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KDDI Makes Waves With 1x

Light Reading
LR Mobile News Analysis
Light Reading
6/25/2002

KDDI Corp. has gleaned 1 million subscribers for its wannabe 3G service, CDMA2000 1xRTT, in just three months (see 1M Use KDDI's 3G) -- nearly 10 times more than archrival NTT DoCoMo Inc.'s (NYSE: DCM) FOMA service and in something less than half the time.

An even more impressive statistic is that about 400,000 of the 1 million are new subscribers, not customers upgrading from KDDI's existing CDMAOne service, according to UBS Warburg.

The carrier was in need of the boost, according to West LB Japan telecom analyst Naomi Iida, who believes the service has rescued the company. KDDI had a miserable time in its last financial year, averaging a maximum 8 percent increase in new subscriber share (the proportion of new subscribers for each operator) compared with about 30 percent for J-Phone Co. Ltd. and more than 60 percent for DoCoMo.

Iida adds that the carrier's investor relations department is upbeat about the latest figures. "I talked to KDDI investor relations [June 19] and they said the timing to hit 1 million was actually a little bit earlier than they expected."

Even so, there are doubts both within the operator and from analysts as to whether KDDI can hit its magic target of 7 million subs by March 2003. "It seems the pace is a little bit slow compared to our target of 7 million [by March 2003,]" says Haruhiko Maede, KDDI's media relations advisor, reacting to the figures.

But compared with FOMA's fumbling start, KDDI's 1x service (offering data rates of up to 144 kbit/s if you take the marketing literature seriously) has had a great launch. Subscriber numbers climbed from 334,100 on April 30 to 695,700 by May 31 and 1 million in late June.

Several factors have contributed to its early success. One noticeable advantage the service has had over DoCoMo's FOMA offer is the number of handsets available -- six in total, compared with the three available for FOMA subscribers. The Casio Computer Co. model with geographic positioning (GPS) capabilities and a camera has accounted for about half the sales so far, according to KDDI. In addition, the 1xRTT service is already available in 43 municipalities in Japan, is backwards compatible with CDMAOne, and should reach 90 percent population coverage by the end of this year.

And the terminals work well, lasting as long as the standard 2G PDC models, another plus point against the FOMA handsets, which are quick to eat up their battery power. And they are relatively cheap, at about ¥14,000 to ¥16,000 (US$115 to $132).

These factors, coupled with GPS-based applications, are attracting customers in the vital teens-to-thirtysomething age brackets, according to UBS Warburg in Tokyo, where analysts believe this will help KDDI get a step closer to its projected ¥7,900 ($65) monthly revenue-per-user target.

The company's capital expenditure looks healthy too, with UBS estimating that KDDI will have spent about ¥480 billion ($3.95 billion) in the four years to 2004 as it upgrades to 1x/EV-DO, less than half the ¥1 trillion-plus DoCoMo will have spent.

But despite the encouraging start, it's not all good news and kudos. During the past month analysts such as Mark Berman of Credit Suisse First Boston Corp. (CSFB) have pronounced the launch a success. Yet Berman told Unstrung he believes the 7 million target figure to be "a ridiculous aim." CSFB reckons 2 to 3 million is realistic, while UBS thinks KDDI will hit about 4 million by March 2003. Most optimistically, West LB pegs it at between 4 and 5 million.

One source, who wished to remain anonymous, says KDDI "always comes out with aggressive plans but never meets them. Call me a skeptic."

One reason why that target may look a little fanciful is that KDDI's rivals are fighting back. DoCoMo has just released its own handset with onboard camera, while J-Phone has issued improved models, again with camera functionality, for its sha-mail customers.

KDDI counters that an increasing lack of CDMAOne terminals and more new CDMA2000 handsets later this year will add choice and spur upgrades. Meanwhile, the company suggests it will continue to heavily subsidize its terminals to keep prices down. UBS believes such subsidies reach up to ¥45,000 ($370) per phone.

While KDDI will not outline its terminal strategy, Unstrung has heard the carrier plans to double its handset offering. This could include two new low-end phones, a couple of high-end models, and the release of three camera-phones that have video capabilities as well as the still picture function. "This should invite subscriber growth," states West LB's Iida.

— Paul Kallender, special to Unstrung
http://www.unstrung.com

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