DoCoMo, KDDI weigh price-war risk in industry shift

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TOKYO, Oct 3 (Reuters) Japan's two biggest mobile phone operators, NTT DoCoMo Inc <9437.T> and KDDI Corp <9433.T>, plan to adopt new strategies that will slash calling fees and boost handset prices in a major shift that could escalate a bruising price war.

The shift in the industry's business model, already blessed by regulators, is likely to see operators increasingly vie with each other for market share to make up for high handset costs.

It is also expected to spur consolidation among Japan's handset makers, who will be cut off from subsidies averaging about 0 per handset that have fostered development of some of the world's most cutting-edge phones.

''We need to watch to see whether the new plans will lead to a war of attrition,'' said analyst Hitoshi Hayakawa of Credit Suisse. ''It's very possible, and if that happens, nobody wins.'' The change would bring the country's mobile phone industry closer in line with U.S. and European markets, where the consumer shoulders a larger part of the handset cost in exchange for cheaper call and data rates. At end March, Japan had close to 100 million mobile phone users.

Reports of the new price plans, which sources said would comprise cuts to basic charges and calling fees, caused shares of DoCoMo to close down 0.6 percent while KDDI shed 0.2 percent on Wednesday. But No. 3 mobile phone operator Softbank Corp <9984.T> rose 3.5 percent.

Softbank, which bought Japan's No. 3 operator from Vodafone last year, has already come up with its own method to remove the subsidies from its expenses by making users pay for the handsets in instalments.

It has since slashed service fees, luring more new subscribers than its bigger rivals for the fourth straight month in August.

Over the long-term, the plans would most likely be slightly positive for the industry, because it should allow operators to lock in their customers for longer periods, analysts say.

Selling fewer handsets paradoxically means lower handset incentive costs for operators.

For DoCoMo, which expects operating profit to nudge up 0.8 percent to 780 billion yen in this business year, subsidies make up 1.8 trillion yen, or a third of its total operating costs.

''Japan has traditionally been a very high subsidy, high tarriff market. Operators have always justified the high prices by saying 'it is expensive but that is because we are giving away 0 handsets','' said Macquarie Research analyst Nathan Ramler.

NEW ERA Decoupling handset costs from call charges would affect handset makers, distributors and could even push down Japan's consumer price index, where mobile phone service charges since last year have a greater weighting.

Elsewhere, consumers typically pay for the handset costs up front in exchange for cheaper call and data rates.

More than a dozen players including Sharp <6753.T>, NEC <6701.T> and Kyocera <6971.T> do battle in Japan's saturated market, supplying small lots of phones exclusively to operators in the world's biggest market of third-generation (3G) phones.

That contrasts with industry leader Nokia , which mass produces models that it supplies to vendors worldwide, outrunning Japanese handset makers who together comprise less than 10 percent of the global market.

Users are likely to hold on to their handsets longer as they become more expensive, while operators may seek to restrict cancellations as call charges fall.

This could lower mobile handset unit sales in Japan by up to 20 percent, according to Hayakawa.

In Japan's tight market, this could mean some handset makers may need to pool their resources.

''The subsidies have contributed to developing mobile technologies,'' NEC President Kaoru Yano told reporters earlier this week. ''We hope operators will proceed with caution.'' Shares of DoCoMo have shed 14 percent since June 26, when Japan's telecommunications regulators recommended eliminating the subsidies, while shares of KDDI lost 10.5 percent. Softbank has lost 16.8 percent.


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