Vodafone’s opportunity cost of US$ 83 billion, asset write-down by £28bn (= approx. US$ 50 billion) in 2006, and kicking off SoftBank’s meteoric rise
Vodafone Japan fail: learn from the missed US$ 83 billion opportunity in Japan
Vodafone Japan fail: a painful lesson for the Vodafone group, and the jumpstart for SoftBank’s meteoric rise
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 (= Vodafone Japan) 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 (=Vodafone Japan) by SoftBank laid the foundation for SoftBank‘s meteoric rise to a major global player.
Vodafone Japan fail: 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:
- 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
- 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
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:”
- Vodafone never did any market research in Japan?
- Vodafone did market research in Japan, but the quality was low?
- 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: https://www.eurotechnology.com/store/jcomm/
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