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Business

In bungling iPhone strategy, Docomo follows parent's footsteps

Docomo released Apple's iPhone 6 and iPhone 6 Plus in September.

TOKYO -- Humble pie was on the menu Friday for NTT Docomo President Kaoru Kato when the company slashed its earnings forecast for the year ending March 2015.

     Japan's largest wireless carrier expected a rush of new subscribers after it finally began offering the Apple iPhone last fall. But that did not happen, and on Friday it said it now expects consolidated operating profit to total just 630 billion yen ($5.7 billion).

     That is 120 billion yen lower than the original forecast, 23% less than last year, and the lowest amount in 15 years.

     What's more, it places Docomo at the bottom for the first time among Japan's three big wireless carriers.

     Business miscalculations are the immediate cause, but Docomo's problems may also be systemic. In the company's inability to respond nimbly to changing circumstances, it is behaving like parent NTT did back when it operated as a public telephone company.

     For the April-September half, Docomo's sales dipped 1% to 2.17 trillion yen and net profit slipped 14% to 259.5 billion yen.

     That was not supposed to happen. The introduction of Apple smartphones in the fall of 2013 was supposed to limit the loss of subscribers to other carriers and begin to bear full fruit this fiscal year.

     Docomo completely misjudged the effect of introducing a flat-rate plan in June, and Kato admitted this was the main reason profits have declined.

     The flat-rate plan was meant to halt the decline in talk-time revenues, which have been falling with the spread of smartphone applications that allow people to talk for free. But the new plan had unintended consequences. Heavy users were happy to switch because it gives them unlimited talk time for 2,700 yen a month, which for them is a bargain. But the average Docomo subscriber was paying 1,190 yen a month, so for them the plan represents a rate hike. Starting in August, Docomo stopped accepting contracts for the old plans and forced the new plan on subscribers when upgrading their phones.

     Docomo expected to offset a loss in revenue from heavy users with a rush of new subscribers eager to get their hands on Docomo iPhones. That model proved faulty. KDDI, which operates the au wireless service, was worried at first about a loss of customers, but it's clear that Docomo's efforts have had little impact: 90% of KDDI subscribers are renewing when their two-year contracts expire, the company said Friday.

     Both KDDI and SoftBank Mobile are following Docomo's lead and introducing flat-rate schemes, but they are acting more flexibly. For example, SoftBank planned to stop accepting contracts for its old plans at the end of August, but it saw Docomo's troubles and decided to hold off until the end of November.

     Executives from parent company NTT look at Docomo and say it has no business sense. NTT itself faced the same criticism as it watched its revenues from fixed-line phones plummet over many years, but now it is working hard to sell services centered around cloud computing.

     Bracing for dismal earnings, Docomo should have kept costs down. But in reality, its expenses climbed 5% on the year in April-September. Parent NTT looks on and sees its subsidiary behaving like the old public phone company.

     Docomo had been in discussions with Apple in 2008 in an effort to land the iPhone, but ended up being scooped by SoftBank. And it has continued to make missteps, like the so-called "two-top strategy" of promoting the smartphones of only two manufacturers.

     Docomo used to dominate Japan's mobile phone market. But the 55% share it boasted in 2006 when SoftBank entered the fray has now dropped to 45% and it can no longer rest easy on the throne.

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