 (Exhibit 16).30 By March 2001, i-mode subscribers reached 21.7 million (Exhibit 17), and revenues from packet transmission services increased from ¥295 million to ¥38.5 billion within a year after launch (Exhibit 18).31 i-mode also contributed to an increase in revenue from regular voice services, even as price competition drove down average monthly revenue per subscriber to ¥7,770 in March 2001.32 In addition, the important customer churn rate began to drop from 1.97 in FY1998 to 1.39 in FY2001, while DoCoMo‘s market share in the cellular market climbed to 59.1% in March 2001.

Playing Catch-up
Two months after i-mode‘s extraordinary launch, two competitors, DDI Cellular and IDO, announced their own mobile data communication services, called ‗EZ Web‘ and ‗EZ Access‘ respectively. Similar to i-mode, customers could subscribe to their services to access the Internet via their mobile phones.33 However, with an eye towards future markets abroad, DDI and IDO asked their content providers to code their pages in HDML (Handheld Device Markup Language) used for the Wireless Access Protocol (WAP). Unsurprisingly, due to the costs and difficulties in transforming existing HTML-based Internet websites to EZ Web sites based on HDML, only a handful of content providers were willing to participate in the new service, driving DDI Cellular and IDO to purchase content until the number of subscribers was high enough for content providers to bear such costs voluntarily. In 2000, the two carriers merged to create ‗AU (access to you)‘. Although the number of DDI and IDO subscribers was much smaller than DoCoMo‘s i-mode subscribers, they still remained competitive with 6.7 million subscribers in 2001. DoCoMo‘s other main rival, J-Phone responded to i-mode‘s success by concentrating on improving transmission quality and adding content to its existing service (J-Sky Web), and upgrading its J-Sky service so that users could send and receive large e-mail messages (3,000 characters each) and view Internet content.35 As with i-mode and EZ Web, all official JPhone sites were accessible via the J-Phone portal and classified into nine categories. By 2001, the new J-Sky service continued to attract many new – particularly adolescent customers, totaling 6.2 million subscribers in March 2001.

Without a Net
As its competitors played catch-up, DoCoMo continued to power ahead in its quest for imode dominance in Japan. In March 1999, a month after the launch of i-mode, it formed a strategic alliance with Sun Microsystems. Through the partnership, Sun and DoCoMo developed i-appli, a new i-mode application platform that allowed users to run a wider variety

of programs, from video games to online financial services on their mobile phones. A similar strategic partnership with Symbian, a UK-based wireless operating system company, led to the development of a new operating system adaptable to both PCs and mobile phones. On the content side, in the two years after launching i-mode, DoCoMo struck a number of partnerships with new content providers, ranging from Japan Net Bank (the first Internet bank in Japan) and Playstation.com, to AOL and Walt Disney. Furthermore, i-mode pioneered socalled machine-to-machine or M2M communications that allow i-mode users to purchase soft drinks and other sundries from Japan‘s huge network of vending machines. A joint venture with Dentsu, the largest advertising agency in Japan, led to the introduction of advertisements on i-mode, thereby providing a new source of revenue and attracting new content providers to the network. Through these and other partnerships the i-mode network swelled to 42,720 sites (1,620 official and 41,100 unofficial) by March 2001. Looking into the near future, DoCoMo had great hopes for entering the European and American markets and establishing i-mode as a global standard. In recent years, the Japanese mobile giant had been building its equity stakes in various foreign carriers, as well as applying for 3G licenses in markets inside and outside of Japan. In January 2001, while NTT DoCoMo was announcing plans to introduce i-mode in Europe a number of crucial questions needed answers. Were i-mode and its success easily transferable outside of Japan? Could DoCoMo make it work outside of Japan and should it use the same strategy? Despite i-mode‘s runaway success, DoCoMo faced a number of key domestic challenges. Its capital expenditures continued to soar as it built its new 3G services. Network congestion and interoperability between newer mobiles and the i-mode system continued to plague the company. In March 2001, under intense political pressure, DoCoMo was forced to reduce interconnection fees to other mobile phone operators. And with Vodafone‘s acquisition of a controlling stake in J-Phone, DoCoMo‘s guaranteed preeminence in the Japanese market came under an increasingly dark cloud. How sustainable was NTT DoCoMo‘s advantage and what should its future moves be? Keiji Tachikawa, Ohboshi‘s successor, believed that NTT DoCoMo‘s future was bright. In the three years since the launch of i-mode, DoCoMo had become the only company to make money out of the mobile Internet. Its net income continued to rise to an all-time high of ¥365.5 billion in March 2001, and its market capitalization far exceeded its parent company, NTT. In the fall of 2001, DoCoMo launched FOMA (―freedom of multimedia access‖), the world‘s first 3G mobile network capable of video-telephony and the use of data and voice services simultaneously) while other promised 3G initiatives around the world languished. As Tachikawa said, ―Anything mobile in society is a business opportunity for NTT DoCoMo‖. Maybe Mr. Ohboshi can finally get a good night‘s sleep

Exhibit 1 Number of Regular Mobile Phone/PHS Subscribers in Japan (in million)
Mobile phones PHS Total (Reference) Pagers Fixed-line Population Source: Mar90 0.49 0.49 4.25 123.61 Mar91 0.87 0.87 5.08 54.48 Mar92 1.38 1.38 5.91 56.21 Mar93 1.17 1.71 6.69 57.60 Mar94 2.13 2.13 8.06 58.78 Mar95 4.33 4.33 9.35 59.88 125.57 Mar96 10.20 1.51 11.71 10.61 61.04 125.59 Mar97 20.88 6.03 26.91 10.07 61.46 125.87 Mar98 31.53 6.73 38.25 7.12 60.38 126.22 Jan-99 39.79 5.86 45.64 4.27 N/A 126.45

Ministry of Public Management, Home Affairs, Post and Telecommunications (MPHPT), Telecommunication Carriers Association (TCA), Statistics Bureau and Statistics Centre.

Exhibit 2 Development of Regular Mobile Phones in Japan Year 1979 1985 1987 1989 1991 1994 1995 1996 1997 Height 140 190 120 175 140 143 140 130 127 Width 50 55 42 42 47 49 42 41 40 Thickness 210 220 180 77 26 29 26 23 18 Weight 2,400 3,000 900 640 220 185 155 94 79 Battery Life N/A 8 6 9 13 20 150 170 220

Exhibit 3 Mobile Phone Rates

Exhibit 4 Wireless Telecommunication Carriers in Japan
(as of January 1999) J-Phone group TuKa 1994 1994 5.75 2.82 14.41 7.08 PDC PDC

Year of founding Subscribers (m) Market share (%) System

NTT DoCoMo 1979 22.89 57.53 PDC

DDI Cellular 1990 5.09 12.79 TACS (Analog) PDC CdmaOne

IDO 1988 3.24 8.14 NTT (Analog) TACS (Analog) PDC CdmaOne 800 MHz

800 MHz Frequency Operational region 800 MHz Nationwide Nationwide -excluding Kanto* and Tokai* DDI Pocket PHS operations Major NTT Personal No Toyota No No Nissan 1.5 GHz Nationwide 1.5 GHz Kanto* Kansai* Tokai*

Kanto* Tokai*

DDI NTT shareholders Kyocera Japan Railways companies Vodafone Airtouch Hitachi DDI Electric utility Japan Telecom

British Telecom

Motorola

Sony

Note: The underlined shareholders are fixed-line telecom carriers or telecom equipment suppliers. Source: Company annual reports, Telecommunication Carriers Association (TCA), Goldman Sachs. *: Kanto: Tokyo area; Tokai: Nagoya area; Kansai: Osaka area

Exhibit 5 Average Monthly Revenue and Average Monthly Minute of Use per User
FY1995 19,720 172 1.18% FY1996 15,930 170 1.20% FY1997 12,570 158 1.66% FY1998 10,800 155 1.97%

Average monthly revenue per user (Yen) Average monthly minute use per user (minutes) Churn rate Source: NTT DoCoMo.

Exhibit 6 Internet Users and the Number of Commercial (b2c) Websites in Japan
Dec-96 N/A 3.3% N/A 2,966 N/A Dec-97 11.55 6.4% N/A 8,245 N/A Dec-98 16.94 11.0% 32.4% 13,926 N/A Dec-99 27.06 19.1% 42.5% 21,634 336 Dec-00 47.08 34.0% 58.9% N/A 770

Internet users Penetration rate in Japan Penetration rate in US Commercial websites B2C eCommerce market (billion yen)

Source: MPHPT, NUA, Nomura Research Institute, Accenture.

Exhibit 7 Capital Expenditure by Carrier in Japan
(billion yen) FY98 1,727.9 66.5 65.6 118.2 1,978.2 845.9 137.6 166.1 42.8 61.1 1,253.5 3,231.7

Fixed Line NTT DDI Japan Telecom KDD Fixed Line subtotal Mobile NTT DoCoMo DDI Cellular IDO J-Phone Tu-Ka DDI Pocket (PHS) Mobile subtotal Total Note:

FY96 1,991.2 59.7 54.2 67.9 2,173.0 733.6 197.5 119.5 181.7 84.1 76.8 1,393.2 3,566.1

FY97 1,886.9 93.4 84.6 95.2 2,160.1 728.7 143.5 115.4 182.7 57.6 99.6 1,327.5 3,487.6

Financial Year (FY) denotes the year from April to March of next year.

Source: Morgan Stanley Dean Witter (MSDW).