Presentation Materials

You revised your full-year free cash flow forecast downwards by 100 billion yen. How much of this decrease is attributable to the introduction of the installment payment system for the purchase of handsets?

Approximately half of the 100 billion-yen revision of the free cash flow forecast is related to investments that were already made or committed for the future. The remaining half is attributable to the decrease in cash resulting from the installment claims payable to distributors following the introduction of the new installment payment system.

Given the current circumstances, do you think it is more sensible to make all-out efforts to retain your existing customers rather than trying to recover your market share of net additions?

The primary reason why we have not been able to increase our share of net additions is the churn rate, which remains higher than expected, and not that we failed to acquire a sufficient number of new subscriptions. Because our replacement handsets are more expensive, we are losing some customers to our competitors who are offering handsets for free. We decided to introduce the installment payment system this time to turn around this situation. With the introduction of the installment scheme, the initial cost for the purchase of a handset can be reduced to a very low level or even 0 yen. We are also currently studying privileges to be offered to long-term users, which will be announced shortly.

I think it is about time for you to introduce attractive new services, rather than to defend your position through the retention of subscribers. When we look at the peripheral industries, search services, portal, SNS and other new capabilities are expanding. How do you incorporate these capabilities in your services?

While the measures to curb churns—such as the newly announced handset sales schemes—are important, we also believe it is critical to introduce measures that will take us one step ahead. Because cellular phones are expected to become increasingly similar to PCs in terms of functionality, we are making preparations to introduce new content such as search, SNS and map information, etc., and we will announce them as soon as they become ready.

DoCoMo prepares its financial statements in accordance with US GAAP. How do you think the introduction of the new handset sales schemes will affect the amount subject to EITF01-09 rule? How will the 200 billion-yen increase in operating income be represented when split between revenues and expenses?

The projected 200 billion-yen increase in operating income does not factor in the impact of EITF01-09. We currently believe the new sales schemes will likely be treated in a way similar to the Japanese accounting standards.
The cost of sales incentives are expected to decrease, but on the other hand, cellular services revenues are also projected to decline due to the discounts to be offered under the new sales schemes.

If all users choose Value Course, your revenues could be negatively affected by as much as 500 to 600 billion yen. Have you designed the handset sales scheme in such a way that the projected reduction in incentive costs would be greater than the revenue loss resulting from the discounts? Additionally, how much growth in income do you foresee achieving from the reduction in the number of handsets sold?

For the short term, the scheme is designed to generate profits because the reduction of expenses owing to lower incentive costs is expected to be larger than the decrease in revenues resulting from the discounts on basic monthly fees. However, this income-boosting effect is expected to disappear as the adoption of new handset sales scheme becomes widespread. The newly announced sales schemes are designed in such a way that will allow us to offset the decline in basic monthly charges with the installment payments, and sufficiently finance the incentives for subscriber acquisition.
The number of handsets sold may end up higher than our expectations as far as this fiscal year is concerned. Over the middle term, however, because the new handset sales schemes are conditioned upon 2-year handset use, the number of handsets sold is expected to decrease to some extent, which will in turn contribute to lowering distributor commissions.

Do you think the reduction in handset incentives will result in a sharp increase in equipment sale revenues from next fiscal year?

The elimination of handset incentives is expected to boost equipment sales revenues, because the amount subject to EITF01-09 will be reduced. On the other hand, however, the "Direct Wari" discount provided by DoCoMo will increase the amount subject to EITF01-09. Accordingly, we do not think the introduction of the new handset sales schemes will significantly increase our equipment sales revenues.

Is it correct to understand that your handset prices will be marked higher in the stores, but the basic monthly charge will be reduced in return?

Correct. In addition, we will also provide a limited-time discount (8,400 yen) for the purchase of a handset as an introductory offer, so our handsets will be marketed at a price subtracting approximately that amount from their respective procurement costs.

If your main focus is on the Value Course, is it correct to assume that the reduction of handset procurement costs will become an important factor in strengthening your competitiveness?

While we will continue to exert efforts on the 9-series, we currently attach a stronger emphasis on the 7-series, which is showing a faster pace of decline in procurement costs.
Under the conventional sales scheme, in which the market prices of handsets did not vary significantly in spite of the difference in available functions because of the handset subsidies, we worked to cut costs across the board through the development of single-chip LSIs and a common software platform. Under the new handset sales schemes, however, because the functions embedded in each model will directly affect the market price, it will also become important to reduce costs by reducing the functions to only those that are truly required by users.

Can we expect that the percentage of 7-series handsets to total handsets sold will increase going forward?

A quarter of our users are still on the second-generation (mova) network, and they use mobile phones primarily for voice connections. When we consider the migration of these users to the FOMA network in the future, we must improve the lineup of our 7-series phones. In addition, because the upcoming 905i series handsets are equipped with nearly all conceivable hardware functions, the users of 9-series handsets who have in the past frequently replaced handsets may extend their handset usage period going forward. In view of these factors, we believe the percentage of 7-series phones to total handset sold will rise in the future.

In the market today, we see "reverse pricing" between 9-series and 7-series phones, i.e., 9-series phones are sometimes sold cheaper than 7-series handsets. Do you plan to change the sales strategy for each FOMA handset series following the introduction of the new sales schemes?

Under the Value Course, which is positioned as our main sales scheme for the future, the handset market price will be directly linked to the procurement cost, so the "reverse pricing" will be eliminated.

Explain your current inventory level. Can we expect that most of your handsets will be sold using the new handset sales scheme from the fourth quarter of FY2007?

We currently have one month's worth of 904i handsets, etc., in our inventory, and we believe we will be able to eliminate almost all of them by the new year. The new sales scheme will be applied to 905i/705i and subsequent models. The old models (904i/704i) that we still have in our inventory at the time of the launch of 905i will therefore be sold with the conventional sales scheme. However, we intend to minimize the period in which we will be using parallel sales schemes and will try to make a smooth transition to the new sales scheme.

Why did you decide to offer an 8,400-yen discount as an introductory campaign immediately from the launch of Value Course? Do you foresee any risks that you may end up having to continue this discount for a long time, making the new sales schemes effectively no different from the conventional sales scheme in terms of cost burden?

Though we will provide users with the option to pay the handset price in installments, the market price of our handsets will become higher, and users' resistance to this price increase may not be insignificant. We therefore decided to launch this campaign in the initial phase to encourage subscribers to choose the Value Course. We do not intend to continue the campaign for an extended period to erode the effects of the new sales schemes.

When do you plan to start allowing customers to use DoCoMo Points to pay the remaining installment payments? Are users allowed to use the points to pay the cancellation charges for the Basic Course?

DoCoMo Points can be used from the first day of service launch, to make one-time lump-sum payment or a down payment for the purchase of a handset. It will take a little longer before we allow users to use DoCoMo Points to pay the remaining balance of installments because that requires a modification of our internal system. We do not intend to allow subscribers to use points to pay the cancellation charges of Basic Course because this is a penalty for cancellation before the end of the contract term.

KDDI allows users to use royalty points to pay the cancellation charges of its "Full Support" service, if subscribers wish to replace the handsets in less than two years. DoCoMo's Basic Course, on the other hand, does not allow users to use points for cancellation charges. Don't you think this could provide a new motivation for users to cancel their contracts with you?

In the Value Course, which we intend to attach a stronger emphasis, the replacement of handsets in less than two years does not necessarily require a cost burden, because, for example, users can use the points to pay the remaining installment payments.

I believe there are a considerable number of users who cancel their existing contract and newly join your service as a new subscriber due to the large gap between the market price of new and replacement handsets. What was the number of such "cancel-and-newly join" subscribers for the first half of FY2007?

It is difficult to count accurately the number of such "cancel-and-newly join" subscribers, but the churn rate for September and October 2007 has been declining following the introduction of new discount services in August. We therefore believe the number of "cancel-and-newly join" subscribers has also been decreasing.

To what extent do you think you can improve your cost efficiency by integrating the nine DoCoMo companies into a single entity? Specifically, what kind of measures do you plan to implement to cut costs?

The immediate effects that can be expected from the reorganization include the standardization of service quality, which have so far varied by region, and the reinforcement of user contacts which we plan to achieve by transferring the personnel made available by the reorganization to units closer to users. We also expect to achieve additional effects through the integration of the currently independent call centers and distribution operations after the reorganization is completed sometime in the second quarter of next fiscal year.

If the regional subsidiaries are integrated into a single entity, will the distributor commissions, which currently vary by region, be standardized?

Currently, each region has different distributor commission systems. However, we believe the commission levels will be aligned over time, as the number of handsets sold under the new sales schemes increases. Generally, we will try to unify the systems into a system where handset discounts are provided directly from DoCoMo, although this unification must be studied taking market conditions into consideration.