KDDI to Shed DDI Pocket PHS Unit
By Eric Lin, Thu May 27 21:45:00 GMT 2004

Like RBOCs selling off landline businesses to ease their debt load, KDDI is in talks to sell off its Personal Handyphone System (PHS) network -- in fact to the same company buying Verizon's Hawaiian network.

The Carlyle Group, which just purchased Verizon's Hawaiian landline business, along with Kyocera Corp. are in talks to purchase controlling interest in the DDI Pocket PHS network from KDDI. Kyocera, which is the primary manufacturer of PHS equipment, would up its stake in DDI Pocket from 13% to 30%, the Carlyle Group would grab 60%, and KDDI would maintain a 10% bite. KDDI would get 220 billion Yen ($1.97 billion) for its interest, but would assume the full brunt of the network's debt, which was 134.5 billion Yen ($1.21 billion) at the end of last quarter. By the time the debt is paid down, KDDI is practically giving DDI Pocket away, save for the 10% stake it will keep.

PHS (Personal Handyphone System) was quite popular in Japan about 5 years ago. Its low power requirements and other factors put PHS handsets ahead of the size and design curve back then. But the low power transmitters also meant PHS phones got spotty coverage, so they quickly fell out of favor. Now PHS is relegated to data-centric uses -- it's integrated in some Japanese PDAs and internet devices or accessed with a laptop data card. Users get fairly reliable data at 256k for a small flat monthly fee. Since KDDI has introduced unlimited 3G data, which is significantly faster, for a higher monthly price, it probably would like to convert PHS customers to AU WIN users. It wouldn't hurt to at least shed one of the networks either, considering KDDI operates CDMA, PHS and PDC ventures in Japan.

Carlyle and Kyocera probably aren't hoping to revive Japan's flagging consumer interest in PHS, instead focusing on industrial applications. Companies are already using PHS to track status and inventory in vending machines and other equipment. Also as PHS wanes in Japan, it's growing in China. There are already 37 million PHS subscribers there and the numbers continue to grow. Inexpensive equipment with low requirements have made it easy to blanket densely populated areas. While the DDI Pocket deal doesn't put Kyocera and Carlyle in a direct position to take advantage of the growth in China, it does set them up to use Japan as a test bed and offer successful services to the growing market in China. Though Kyocera is probably making plenty of money on Chinese PHS system already thanks to equipment sales.