Presentation Materials

GALAXY S went on sale today. I hear this product is enjoying a good reputation, but some distributors have temporarily stopped accepting purchase applications due to a shortage of supply and lack of any indication concerning the arrival of additional shipments. I believe you faced a similar situation when you launched Xperia, which resulted in a loss of sales opportunities. Don't you think you have problems in your internal system, repeating the same mistake from the fear of taking risks? Have you devised any measures for improving this for the future?

It is true that we are again facing difficulty in securing sufficient amount of supply for GALAXY S, as occurred in the case of Xperia. From early on, we had been aware of the favorable response to GALAXY S as a result of various market surveys, etc., and we have requested Samsung to provide us with ample supply. The current situation was caused by the global shortage of organic EL screens.
You mentioned that we might have been over-concerned about the risk of procuring excessive quantities of popular products, but we do not think that was the case. We would like to sell products aggressively in the future securing ample quantities in our inventory. In fact, some of our distributors are bringing forward the acceptance of purchase applications from customers who have agreed to product delivery in November 2010. We would like to prepare a system that will allow us to properly respond to customer requests.

I think it was a wonderful decision on your part to introduce "sp mode" to enable the use of i-mode mail on smartphones. On the other hand, I believe you should try to incorporate other i-mode services in smartphones a little faster. I understand that you have separate teams for smartphones and i-mode, respectively. Do you think the coordination between these teams is functioning smoothly?

We tackled the development of "sp mode" expeditiously to respond to the strong requests from our customers, which made it possible to implement i-mode mail on smartphones at an early date. Going forward, we plan to enable the use of "i-channel", "i-concier" and other i-mode services on smartphones, and our "Osaifu-Keitai" e-wallet service will be embedded in some of our 2010 winter/spring smartphone models. Many of these smartphones were originally designed for global markets, and we need to add some localization to adapt them to the Japanese environment, which sometimes result in a slight delay in the timing of launch compared to overseas markets.
On the other hand, we also intend to incorporate the benefits of smartphones such as their user interface in i-mode handsets. Going forward, these two product lines are expected to be much closer to each other and the business units responsible for i-mode and smartphones are working in close cooperation in view of this trend.

What will the impact of this loyalty program revision be on your results for the next fiscal year and beyond?

It is difficult to give a definitive answer, because there are many variables, such as the length of use of handsets by each user and the rate of point expiry, but there is a possibility that we may be able to reduce our allowances by some 10-20 billion yen compared to the amount before revision.

Please comment on your thoughts about the billing plans for smartphones. Your competitors seem to have slightly changed their policies, introducing new plans for smartphones. What are your plans? Do you intend to maintain the current structure which has a ceiling of 5,985 yen per month? How would you react if KDDI changes their rates?

We believe the future rate strategies will have to be considered in conjunction with the rate settings for LTE services.
While we have not yet finalized our plans, we believe we can seek higher charges for LTE compared to 3G because it offers extra benefits such as higher transmission speeds. Also, from the standpoint of fairness, we would like to study the possibility of charging a higher amount from users generating massive volumes of data traffic. We also believe it might make sense to offer promotional discounts for a limited period, because it will take some time before we complete the roll-out of LTE. We will study the rates for smartphones as part of our overall billing strategy including the rates for LTE and 3G.
Of course, the rates offered by our competitors will also be included in the factors to be studied. We will carefully examine our rate structure taking various factors into consideration, because it has a significant impact on our financial results.

Let me ask a question for clarification regarding the impact of the revision of handset repair system. You responded to the previous questioner that you dropped the allowances because you shortened the period of your handset repair "Anshin" support service. Do you think you will continue to see this impact of lower allowances the next fiscal year and beyond?

While it is difficult to provide you with a definitive answer because the impact on the results for the next fiscal year will be affected by the prevailing circumstances, we currently do not foresee any increases in the amount of allowances for the next fiscal year, because the total number of handsets submitted for repair, which currently averages some 4.00 million units per annum, is expected to remain flat going forward. With the latest revisions to the insurance premium for the Mobile Phone Protection and Delivery service, we believe we can optimize the handset repair operations, for example, by recommending users to subscribe to this service upon the purchase of a mobile phone as a protection against possible failures in the future, or encouraging replacement of a handset if the user is using the same phone for a period over 3 years. Under these assumptions, the number of handset repairs is projected to remain flat in the future, and we therefore do not foresee any significant financial impact resulting from this change.

I heard KDDI plans to announce a new flat-rate plan for smartphones around November 10, 2010, and SoftBank is already providing an aggressive billing plan. What are your thoughts on your future rate strategies, when your competitors are beginning to revise their traditional flat-rate plans with an upper limit of approximately 6,000 yen per month?

We believe other carriers also want to maintain their flat-rate charges to the extent possible, and we will take measures keeping an eye on the moves of other carriers in this competitive market. There are various options for us—we may offer discounts for a limited period of time as a promotional campaign, or we may choose to drastically change our rate structure.

This is a question relating to your handset costs. You previously mentioned that it is difficult for you to reduce the cost of handsets remarkably so long you make functional enhancements to the handsets. Now that your procurement costs are coming down, does it mean you can seek further reduction in the handset costs going forward?

We have been working together with the manufacturers on the reduction of handset costs. In addition, the popularity of the relatively inexpensive STYLE series in the recent years has contributed to lowering the average cost per unit. And we will continue to strive for the reduction of costs going forward.
The product mix played a great role in bringing down our handset costs. While part of the savings achieved was as a result of our continual cost-reduction efforts, the effects had not been so visible in the past because of the extra costs incurred by the addition of new features to high-end models like the PRIME series. But now, we do not have so many costly new features left to be added to the PRIME series, so our ongoing cost-cutting efforts are beginning to deliver visible results. We believe we can further reduce our overall procurement costs in the future.

Does it mean that you have room to further cut your procurement costs even if you introduce smartphones?

Yes, that is correct.

I believe the revenues from users who have migrated from i-mode to smartphones are accounted for as smartphone ARPU as opposed to i-mode ARPU. Have you singled out the ARPU of such users who have migrated to smartphones?

We have not separately calculated the ARPU of users who have migrated from i-mode to smartphones. However, when we look at the total packet revenues for the three months of FY2010/2Q, we recorded an increase of approximately 25.0 billion yen compared to the same period of last fiscal year, of which i-mode accounted for approximately 10.0 billion yen, the flat-rate revenues of smartphones 5.0-6.0 billion yen, and flat-rate PC data communications and other services approximately 9.0 billion yen.

Don't you think it will be difficult to grow the sales of smartphones to half of the total devices sold unless you maintain the current level of incentives?

We are seeing a gradual decline in the procurement costs of smartphones on a global scale, which provides us with an opportunity to reduce the incentives going forward.

How do you foresee the demand for tablet devices? Also, how do you plan to cultivate the demand among enterprise users?

The iPad is currently the best seller among the various tablet devices, but we also hear voices that iPad is too heavy to carry around. In that regard, the 7-inch screen GALAXY Tab that we plan to offer comes in a very handy size as it fits in your jacket pocket. The product enjoys a good reputation among many corporate managers, and we established a project team within the Company to propose this device to enterprise clients.

Do you foresee any shortage of supply with GALAXY Tab like you did with GALAXY S?

GALAXY Tab does not carry the supply problems of organic EL screens, so we believe we can procure sufficient quantities depending on the production capacity of the manufacturer.

You have achieved favorable growth in the number of net additions, but the composition of devices among these net additions has diversified due to the expanded uptake of PC data cards, Wi-Fi routers and digital photo frames. I believe the ARPU, incentives and traffic levels of these new products vary significantly. How should we consider the profit margin of these new products?

As you pointed out correctly, the profit margin of each product is affected by various factors, but we would like to reserve our comments on the specific profit margins for each product. Although we do not necessarily make a precise calculation on the life-long profitability of each subscription, we set higher amounts of discounts for new markets we intend to cultivate strategically, taking into account the additional revenues to be expected from the acquisition of a new subscription.

Your services and billing plans are more complex and difficult to understand compared to those of your competitors. Don't you have any plans to streamline them to make them easier to understand for users?

Our data plans for smartphones and PC data cards are basically the same, and we only have one rate structure for i-mode. Although we currently offer discounts under a promotional campaign, the rate for Wi-Fi-enabled devices is also basically same with that of PC data cards, so we do not think our rates are so complex.
The rates for some new services may look somewhat different because of the individual sales strategies that we adopt, but our intent is to keep the rates as simple and easy to understand as possible, and we are continually making efforts to this end.

Do you think you can decrease your capital expenditures even further leveraging the higher efficiency of LTE?

If we tried to accelerate the installation buildup using FOMA to accommodate the growth of traffic, which has been increasing by 1.6 times every year, we will have to anticipate an increase in total capital expenditures. By mixing LTE equipment that offers better spectral efficiency in our infrastructure, we believe we can improve the efficiency of capital expenditures.