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Docomo Buyout Shows Dumb Pipes No Longer Cut It

Docomo Buyout Shows Dumb Pipes No Longer Cut It

Saturday, 3 October, 2020 - 05:15

Nippon Telegraph & Telephone Corp.’s plan to buy out its NTT Docomo Inc. wireless unit would mark the end of an era for a company once hailed as the world’s leading mobile operator. It also signals a stark new reality in the telco business: that mere connectivity isn’t enough.

Docomo said its board will meet Tuesday to consider NTT’s proposal. That seems moot: The parent already owns 66% of the subsidiary. It’s likely to offer 30% more than the share price at yesterday’s close, the Nikkei newspaper reported earlier. That would be at the upper end of average premiums globally for telco deals valued at more than $5 billion in the past five years, according to data compiled by Bloomberg. Still, it’s worth noting that prior to the news Docomo had fallen 20% below its March high and is well below its 50-, 90- and 200-day averages.

This month’s appointment of Yoshihide Suga as Japanese prime minister to succeed Shinzo Abe may have been a spur. Suga had been an outspoken critic of mobile data pricing before taking over the top job, and now forcing down tariffs has become an easy policy win. Going private would take Docomo out of the public spotlight as it renovates its business model and weathers that storm.

Docomo’s struggle was apparent even before Suga rose to the top. More than two decades ago, it amazed the world with the release of i-Mode, a mobile internet service that allowed Japanese consumers to read email and surf the web during their morning commute. Apple Inc.’s first iPhone wouldn’t arrive for another eight years.

I-Mode helped Docomo post annual revenue growth reaching as much as 26% and operating income gains of 42%, cementing its place as Japan’s No. 1 wireless carrier. While the company has held onto that position, it has done so by cutting average revenue per user below levels at KDDI Corp. or Masayoshi Son’s SoftBank Corp., the first telco in Japan to sell the iPhone.

Price wars with those rivals have hurt, even amid accusations that rates remain too high by global comparison. Docomo has maintained a respectable operating margin of around 20% in recent years (it dropped to 18.4% for the year to March 30 amid the Covid pandemic). Revenue and operating income growth have slowed to a crawl, though, lagging behind competitors.

The reasons can be seen in its sales breakdown, with 80% still coming from mobile services. By comparison, SoftBank owns Yahoo Japan (via a subsidiary) and gets additional revenue from fixed-line businesses. Consumer and enterprise wireless service accounts for only about half of SoftBank’s sales. KDDI isn’t quite as diversified, yet it’s able to lean a little more on non-telecom businesses and is pushing its so-called “life design” services that include e-commerce, personal finance, entertainment and education.

Then there’s Rakuten Inc., which recently entered the mobile business and promises to drive prices down even further. It’s doubtful whether the e-commerce company intends to make much profit from its wireless unit, instead using it as a loss-leader to drive online retail and related services.

That leaves Docomo looking pedestrian as a purveyor of mobile connectivity, aka dumb pipes, like the former state-owned incumbent that it is. With the onerous costs of a 5G rollout looming and a price war set to escalate, the safest place may be back under the protection of its majority owner. Investors need not worry about NTT having to shield its subsidiary from public markets. A combined entity could leverage procurement, better integrate infrastructure and services, and streamline its balance sheet.

Once the business is stabilized and profit growth returns, look for NTT to be the biggest winner from a future Docomo initial public offering.


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