The Cost of Being Big in Japan

Geographically, Japan is small. But there's nothing small about its market for wireless services.

In probably the most competitive market for mobile services in the world, Japan's leading carrier, NTT DoCoMo (NYSE: DCM), showed in its latest earnings report that being the biggest isn't necessarily the best.

DoCoMo's net income in its fiscal third quarter rose 38% to $1.22 billion, thanks in part to efforts to cut costs, but revenue fell slightly to $11.34 billion. In the first nine months of its fiscal year, revenue dropped 2.1% to $32.97 billion and operating income dropped 7.7% to $5.85 billion.

With local number portability introduced late in 2006, it is easier for Japanese to change providers now. And cost pressures from rivals KDDI and Softbank has led DoCoMo to introduce new low-cost service plans. The result has been a drop in the monthly average revenue per user from $63.29 to $60.57 in the trailing nine-month period.

The Japanese mobile market has undergone a rash of changes in a very short time, as many companies attempt to enter the lucrative market. But handset leader Nokia (NYSE: NOK) has always struggled to match local tastes for phone styles. Global carrier Vodafone (NYSE: VOD) entered but soon pulled out of the market, selling its network operations to Softbank in 2006. And now Disney (NYSE: DIS) has teamed up with Softbank to offer branded mobile phone service on its local network.

To stay competitive, DoCoMo continues to roll out advanced services such as mobile payment capabilities at McDonald's (NYSE: MCD) and Coca-Cola (NYSE: KO) vending machines. In the past week, DoCoMo has struck a new partnership with Google (Nasdaq: GOOG) to bring its search applications to its 51 million mobile subscribers.

The new features as well as new low-cost plans are aimed at retaining increasingly hard-to-keep customers. On this end, the company has improved monthly churn down to a 0.74% level in the latest quarter. This is a noticeable tick down from the 0.85% level over the previous nine months, which the company blamed on the effects of mobile number portability.

Thankfully, being big often means there's plenty of room to trim expenses and keep profits up. If DoCoMo can successfully innovate while keeping operations in check, the leader should continue to hold its place.

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