Once astounding the world with its success in 1995 and 1996, Personal Handyphone System service in Japan now has taken a turn for the worse.
The number of PHS subscribers has decreased for six straight months since October, sending top executives at all three PHS firms moving toward reorganizing their businesses.
According to Information Gatekeepers Inc., a consulting firm in Boston, Astel Tokyo, the third-largest PHS operator, trimmed its workforce by 30 percent, reduced sales promotion expenditures in April and reshuffled its board of directors. The carrier hopes these measures will enable it to keep its fiscal 1998 losses to about $153.8 million, half the loss it expects for fiscal 1997.
Analysts speculate NTT DoCoMo will take over the operations of NTT Personal Communications Network, the second-largest PHS group in Japan. The NTT DoCoMo group companies took a nonrecurring charge this fiscal year of about $852.7 million for losses associated with NTT Personal. NTT has a 28-percent stake in the NTT Personal group companies, and each NTT DoCoMo firm has about a 47-percent stake in each of the NTT Personal companies.
“The future of NTT Group’s PHS business is still under consideration, mainly by NTT,” said Masami Kawasaki, an NTT DoCoMo spokeswoman. “The merging or transferring of the PHS business is only one possibility out of many choices.”
DDI, the parent company of DDI Pocket Group, raised $288 million in funds from Kyocera to rescue DDI Pocket Group companies. The company announced in late March plans to reorganize its PHS business by slashing sales promotion fees and putting its service expansion plans on hold, said Information Gatekeepers. The company hopes to cut in half its fiscal 1997 capital investment budget, originally $746.2 million, and drive down its high subscriber churn rate.
George Hoffman, analyst with the Yankee Group in Tokyo, said several factors have contributed to PHS service’s downfall. When Japan’s PHS operators launched in 1995, they attracted large volumes of customers by offering service significantly cheaper than cellular service and implying that the service was another form of cellular even though it lacked key features like mobility and coverage. Within two-and-a-half years, PHS customers climbed to 7 million. The carriers’ selling strategy began to backfire, however, as customers experienced dropped calls and discovered their service only could be be used in certain areas.
“PHS operators advertised that PHS would be usable in areas where cellular had no coverage, such as subway platforms and shopping centers,” said Hoffman. “In addition, they advertised that PHS was able to transmit data at 32 kbps compared to the 9.6 kbps max by cellular at the time. However, these characteristics were not delivered until much later. In terms of its service characteristics, PHS had no real differentiation except for pricing.”
Cellular carriers also became more aggressive and creative in their pricing strategies, undermining the perceived value of PHS service. In response, PHS carriers attempted to expand their market shares by giving incentives to retailers that in turn gave free PHS phones to customers in hopes they would subscribe to the service. Though the strategy worked initially, PHS service operators discovered that many of those who signed up for free or at low cost were low- or no-volume users who canceled their contracts easily, said Hoffman. The practice of giving incentives, coupled with the money PHS carriers have invested in constructing base stations around the nation have left a huge deficit for Japan’s PHS carriers.
Japan’s Ministry of Posts and Telecommunications last month offered a rescue measure by lifting a ban that regulated the maximum strength of a signal from base stations. Deregulation will help PHS carriers increase coverage in suburbs and inside buildings. The ministry also decided to allow carriers to use microwave for the trunk network instead of expensive ISDN lines and allow PHS technology for local networks in rural areas.
Jump-starting the Japanese PHS market will take strong initiative from the country’s PHS carriers, say analysts. The Yankee Group sees no significant growth for PHS in Japan for the next five years.
“There needs to be a clear differentiation between cellular and PHS besides just service pricing,” said Hoffman. “At present, this is still lacking.”
As part of the come-back effort, PHS operators are beginning to offer inexpensive pricing plans for specific use patterns, said Hoffman. DDI Pocket introduced a new low-priced service package with a basic monthly charge of $7.35 that allows customers to call only two preregistered numbers.
