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Copyright © 2004, Emerald Group Publishing Limited
DOes this COmpany need to make MOre write-offs?
A regular column on the information industries
DOes this COmpany need to make MOre write-offs?
There is nothing new about companies seeking to expand overseas, although their motives for so doing can be contradictory. On the one hand, for example, the motivation may be to introduce a successful product into overseas markets, while on the other, it may be an attempt to distract investors’ attention from poor trading results in the domestic market. In the former case, if the company is also very large, has access to huge reserves of cash and is renowned for its technical expertise, the results should be predictably positive, so why, one may reasonably ask, has DoCoMo been obliged to write down the value of its overseas investments, and has the process come to an end?
During the late 1990s, DoCoMo, majority-owned by parent NTT, was busy building on its initial success in developing 2G cellular services in Japan. For this purpose it used primarily the technology known as personal digital cellular (PDC) on the 800 and 1,500MHz bands, rather than either GSM or CDMA as used almost everywhere else in the world, but the domestic market was sufficiently large, and growing at such a pace, that this was not considered to be a particular drawback. As for the introduction of data over cellular networks, here DoCoMo was the world leader even though, once again, it chose to go its own way, eschewing WAP/GPRS and cdma2000 1xRTT in favour of its home-grown i-mode technology. That i-mode, a play on the Japanese word for “anywhere” – the “I” stands for “information” – has been a monumental success cannot be in doubt, as subscriber figures reveal. Commencing on 22 February 1999, it acquired subscribers as follows: 8 August 1999=1 million; 15 March 2000=5 million; 6 August 2000= 10 million; 22 November 2000=15 million; 4 March 2001=20 million; 1 July 2001= 25 million; 24 December 2001=30 million; 20 September 2002=35 million; 30 October 2003=40 million. Although the quarterly growth rate has inevitably slowed during the past two years, figures on this scale indicate that i-mode has only ever been exceeded in terms of a consumer purchase by the Sony Walkman. In May 2002, DoCoMo launched the 504 series of handsets, capable of infrared connectivity and data transmission at 28.8Kbps. This was replaced by the 505 series, including the SH505i – incorporating a 1.3 megapixel camera – and F505i featuring fingerprint authentication. Clearly, here is a technology which should excite overseas operators.
However, the prospects for exporting the i-mode model were not the only thing on the minds of DoCoMo’s management. By the end of the 1990s, agreement had been reached on the technological underpinnings of International Mobile Telecommunications-2000 (IMT-2000), the blueprint for what is now universally known as 3G – a packet-based technology permitting data transmission speeds of up to 3mbps. DoCoMo had decided to throw in its lot with the European Union (EU) and press for the use of Wideband CDMA (W-CDMA) – known in the EU as the universal mobile telecommunications system (UMTS) and in Japan as freedom of mobile multimedia access (FOMA) – at a time when the US was undecided whether to support W-CDMA or cdma2000 1xEV-DO. One obvious benefit of this strategy was that DoCoMo would at last be able to sign up for roaming rights throughout the rest of the world. Furthermore, as the first operator to launch its W-CDMA service (in October 2001), it would be able to have a major say in the way that the technology developed.
Commencing in 1997, DoCoMo invested heavily in the formation of a strategic community which would support its preferred technologies (Kodama, 2002). However, this was an investment of time and effort and relied entirely on the goodwill of DoCoMo’s partners. The more difficult issue was whether to promote i-mode and W-CDMA by taking stakes in overseas operators with a view to influencing their strategies, since this would be a completely new way to proceed. In the event, DoCoMo decided to take this route via its Global Business Division. It justified this in the Annual Report 2002 (DoCoMo, 2002, p. 43) as providing “the ability to significantly influence the operating or financial policies of the investee”. It was stated that this would raise the market value both of DoCoMo and of its investees. Total investment by 31 March 2002 equalled roughly ¥1,900 billion ($15.8 billion) of which the majority (almost $10 billion) had been spent in January 2001 on a minority stake in AT&T Wireless. It is significant that, because it was unlisted at the time, and hence prevented from using its own shares to engage in share swaps, all of DoCoMo’s major overseas investments had to be financed with cash. The destination of that money can be seen in Table I which indicates the stakes in overseas operators as well as the dates of introduction of i-mode equivalent services, in some cases by affiliates in which DoCoMo has no financial stake.
However, as of 31 March 2002, the total carrying value of the investments was only ¥997 billion. The Annual Report 2002 (DoCoMo, 2002, p. 34) explains the methodology in use for amortization. Under the rules then being applied, DoCoMo’s operating results revealed (DoCoMo, 2002, p. 35), under the heading “equity in net losses of affiliates”, a negative figure of ¥1.7 billion for the financial year 1999 (ending 31 March 2000), a negative figure of ¥17.8 billion for the financial year 2000 and a negative figure of ¥644.0 billion ($4.7 billion) for the financial year 2001. The latter constituted gross impairment charges of ¥664.5 billion attributable to the hived-off AT&T Wireless, ¥320.5 billion attributable to KPN Mobile, ¥36.5 billion attributable to KG Telecom and ¥56.4 billion attributable to Hutchison 3G UK – equivalent gross to roughly $8.4 billion – set off in total by deferred taxes of ¥453.2 billion ($3.4 billion). The net impairment therefore constituted two-thirds of the carrying value. Nevertheless, the first half of financial year 2003 proved to be no better, with DoCoMo obliged to take a further impairment charge of ¥573 billion ($4.7 billion) in November 2003.
In December 2002, faced by a potential investor revolt if it continued to pour money into its malfunctioning affiliates, DoCoMo turned down a request from KPN Mobile to participate in a debt-for-equity swap with its parent at a cost to DoCoMo of $2.4 billion, and, as a result, its stake fell to only 2.2 per cent. Despite this, in April 2003, DoCoMo agreed to provide its pro-rata share of the £1 billion refinancing of Hutchison 3G UK, amounting to $315 million. Overall, its position appears to be best expressed as “cautiously optimistic” that things will improve during 2004, and it continues to examine the possibilities for further investments.
The fact that DoCoMo chose to take fairly modest minority stakes when buying overseas has struck many commentators as a foolish strategy – it was not a great success for BT either – although it has to be said in DoCoMo’s defence that it was not in a position to pay cash for the whole of AT&T Wireless, nor would Hutchison, for example, have tolerated a majority stakeholder. In addition, parent NTT would have been able to prevent anything that appeared to be too audacious. Interestingly, in relation to the AT&T Wireless stake, Lex first noted that DoCoMo needed to move out of the domestic market because 2G was maturing and that this would present an opportunity to influence overseas operators’ choices of 2.5 and 3G technology, only to backtrack almost immediately on the grounds that DoCoMo could have sold its technology, and taken royalties, without an equity stake (Lex, 2000a, Lex, 2000b). For the time being, the position re i-mode and W-CDMA remains unclear. So far, the success of i-mode in Japan has not been replicated in Europe – the number of subscribers is typically only several hundred thousand in each country – although it may yet take off. It may be noted that DoCoMo is not linked (as yet) with either Vodafone, Deutsche Telekom, Orange or BT, all of which have their own portals, so its approach to i-mode in Europe has arguably been too low key. As for 3G, the exclusive use of W-CDMA in Europe was determined some time ago, so DoCoMo no longer has much to gain in pushing for its introduction.
In June 2003, DoCoMo apologised sincerely for the massive write-offs – by then amounting to the vast bulk of its entire overseas investments – and for “causing shareholders to worry”. The unhappy experience has largely driven DoCoMo back into its domestic market, but with telecoms markets improving, i-mode established overseas if not exactly thriving and 3G launches on the increase, the worst is undoubtedly over and DoCoMo may even begin to find its remaining overseas interests contributing positively to its balance sheet by the end of 2004. If so, its massive cash flow may even induce it to look overseas once again, but at Asia rather than Europe.
Peter CurwenVisiting Professor of Telecommunications, Strathclyde Business School, Glasgow, UK.E-mail: email@example.com
DoCoMo (2002), DoCoMo Annual Report, DoCoMo, Tokyo
Kodama, M. (2002), “The world’s first 3G mobile phone service: a case study of innovation”, Journal of General Management, Vol. 28 No. 2, pp. 43–57
Lex (2000a), “Lex DoCoMo/AT&T Wireless”, Financial Times, 23 November
Lex (2000b), “DoCoMo/AT&T”, Financial Times, 1 December