Will Price Cuts Work for Softbank?

So much for the revolution Softbank’s (SFTBF) Masayoshi Son promised in 2006. The maverick chief executive officer [CEO] at the smallest of Japan’s three wireless operators thought he could march right in and steal business from his entrenched Japanese rivals after buying British operator Vodafone’s (VOD) Japanese unit last April [see BusinessWeek.com, 3/17/06, "Softbank-Vodafone Deal Rings True"].

So far, that hasn’t happened: Since last October, when new rules in Japan allowed mobile phone users to switch carriers without giving up their existing number, Softbank’s share hasn’t budged from 16%.

To boost Softbank’s business, Son is ringing in the New Year with one of his favorite marketing gambits. On Jan. 5 he announced a new low-price plan that, beginning in mid-January, charges subscribers just 980 yen [$8.30] a month and lets them make free calls and send e-mail at no charge from 1 a.m. to 9 p.m.

Cold Comfort No carrier has ever gone that far, not even Softbank, whose current monthly rate stands at 2,880 yen [$24.40]. Son promised even more. “If any of our competitors offers a lower price, within 24 hours we will come up with a plan that undercuts their prices,” he told reporters, adding that he would single-handedly lower Japan’s cell phone rates, now among the world’s highest.

Although the announcement came after markets closed for the day in Tokyo, word of an impending pricing plan appeared to have buoyed Softbank’s shares by 2.1% in Tokyo. [The Nikkei 225 Stock Average fell 1.5% on the day.] But the day’s gains were cold comfort for investors who have watched the stock drop 45% since last January.

Shinkin Asset Management analyst Naoki Fujiwara chalked up the day’s gains to technical buying, rather than euphoria over Softbank’s latest announcement. “After bailing out of steel stocks at the end of the year, investors were looking for somewhere else to put their money,” says Fujiwara.

Jazzing it Up Having upended Japan’s broadband business with Softbank’s Yahoo BB unit, Son has set out to wrest control of the country’s $75 billion mobile phone business from NTT DoCoMo (DCM) and KDDI (KDDIF) [see BusinessWeek.com, 9/6/06, "Japan: Some Cell Carriers May Have Wrong Number"].

In recent months, Softbank has rolled out dozens of snazzy handsets that let users download tunes over fast 3G networks, gain access to Yahoo! Japan’s search engine with the touch of a button, and catch the latest ball game via digital TV receivers. The stellar lineup of new models put the upstart on a par with DoCoMo and a cut above KDDI’s AU brand, which has the smallest handset offering.

But Softbank’s wireless debut ended up a disaster after a misleading ad campaign. In late October, just before Japan began mobile number portability, Son kicked off a pricing war, advertising low rates and free services for new subscribers.

The monthly rates came with hidden clauses and, after a reprimand from Japan’s Fair Trade Commission, Softbank promised to redo its ads so terms would be clearly spelled out. The incident forced Son to spend millions to retool the campaign and left the company with a tarnished brand image.

Take It on Faith That’s one big reason his dream of scooping up millions of new subscribers hasn’t gone as planned. At the end of November, he had just shy of 15.4 million, a gain of less than 70,000 from a month earlier, according to Japan’s Telecommunications Carriers Assn.

The big winner was KDDI, which lured more than four times that number, raising its subscriber base by 324,900 to nearly 27 million. In contrast, DoCoMo lost 17,500, to 52.1 million. December is likely to have ended up much the same.

Still, nobody thinks Son will give up easily. His latest rate cut is evidence of the extremes to which he’s willing to go to drum up business. That’s unlikely to lead to a boost in profits anytime soon, something Son himself has acknowledged.

Yet Softbank has other assets it can tap into over the long run. Its ownership of Yahoo! Japan, the country’s No. 1 portal site, its fixed-line telco business, and its broadband service give it everything it needs to be a contender as wireless and fixed-line communications and Net-based services converge. In the meantime, he’ll have to give both investors and cell phone users a reason to keep the faith about his enterprise.