Why Japan is several years ahead of Europe in telecoms and broadband?

Eurotechnology report on Japan's telecommunication markets

Briefing at the European Union Embassy following Vodafone’s failure in Japan

and what Europe can do to catch up?

Today (March 23, 2006) I was invited to brief the Technology Attaches of the Embassies of the 25 European Union countries here in Tokyo about the topic “Why Japan is several years ahead of Europe in telecoms and broadband?”, about Japan’s telecommunications sector (both fixed net and wireless) in a one hour presentation + discussion, following Vodafone’s failure in Japan, and sale of Vodafone-Japan to SoftBank.

I had offered several alternative topics and the conference of EU Technology Attaches selected the most provocative title I had offered:

Why Japan is several years ahead of Europe in telecommunications and what Europe can do to catch up

Vodafone KK’s Chairman and former NTT-DoCoMo Vice-President Tsuda, who had worked 34 years at NTT and DoCoMo (and who resigned from his Vodafone-Japan CEO position a few weeks after being head-hunted), said in a recent interview with Bloomberg that “Japan is way ahead in 3G”. – therefore, although this title is clearly provocative, it’s clearly worthwhile examining this question. With the sale of Vodafone KK to SoftBank last week, the timing of this briefing was particularly interesting. My presentation discussed the following questions:

  • Is Japan ahead of Europe in Telecommunications?
  • Why?
  • What is the impact?
  • Is this important?
  • What Europe can do to catch up

Download a pdf-file with the slides of my presentation here (for current (2006) corporate customers, we offer this presentation free of charge (please contact us for your copy), for others the presentation is available for purchase)

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Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Softbank acquires Vodafone Japan with co-investment from Yahoo KK

Softbank acquires Vodafone Japan with co-investment from Yahoo KK

The Deal seals Vodafone’s exit from Japan

Softbank acquires Vodafone Japan in an approx. US$ 15 billion deal

SoftBank and Yahoo-Japan acquired 97.7% of outstanding shares of Vodafone Japan (Vodafone KK) in Japan’s largest M&A transaction (the remaining 2.3% are owned by other investors). In a Leveraged Buy-Out (LBO) a consortium of banks extended US$ 9.5 to 10.4 Billion in loans.

Citibank was the lead in this transaction on SoftBank side, but because of the size of this transaction, essentially all major players in Japan’s financial industry were involved – including our company, which advised one of the loan risk assurance companies on aspects of the risks of this transaction.

Softbank acquires Vodafone Japan - outline of the transaction
SoftBank acquires Vodafone KK (= Vodafone Japan) – outline of the transaction

SoftBank’s aim: grow to 26 million mobile subscribers and become No. 2 in Japan

SoftBank announced the plan to return to J-Phone’s growth curve and to aim for 26 million subscribers, which would place the resulting mobile operator on place 2 in Japan.

 After acquisition of J-Phone by Vodafone, growth stopped.
After acquisition of J-Phone by Vodafone, growth stopped.

Japan’s new telecom landscape

Three major players emerge after a sequence of consolidation and restructuring: NTT, KDDI and Softbank/YAHOO. The following figure outlines Japan’s telecom sector in 2006:

Outline of Japan's telecom sector in 2006 and M&A transactions
Outline of Japan’s telecom sector in 2006 and M&A transactions

For more information:
download our JCOMM-Report on Japan’s telecom’s industry

You can find a sequence of similar diagrams explaining the evolution of Japan’s telecom sector in our report on Japan’s telecom sector.

Understand Softbank: our report: “SoftBank today and 300 year vision”

pdf file, approx 120 pages, 47 figures 18 photos, 7 tables
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Copyright (c) 1997-2013 ·Eurotechnology Japan KK All Rights Reserved

Why did Vodafone fail in Japan? … and lose the opportunity of US$ 83 billion value

eurotechnology.com

Why Vodafone decided to sell Japan operations to SoftBank and quit Japan? – at an opportunity cost of an estimated US$ 83 billion – and wrote asset down by £28bn (= approx. US$ 50 billion) in 2006

Vodafone’s missed US$ 83 billion opportunity in Japan: learnt about some of the traps into which Vodafone fell in Japan

Don’t fall into these traps: contact us!

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When Vodafone acquired Japan Telecom in a series of transactions, Japan Telecom was a full service fixed and mobile (= J-phone) telecom operator servicing private and corporate customers, competing neck-to-neck with KDDI Corporation (TYO:9433) for the second place in Japan’s telecom sector.

KDDI Corporation (TYO:9433) today (10 August 2016) has a market cap of YEN 8450 billion (= US$ 83 billion), and at the time when Vodafone acquired Japan Telecom, was very similar to KDDI.

It can therefore easily be argued that if Japan Telecom had been managed equally well as KDDI, then there is no reason to believe that Japan Telecom today would not have a market cap of at least US$ 83 billion as well.

Instead, Vodafone sold off Japan Telecom bit-by-bit to the SoftBank Group in a large number of transactions, the biggest one the sale of Vodafone KK to Softbank on 17 March 2006 for about US$ 15 billion.

And according to the BBC, Vodafone announced in February/March 2006, that Vodafone would write off (write down the value of Vodafone assets) £28bn (= approx. US$ 50 billion).

The acquisition of Vodafone KK by SoftBank laid the foundation for SoftBank‘s meteoric rise to a major global player.

Learn from Vodafone’s experience in Japan for your own business

Vodafone Japan failed not for one single reason but for hundreds of reasons, which can be grouped into soft factors (mainly lack of understanding Japan and Japan’s telecom markets and it’s true size) and hard factors (mainly far too low investment) – read more details in our SoftBank-report:

  1. Soft factors:
    • Japan knowledge at HQ, and knowledge at HQ about the specifics of Japan’s telecom sector (or lack thereof).
    • choice of management structure (there were attempts to correct the management structure, however too little and too late).
    • attitude displayed both privately e.g. within the Japanese industry sector and publicly via marketing messages and advertising
    • choice of executives and lower ranking managers and their knowledge and experience in Japan’s telecom sector (or lack thereof)
    • lack of sufficient know-how and experience to manage a large Japanese company, and particular the chain of retail stores
    • lack of management and execution know-how in Japan: tried three (3!!) times to introduce / roll-out 3G services in Japan, and failed every time to attract sufficient subscribers. As a result Vodafone Japan was far behind in 3G introduction. Only after sale to SoftBank, did SoftBank succeed in implementing the transition to 3G
    • too high expectations for profitability and margins from HQ, which were out of line with profitability and returns usual in Japan, and out of line of competitor’s margins at that time. Note that SoftBank turned round the failed Vodafone-Japan company within a few months, and today Japan’s mobile operators Docomo, KDDI and SoftBank enjoy some of the highest profit margins on planet earth.
    • and many more
  2. Hard factors:
    • far too low budgets for infrastructure investment resulting in much lower coverage and network quality compared to competitors NTT-DoCoMo and KDDI/au and TuKa, Willcom and others. As a consequence of far too low investment budgets, Vodafone failed three times to introduce 3G services in Japan. (3G services were not successfully introduced until after the acquisition by Softbank, and after conversion of Vodafone KK to Softbank-Mobile).
    • mobile phone handsets were inferior to the handsets offered by competitors NTT-DoCoMo and KDDI, and TuKa
    • and many more

Don’t fall into these traps: contact us!

Vodafone Japan? Why did it fail and sell to SoftBank? – Detailed answer

Find a long answer in this blog post below, in our other blog posts, and in some detail including statistics and financial data in our Softbank Report.

On Friday March 17, 2006, Vodafone and Softbank announced that Vodafone sells Vodafone KK (the totality of all Vodafone operations in Japan) to Softbank.

It has been reported that on Monday March 20, 2006, Softbank started to move all Vodafone KK staff, furniture and equipment from Vodafone KK’s former headquarters in the top floors of the Atago-Greenhills-Mori-Tower to Softbank headquarters in Shiodome (near Shinbashi). Also Softbank arranged very quickly that essentially all foreign expatriate managers left Vodafone KK – some stayed in Japan working for other IT companies, some returned to European Vodafone divisions, and some pursued telecom careers in USA, India, Bangladesh, or elsewhere.

By total coincidence, I had dinner with a high-level manager of Vodafone KK, of European nationality, at the indian restaurant Moti’s in Tokyo-Roppongi on exactly the same day, the Friday March 17, 2006 a few hours after the sale of Vodafone KK to Softbank was announced.
I asked him: “Which of the following is true:”

  1. Vodafone never did any market research in Japan?
  2. Vodafone did market research in Japan, but the quality was low?
  3. Vodafone did market research in Japan, but nobody read it?

This Vodafone KK (Vodafone Japan) manager’s answer at the indian dinner was (3): market research was done about Japan’s mobile phone market, but the market research was not sufficiently taken into account in the business and strategy planning.

Fact is, that Vodafone KK (Vodafone Japan) took many major strategy and market decisions in Japan, which were not related to the realities of Japan’s market. Here one example. When “rebranding” (=changing the company / product / services names) from J-Phone to Vodafone, this “rebranding” campaign was centered on global roaming, i.e. Vodafone enabled Japanese customers to use Japanese J-Phone/Vodafone mobile phones in a very large number of countries outside Japan as well as inside Japan. This was at a time, when Japan’s mainstream mobile 2G phone system which both DoCoMo and J-Phone used was PDC, while much of the rest of the world, especially Europe used GSM. However, what Vodafone overlooked was, that at that time DoCoMo had about 30,000 roaming customers, out of approx. 50 million subscribers, i.e. only about 0.1% of Japanese mobile phone users used international roaming at that time. Thus Vodafone KK in Japan focused their main nation-wide poster and TV and other media campaign on about 0.1% of the Japanese market (and about 0.02% of Vodafone KK’s accessible market, given Vodafone KK’s approx. 20% market share) – less than a niche. (The reason we know how many roaming customers DoCoMo had at that time, is because one of Vodafone KK’s competitors in Japan engaged our company Eurotechnology Japan KK to analyze Japan’s roaming market, and help our client to develop strategy to better compete with Vodafone KK’s roaming products, which were aggressively marketed, and the core of Vodafone KK’s marketing focus).

Another example was Vodafone KK’s strategic focus on Japan’s prepaid market (find detailed statistics and market shares and analysis of Japan’s prepaid market in our JCOMM report). In 2006 there were about 2.6 million prepaid mobile phone customers in Japan, i.e. about 2.7% of the market, while DoCoMo had about 45,200 prepaid subscribers, i.e. about 0.09% of DoCoMo’s subscribers were prepaid customers. Since the prepaid market in Europe (especially Italy where about 1/2 of the market is prepaid) is extremely important and highly profitable, Vodafone decided on the strategy to focus strongly on the development and growth of Japan’s prepaid market. Almost at the same time however, a national campaign started in Japan linking unregistered and illegally traded prepaid mobile phones to crime, and a law was proposed in Japan’s parliament to outlaw any type of prepaid mobile phones. Thus Vodafone KK found itself on the one hand promoting and investing to develop prepaid mobile phone services in Japan, developing, purchasing (as was the business model in Japan at that time) and bringing to market special prepaid handsets, and organizing national media campaigns promoting Vodafone prepaid mobile phones, while at the same time on the other hand facing the possibility that Japan’s parliament would outlaw these same prepaid mobile phones, and a broad press and TV national discussion on how prepaid mobile phones are linked to crime. The end result was, that instead of outlawing prepaid mobile phones, it was decided to introduce far stricter registration requirements and ID requirements for mobile phones and especially for prepaid mobile phones, and the unauthorized/unregistered sale or transfer of prepaid mobile phones in Japan was made a crime. The end effect for Vodafone of course was a commercial failure of Vodafone’s prepaid mobile phone campaign, in addition to a general decrease of ARPU (average revenue per user).

Instead of focusing on its core business in Japan, Vodafone KK focused management resources, and other resources to try to influence political decisions concerning 2.7% of the market: Japan’s minute and decreasing prepaid market.

Vodafone had many other management issues in Japan, which included recruitment and personality and retain issues of top executives, many kinds of HR issues, management issues at the retail stores, handset planning issues, branding and brand management issues, localization issues and much more.

As a consequence of these and other factors, Vodafone KK’s market share continuously decreased, subscribers moved from Vodafone KK to DoCoMo and KDDI/au, and the financial performance of Vodafone KK deteriorated, in the end convincing Vodafone that the best option was to sell Vodafone’s Japan operations and terminate business activities in Japan.

Vodafone-Japan’s leadership was also chaotic. While normally sending a stream of European Vodafone executives without knowledge of Japan or Japanese language on very expensive expatriate packages for limited periods to Japan, at some stage Vodafone decided to headhunt one of Japan’s top mobile industry veterans, who had just lost a battle for Docomo’s CEO position. This Japanese mobile phone industry veteran after a few weeks asked to be transferred from his executive CEO of Vodafone-Japan position to the non-executive Chairman position and soon after left Vodafone-Japan – clearly it took him only a few weeks to understand the hopelessness of the situation.

You can find further details and statistics, financial performance and market share data during this period in our reports:

Don’t fall into these traps: contact us!

Japan telecommunications industry report – Preview an outline:

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Mobile music taking off in Japan

iTunes versus Chaku-Uta: more KDDI Chaku Uta downloads in Japan than iTunes downloads globally until mid-2014

i-Tunes Music Store (ITMS) kick-started internet music downloads in Japan

i-Tunes Music Store (ITMS) kick-started internet music downloads in Japan, which were falling just before ITMS arrived:

Mobile music going strong in Japan
Mobile music going strong in Japan

i-Tunes & i-Pod themselves are under attack in Japan

i-Tunes & i-Pod themselves are under attack by KDDI‘s “au Listen Mobile Service” – LISMO!, which includes sophisticated viral marketing, music community and location based services.

Read more in our Mobile-Music-Japan Report (MOMJ)

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Vodafone in Japan? A dramatic change of Vodafone’s mind?

eurotechnology.com

“Vodafone K.K.’s Tsuda, 津田志郎, seeks growth in Japan, not sale”

However, sale to SoftBank may be the way forward

About one year ago, in an interview with Bloomberg (“Vodafone KK’s Tsuda seeks growth in Japan, not sale“), I mentioned that a sale of Vodafone’s Japan operations to Softbank might be the way Vodafone will go in Japan. This seems to be happening now and negotiations to this effect were confirmed by both Softbank and Vodafone over the weekend.

The potential deal

Although a deal has not been closed yet, it is widely reported that a sale of Vodafone’s Japan operations to Softbank is very likely to be closed within a few weeks. What could this deal look like?

As reported by Bloomberg Vodafone KK’s capitalization at the point of delisting from the Tokyo Stock Exchange was around YEN 1.4 Trillion (= about US$ 12 Billion). Bloomberg mentions estimations by London based analysts who value Vodafone KK in the range US$ 14 to 16 Billion. Of course, if a deal is actually concluded, it might be a complex deal with several components, not just a simple cash price, and any cash value will not be determined by analysts in London, but on the negotiating table between Softbank and Vodafone, and the final deal could be more complex than a simple sale against cash payment.

In any case, this deal – if it happens – promises to become one of the largest M&A transactions ever in Japan sofar in terms of cash value. Vodafone is reported to prefer a cash deal, and Softbank has been reported to consider a leveraged buy-out (LBO) where Softbank will take debt against the to-be-acquired company.

It has also been reported that Softbank seems to be planning to change the name of the resulting company, so the “Vodafone” brand is not likely to survive in Japan.

What is Softbank likely to do with Vodafone’s Japan operations

An acquisition of Vodafone’s Japan operations will be the completion of Softbank‘s march to build a full-scale telecommunications group on a par with NTT and KDDI through a series of acquisitions plus internal growth.

Softbank in this new shape will become a much more serious competitor for NTT and KDDI, which both have succeeded to transform themselves from former monopolies into some of the world’s most advanced telecom operators.

In a sense Softbank is already where DoCoMo and KDDI are working very hard to get to: DoCoMo and KDDI are working hard to build content and transaction businesses (such as shopping, financial services, auctions and music), because pure traffic revenue (ARPU) is driven down by relentless competition.

Softbank is strongly linked to YAHOO-Japan, and YAHOO-Japan demonstrated it’s strength by driving eBay out of Japan – so Softbank is already where DoCoMo and KDDI want to go. All Softbank still needed was a wireless network, and with a Vodafone acquisition, Softbank will have a wireless network much faster than expected.

A Vodafone/Softbank deal will not be a good development for eAccess/eMobile, and eAccess/eMobile is reported to have submitted documents to Japan’s regulatory authorities regarding Softbank’s wireless license. It will be interesting how the regulating government ministry will decide on the regulatory aspects of any Softbank/Vodafone deal. In the past few years Japan’s government has been singularly focused on creating the conditions to make Japan the most advanced IT market in the world, so I think we can
be confident to expect a wise decision – wise for Japan, not necessarily beneficial for particular mobile operators.

What made Vodafone change it’s mind about Japan?

As reported by Bloomberg, one year ago Vodafone had the clear intention to remain in Japan for the next 10, 20, 30 years. What made Vodafone change it’s mind?

As widely reported, Vodafone was loosing market share in Japan’s mobile phone market over the last several years.

With number portability being introduced in Japan from autumn 2006, and with three new operators entering the market during 2006-2007, the competitive environment will become much more severe than it is now, decreasing pure network profitability, while at the same time massive network investments are necessary.

Analysis of Vodafone-Japan’s subscriber numbers shows that early warning signs appeared already in 2002 – 2002 would have been the time for Vodafone to take decisive action to turn the business around in Japan.

More about Japan’s telecom sector: download our JCOMM-Report.

See also: my comments in Der Standard (German language) “Aus fuer Vodafone in Japan”

UPI also quotes us: “Globe Talk: Vodafone’s sayonara problems”

Understand Softbank: our report: “SoftBank today and 300 year vision”

pdf file, approx 120 pages, 47 figures 18 photos, 7 tables
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On Germany’s national network about FeliCa wallet phones and other mobile trends

Mobile Payment Forum and Eurotechnology Japan KK jointly organize the Mobile Payment Forum meeting in Tokyo. World's most advanced mobile payments.

Got interviewed about mobile FeliCa and other mobile trends in Japan by Germany’s largest broadcasting network ARD:

read text of program here

listen to the broadcast here (in German)

Much of this broadcast is based on our presentation: Japan’s telecom sector

Preview – Mobile payment Japan, e-money and mobile credit report:

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Copyright·©2013 ·Eurotechnology Japan KK·All Rights Reserved·