KDDI
Corporate History & Strategy

In the 1980s, the Japanese government promoted the privatization of NTT Public Corporation and the liberalization of the telecommunications industry, embarking on the development of a legal framework that would allow private companies to enter the telephone business. The enactment of the Telecommunications Business Act in April 1985 opened the long-distance telephone market, paving the way for breaking NTT's (formerly NTT Public Corporation) monopoly. Momentum for entry into the telecommunications business grew among business circles, and multiple corporate groups actively explored market entry.

Kyocera stepped forward as one of the new entrants. The company was engaged in the manufacture of telephone terminals and envisioned expanding into the upstream infrastructure domain of the telecommunications industry. However, since the deployment of telecommunications infrastructure required capital on the order of 100 billion yen, Kyocera chose a joint investment structure with multiple major corporations rather than bearing the risk alone.

In June 1984, Daini Denden Planning Corporation was established. Kyocera was the largest shareholder with a 28% equity stake, alongside other major corporations including Secom, Ushio Inc., Mitsubishi Corporation, and Sony. The initial capital was 1.6 billion yen, with Kyocera's investment estimated at approximately 450 million yen. A notable feature was the adoption of a business coalition-type investment structure rather than a single company's risk-taking.

The business plan envisioned deploying a long-distance telephone network connecting Tokyo, Osaka, Kyoto, and Kobe via fiber optics. Aiming to provide low-cost services below NTT's pricing structure, the company changed its name to Daini Denden Corporation the following year in 1985 and commenced service provision in October 1986.

In 1990, Motorola (US) announced the 'Iridium project,' a plan to realize mobile phones usable worldwide via artificial satellites. It was a large-scale project with an expected total investment of $4.7 billion, aiming to build a communications network independent of terrestrial base stations. In May 1997, Motorola launched the artificial satellites and completed the technical preparations for service commencement.

DDI decided to participate in the Iridium project and established the subsidiary 'Japan Iridium' in 1993. The equity structure comprised DDI at 58%, Kyocera at 10%, Ushio Inc. at 5%, Secom at 5%, Mitsui & Co. at 5%, Sony at 5%, and others, with DDI holding a majority stake. For DDI, this was positioned as a strategic foothold in the international communications domain.

The Iridium service had a high monthly base fee of $50, and miniaturization of the handsets proved difficult. Furthermore, the rapid proliferation of terrestrial base station-type mobile phones in the late 1990s effectively eliminated the advantages of satellite-based communications. Subscriber acquisition fell far short of projections, and the Motorola-led Iridium project collapsed by 2000.

Japan Iridium, a subsidiary of DDI, was forced to cease operations and went bankrupt with total liabilities of 10.6 billion yen. DDI recorded an 'Iridium business restructuring loss' of 37.4 billion yen as an extraordinary loss in the fiscal year ending March 2000, resulting in a full write-off of its satellite communications investment.

In February 1999, NTT DoCoMo launched the i-mode service, popularizing internet access through mobile phones. Nationwide base station development was essential for the proliferation of mobile phones, requiring capital expenditure of several hundred billion yen annually. As NTT DoCoMo, backed by its abundant capital, shifted to a full-scale investment offensive, competing carriers with smaller capital bases faced difficulties in mounting an independent response.

At the time, non-NTT telecommunications operators were fragmented into multiple groups. DDI (Daini Denden) operated long-distance telephone and mobile phone services, KDD (formed through the 1997 merger of Kokusai Denshin Denwa and Japan Highway Communications) focused on international communications, and IDO (invested in by Toyota and others) handled mobile phone services in the Kanto region. Each company shared the common challenge of being unable to independently secure the investment resources needed to compete with DoCoMo.

In October 2000, DDI, KDD, and IDO completed their merger. At the time of the merger, DDI had revenue of approximately 1.2 trillion yen (approximately 3,000 employees), KDD had revenue of approximately 400 billion yen (approximately 5,000 employees), and IDO had revenue of approximately 400 billion yen (approximately 1,000 employees). The merger created a telecommunications operator with combined revenue of approximately 2 trillion yen, and the company name was changed to KDDI Corporation in 2001.

The mobile phone brand was unified under 'au,' which was launched through the merger of seven Cellular companies in November 2000. By consolidating long-distance telephony, international communications, and mobile phone businesses under a single company, the group secured the industry's second-largest position behind NTT DoCoMo.

The aim of the three-way merger was to unify dispersed management resources and build a financial foundation capable of sustaining capital investment in base stations. After the merger, KDDI positioned its mobile phone business as its growth pillar and, under the au brand, began developing services to compete with DoCoMo's i-mode.

In terms of merger structure, DDI served as the surviving entity, absorbing KDD and IDO. The integration of three companies with different corporate cultures was not straightforward, but the common competitive axis of the mobile phone market provided a relatively clear direction for business integration. Through the merger, KDDI established its position as the only comprehensive telecommunications operator capable of competing with the NTT Group.

In fiscal year 2001, KDDI decided on a policy to unify the telecommunications standard for au on CDMA and proceeded to decommission legacy PDC equipment. By concentrating management resources on CDMA, which supports high-speed data communications for mobile phones, the company urgently worked to build a service platform capable of competing with NTT DoCoMo's i-mode. This marked a strategic shift from dispersed investment across telecommunications infrastructure in general to focused investment in mobile phone infrastructure.

Since changing telecommunications standards entailed extraordinary losses on the scale of hundreds of billions of yen, KDDI executed the securitization of its Shinjuku headquarters building, recording 144.8 billion yen in extraordinary gains to offset the losses. Financial arrangements were essential to simultaneously proceed with the decommissioning of existing equipment and investment in new equipment.

Following the decommissioning of PDC equipment, KDDI continued annual capital investment of 200 to 300 billion yen throughout the first half of the 2000s, advancing the nationwide deployment of CDMA base stations. This investment level was necessary to keep pace with NTT DoCoMo, and the financial foundation secured through the three-way merger served as the backing for this investment.

The unification on CDMA provided the infrastructure precondition for the subsequent provision of high-capacity data communication services, beginning with 'Chaku-Uta.' The improvement in communication speed broadened the scope of collaboration with handset manufacturers and content providers, becoming the foundational technology supporting au's competitiveness.

In December 2002, KDDI launched the mobile phone music download service 'Chaku-Uta.' The development of 3G infrastructure through the unification on CDMA had made it technically possible to download audio content, providing the background for this service. The format played the melody portion of songs for 30 seconds, with a unit price set at 80 to 100 yen per song.

The primary uses were as phone ringtones and alarm sounds, and for KDDI, the service offered the dual revenue benefits of increased handset subscriptions and increased data transmission revenue. The business model was designed for the telecommunications carrier to provide the content distribution platform itself and secure revenue through data usage.

Access to popular songs required the resolution of rights relationships with record labels. KDDI established the joint venture 'Label Mobile' in 2001 with equal investment from six companies—SME, Avex, Victor, Toshiba EMI, Universal Music, and KDDI itself—centralizing the song licensing process. By September 2003, a distribution system for 5,000 songs was in place, with songs by popular artists such as Amuro Namie and Hirai Ken available from the service launch.

On the hardware side, KDDI requested mobile handset manufacturers to develop Chaku-Uta-compatible models, building a system that simultaneously assembled the three elements of 3G infrastructure, compatible handsets, and a song library. Leveraging its position as a telecommunications carrier, the company advanced handset specification standardization and content procurement in parallel.

Chaku-Uta gained support as a service that made it easy to listen to popular songs on mobile phones, and by August 2003, cumulative song downloads reached 7 million. KDDI secured telecommunications revenue from song downloads, realizing a structure in which content distribution drove infrastructure revenue.

For customers, Chaku-Uta became one motivation for newly subscribing to au, and in fiscal year 2003, KDDI's au surpassed NTT DoCoMo to take the top position in annual net subscriber additions in Japan. This made visible the competitive structure of the mobile phone market in which content appeal influenced carrier selection, and determined the direction of KDDI's service strategy.

The proliferation of smartphones, led by the iPhone, in the 2010s caused a fundamental change in the revenue structure of mobile phone companies. In the previous feature phone era, carriers had maintained integrated control over handsets, carrier billing, and communication fees, but the spread of smartphones created a significant possibility that control over handsets and payments would shift to Apple and Google. Securing new revenue sources beyond telecommunications became an urgent management priority for KDDI.

From around 2015, KDDI began pursuing business expansion beyond mobile telecommunications, entering lifestyle infrastructure areas such as finance, insurance, and electricity. The capital and business alliance with Lifenet Insurance and the launch of au Denki were strategic moves to extend services from communications contracts to all aspects of customers' daily lives.

In May 2016, KDDI announced 'Maximization of the au economic zone' as a strategic objective in its medium-term management plan. Through ancillary services such as au WALLET point rewards, au Denki, au Insurance & Loans, and au STAR, the concept was to convert telecommunications subscribers into users of financial and lifestyle services.

What KDDI aimed for was a platform-type business model that leveraged its subscriber base to provide 'customer referrals' to service-providing companies and earn commission revenue. This represented a role transformation from telecommunications service provider to a referral platform with customer touchpoints, and was an approach to monetizing the asset of carrier subscribers that differed from Rakuten's construction of an economic zone centered on 'EC × credit cards.'