The third-generation technology debate is beginning to have a negative impact on the valuation of the
world’s largest wireless carrier, Japan’s NTT Mobile Communications, which plans to become the first carrier in the
world to deploy wideband Code Division Multiple Access technology.
Dresdner Kleinwort Benson downgraded
NTT DoCoMo from a “buy” to “hold” status Jan. 18, saying the company’s risk profile is
increasing because of a delay in the rollout of W-CDMA technology, which DoCoMo plans to offer commercially by
2001. Shinji Moriyuki, analyst with Daiwa Institute of Research in Japan, put DoCoMo on “hold” status in
November. He agreed the company’s risk profile is increasing because of the uncertainty surrounding 3G
technology.
The International Telecommunication Union is looking to set a worldwide 3G standard capable of
delivering high data speeds, Internet-friendly handsets and full-motion video by March. Sixteen different radio
transmission technologies-the majority incorporating some form of CDMA technology-were submitted to the ITU from
regional standards bodies and other entities. But the ITU in December announced it would likely halt any work on
CDMA-based proposals unless intellectual-property-right disputes surrounding the two main CDMA proposals were
resolved by the end of 1998. Both Qualcomm Inc. and L.M. Ericsson claim to hold patents to both W-CDMA
technology-based on GSM technology-and an evolved version of today’s Interim Standard-95 technology called
cdma2000. Qualcomm said it won’t license its IPRs unless one converged CDMA standard is achieved. Ericsson won’t
grant its patents unless full reciprocity is granted and countries around the world are allowed to choose alternative
technologies they want to deploy without being hindered by unequal IPR policies.
The ITU will determine next
week how it should proceed in light of the IPR obstacles. The ITU said it likely will try to give a free hand to technical
experts to proceed without disturbing the IPR issue. Many operators and ITU members want to continue, the standards
body claims, and it doesn’t want to sidetrack the March deadline. However, many operators and manufacturers involved
in the process believe a delay is inevitable given Qualcomm and Ericsson remain deeply divided over the issue of
convergence. Even separating the standardization process from the IPR issues could still mean a drawn-out legal battle
before any carrier could commercially deploy any CDMA-based 3G system.
It is these delays that concern Thomas
Rodes, analyst with Dresdner Kleinwort Benson in Japan. DoCoMo, which raised $18 billion in October in an initial
public offering, plans to deploy 3G equipment in March or April of 2000, but any delay in the standards-setting process
means DoCoMo will be unable to start spending on CDMA infrastructure by then and must continue cell splitting on its
taxed Personal Digital Cellular network to maintain subscriber growth. PDC equipment, now considered obsolete
technology, already has a low return on investment. Excessive spending on more PDC equipment will lower the
company’s free cash flow and raise future depreciation.
“The cost of adding a subscriber will go way
up,” said Rodes. “I’m not sure a lot of people understand the business model. If they truly run out of
capacity, the marginal cost of adding a subscriber is not going to go down. Total new capex spending is going to go
way up.”
And DoCoMo, with more than 20 million customers, cannot push ahead with W-CDMA technology
on its own. Japan’s Ministry of Posts and Telecommunications will not allocate the 2 GHz spectrum needed unless
carriers use technology in compliance with an ITU-chosen standard. DoCoMo plans to use that spectrum to overlay W-
CDMA technology on its existing networks.
And Rodes outlines other risk factors. DoCoMo had planned to relieve
congestion constraints and offset enormous capital expenditures by offering a Personal Handyphone/PDC handset and
pricing it aggressively in the marketplace. But the MPT will not allow the company to price as aggressively as it wants
to, saying the largest wireless operator would obtain an unfair advantage in the market.
“Outside the ITU
process, manufacturers will struggle with commercialization,” said Rodes. “W-CDMA will be wildly
expensive. Whoever rolls out a new network will be the furthest up in terms of knowledge, but economies of scale and
getting the system to work will be difficult.”
Rodes remains bullish on the company as it continues its stellar
subscriber growth. The company’s stock has increased about 20 percent since its IPO.
Kate Lye, analyst with
Warburg Dillon Read in Japan, maintains a “buy” rating on the company, while Goldman Sachs, which
could not be reached for comment, maintains a “strong buy.”
“I’m looking at growth between now
and 2001,” said Lye. “There’s little risk in earnings. Subscribers are growing at a faster rate and stronger
than our expectations … For the longer term, I’m cautious about capex, and I’ve revised it upwards, but no one knows
the price of W-CDMA.”
Lye said DoCoMo claims it only needs six to 12 months to complete a rollout of W-
CDMA technology so it has some leeway if 3G decisions are delayed. She said DoCoMo expects a resolution on the
patent issues this year.
DoCoMo could not be reached for comment.
But Lye believes that if key ITU meetings
in the coming months don’t go well, more analysts will start paying attention to potential risks.
The financial
consequences of the ITU delay could force DoCoMo to take a stance on the chip-rate issue-the main factor preventing
the convergence of W-CDMA technology and cdma2000.
