AOL/NTT DoCoMo in Wireless Partnership

Japan's NTT DoCoMo confirmed a partnership with AOL this morning. The deal should bring DoCoMo's wildly successful wireless Internet service, i-mode, to the United States, where it will face a completely different market. Nevertheless, if the joint venture between the companies can add a wireless carrier to the mix, there may be a new, formidable player in town.

By Chris Rugaber (TMF RFK)
September 22, 2000

Leading Japanese wireless service provider NTT DoCoMo (Nasdaq: NTDMY) confirmed today that it has reached a potentially powerful alliance with America Online (NYSE: AOL) for services in both Japan and the United States. The agreement gives AOL a heavy-hitting partner for its Japanese operations, which have been lagging behind Yahoo!'s (Nasdaq: YHOO), and would give DoCoMo its first crack at bringing its popular i-mode wireless service to the United States.

According to reports from Reuters and The Financial Times, DoCoMo will take a 40% stake in AOL's Japan division, and the companies will form a joint venture in the U.S. The deal also makes it more likely that DoCoMo will reach a partnership with a U.S. wireless carrier, with the joint venture being formed by SBC Communications (NYSE: SBC) and BellSouth (NYSE: BLS) the odds-on favorite. Rumors of DoCoMo's dealings with AOL and SBC/BellSouth have been floating around since last month.

DoCoMo's next move
On Thursday, DoCoMo's president Keiji Tachikawa stated at a press conference that the company intends to form at least one alliance with a U.S. wireless carrier, and cited the SBC/BellSouth operation as a candidate. Tachikawa ruled out a partnership with Verizon Communications (NYSE: VZ) because the two companies' wireless transmission standards are not compatible.

DoCoMo's alliance with AOL should make it more attractive to U.S. carriers, given the range of AOL's content, especially if its merger with Time Warner (NYSE: TWX) goes through. CNN news video on your mobile phone or handheld computer is one obvious possibility, as well as content from Time and other publications.

Can i-mode travel?
However, investors should retain some skepticism. While i-mode has been successful in Japan, the main question raised by its partnership with a company like AOL is whether it can duplicate that success elsewhere.

For observers of and participants in the wireless industry, i-mode's popularity has been the subject of much fascination. While European carriers have had mixed results with wireless Internet services, and U.S. carriers are just getting started with limited data offerings, i-mode has taken off like a rocket, attracting over 12 million subscribers since its launch in February 1999. Almost 95% of DoCoMo's wireless customers sign up for i-mode, which adds 40,000 to 50,000 new customers every day. The service is a lucrative one for the company, which gets about $25 per month in additional subscriber fees from the service.

However, much of i-mode's success can be attributed to many cultural factors specific to Japan. For example, most i-mode customers -- some estimates are as high as 85% -- had little or no experience with Internet access before using the service. Their first e-mail address may have been the one for their mobile phone. U.S. Web surfers, accustomed to high speeds and graphic-rich content, may be a harder sell.

In addition, wireline phone services and Internet access are more expensive in Japan than in the U.S. And thanks to Japan's smaller size and relatively compact population distribution, DoCoMo's wireless service coverage is more comprehensive than that of most U.S. carriers. Finally, wireless phone use is much more widespread, particularly in cities such as Tokyo, where penetration rates may be as high as 80%. In short, the Japanese market was a very fertile one for DoCoMo, much more so than the U.S.

In fact, other wireless data transmission standards are also relatively popular in Japan. According to CMP Media's InformationWeek, WAP (wireless application protocol) even has 3.5 million Japanese users, demonstrating that mobile phones are simply a much more common way to access the 'Net in Japan, i-mode or not. (For more on WAP and other wireless terms, please check out this news story, and The Motley Fool Research Wireless Web report).

A wireless powerhouse?
Nevertheless, a DoCoMo/AOL alliance will certainly be interesting to watch, particularly if a deal with a wireless carrier is added to the mix. Should the SBC/BellSouth wireless venture join the party, we could see a real wireless provider powerhouse. Such an alliance would have a national footprint, almost 18 million subscribers (second in the U.S. behind Verizon), plenty of content offerings, and the one technology for wireless Internet access that has achieved mass acceptance at least somewhere in the world. Its success, or lack thereof, would tell us a lot about the future of wireless Web services.

Your Turn:
What do you think of the NTT DoCoMo deal? What are i-mode's chances in the U.S.? Join us on the Wireless World discussion board.

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