Thursday, July 31, 2008

NTT DoCoMo - cutting cross-subsidies and raising profits

Subsidy cuts boost DoCoMo profits

NTT DoCoMo yesterday said quarterly operating profits jumped 45 per cent as Japan's largest mobile operator benefited from a reduction of handset subsidies and focused on retaining customers.

Operating profits rose to Y296.5bn ($2.75bn) for the April-June quarter, with the change in the business model to cutting subsidies and selling handsets in instalments more than offsetting a decline in revenue from discount plans. The picture would even out over time, an analyst said.

The new business model DoCoMo and its rivals have adopted involves reducing the handset subsidies they tried to partially pass on through the monthly fees. Instead customers pay more for the handset, popularly through instalments, and have a clearer idea of monthly fees.

The company has had a tough time in its home market as it tries to fend off competition from its smaller rivals KDDI and SoftBank, and has seen its market share shrink to 52 per cent from almost 60 per cent at its peak.

DoCoMo back in April announced a change in strategy to try and retain its clientele through better customer service and improving its image, rather than seeking new clients.

The group reported a reduction in its churn (attrition) rate to 0.51 per cent from 0.85 per cent in the same quarter last year.

"[DoCoMo] had been too focused on the monthly net additions number, which is ridiculous because all new customers are low value, meanwhile, it had very high- value customers marching out the back door," said Neale Anderson, an analyst at HSBC. "There was a belated recognition that this needed to change [in favour of] rebranding and customer care.

"The lower churn number is a positive reflection of that strategy. There has been better execution by DoCoMo in focusing on its existing customers' wants and needs."

The reduction in the churn rate is helped in part by customers needing to sign up for two years to benefit from the discount plans it introduced late last year to compete with its smaller rival SoftBank, which initiated a price war with its so-called "White Plan" in the middle of last year. The introduction of paying for handsets in instalments has helped reinforce this.

However, the discount plans took their toll on revenue, with DoCoMo's sales slipping 1.1 per cent to Y1,170bn. Aggregate average revenue per user dropped to Y5,890 compared with Y6,560 last year. The increase in Arpu for data could not offset the decrease in voice Arpu.

The company maintained its full-year profit forecast of a 2.7 per cent rise in operating profits to Y830bn, on revenues of Y4,768bn.

KDDI said this month its operating profits slid 12 per cent, although the quarter did not include its instalment payments for handsets.

No comments: