NTT DoCoMo Officially Ties Up With AOL

The deal will give a boost to AOL's efforts in Japan, but more importantly to its wireless efforts in the US and elsewhere.
by Daniel Scuka

With this week's formal announcement of the long-rumored NTT DoCoMo-AOL tie-up (see "DoCoMo's Tango With AOL Japan -- Just the First Dance?" ), the details are public for the first time, and it's clear that this is no ordinary deal.

According to this week's reports, the new strategic alliance between wired content provider AOL Japan and wireless network operator DoCoMo will be aimed at marketing and developing wireless Internet products in Japan, including AOL's email and some content. The deal will see NTT DoCoMo spend $143 million to buy as much as a 43 percent stake in AOL Japan, giving DoCoMo a larger share in AOL Japan than AOL itself -- whose ownership will fall to 39.3 percent against a new investment of $100 million. Both companies may invest a further $200 million in the future. Attention is focused, of course, on DoCoMo's smash success i-mode mobile Internet access service, presently boasting 13.4 million-plus users, which will become accessible to AOL Japan, long the underdog on Japan's wired Net, having barely managed to gather some 440,000 users, according to some analysts' reports.

While the dollar amounts may be small, the figures mask the wider implications of the deal for cooperation outside Japan's borders, and the announcement could pave the way for DoCoMo to export its i-mode service to the lucrative US market. Indeed, one understated portion of the deal calls for the two companies to establish a US joint venture to cooperate in the wireless access business.

DoCoMo's i-mode presently provides mobile surfers in Japan access to some 25,000-plus official and non-official Web operators offering a huge variety of sites, including news, information, banking services, shopping, ticketing and reservations, sports, dating, character and melody download, and, importantly, access to the outside Web at large (although sites must be suitably formatted for the small screen).

The most compelling aspect of the i-mode service is that DoCoMo, like its competing mobile Internet providers KDDI and J-Phone, has solved the problem of pay-for-content, with mobile surfers being billed small monthly fees to access certain of the official sites. "Official" means that the site is accessible with a few clicks from the cellphone's default start menu, and site owners are paid access fees that are in turn appended to the user's monthly phone bill (although many sites are free), while non-official sites can only be accessed after manually inputting the URL, and no billing assistance is provided by the network operator.

The major stealth aspect of this deal is that DoCoMo has for the first time convinced a major US Internet player of i-mode's merits -- significant because i-mode is in fact a marketing brand name and a business model, and not a cutting-edge technology as many pundits have erroneously claimed. The i-mode service is an extraordinarily clever business model that leverages otherwise simple technologies (a slightly modified version of widely used and widely accessible HTML, menu-driven navigation of useful, in-the-microbrowser content, and pay-per-packet download fees allowing unlimited connection time) to produce a service offering that is simple, robust, and years ahead of US and European wireless networks' WAP (Wireless Application protocol)-based services. "Why is DoCoMo so good at providing i-mode? They focused on consumer needs, and made the service easy to use, exciting, and interesting. They stress convenience, not 'the Internet'," explains Jupiter Japan president Masayuki Nagataka. For its part, DoCoMo, even while basking in the international spotlight and happy to accept all accolades, admits that the technology is nothing special. "I agree that there is no fancy proprietary technology," says one source within the company requesting anonymity, adding: "What DoCoMo offers is the know-how and experience. Years went into planning i-mode, and we've been doing it for 18 months. I think it is this experience of making it work that everyone is interested in."

In a nutshell, this is why the AOL-DoCoMo tie-up is signally significant: the deal in its essence represents a massive transfer of wireless content provision know-how from Japan to the US -- which has to be a first for Net history. And since some 50 percent of the Japanese sites being accessed via i-mode are not official sites, it's also clear that the deal has significant implications for small third-party content, service, and application providers in Japan and the US.

If AOL and DoCoMo can apply the i-mode business model to the US, then significant opportunities for small, US-based third-party players similar to those now seen on Japan's wireless Web will likely arise, especially if the pay-for-content aspect of i-mode can be successfully exported. "It's a huge opportunity for content providers in the US -- and they have excellent content -- but the only problem is, they don't make money off of it. If [a market can be created] that is willing to pay for content, then that's an opportunity for content providers here," says Walt Arp, CEO of Orange County, California-based Squeezenet.com, which provides an intelligent Web content reformatting service for mobile device users. "If DoCoMo comes to the States with AOL, there's potentially an opportunity for us," he adds, somewhat excitedly. Of course, earning revenue for content is still an open question. "That's a great unknown in the US: Will people pay for content on wireless devices? They're not used to doing that on the PC. In Japan, it's guaranteed," adds Arp.

Others are skeptical of making any grown-in-Japan model work outside of Asia. Japan is considered to be a unique market, and the factors that have led to i-mode's success here -- a huge captive audience of cheap Net access-starved would-be surfers, culturally specific content, and a huge commuting population -- may not exist elsewhere. "What we're seeing is that everything that works in Japan doesn't work elsewhere. Japan is a unique market for many of the services -- mobile Internet fun isn't Asian pervasive," says Kurt Davis, analyst at the GE APC Technology Fund in Hong Kong. On the question of Japanese wireless application providers expanding overseas with DoCoMo, Davis is still neutral: "Successful mobile applications are highly specific to cultures and national demographics. What flies in Japan won't necessarily fly in the States or Europe. However, if the application product is flexible and multilingual, they could penetrate other countries with the right channel partners," he adds.

Further, DoCoMo may have a not-insignificant corporate culture problem to overcome as it expands into foreign markets. The firm, part of Japan's former monopoly telco NTT, is long used to having its own way, dictating everything from which content providers are allowed onto the official i-mode menu to what specs cellphone manufacturers will follow. DoCoMo is very much used to operating in a limited market where they are the 900-pound gorilla. "DoCoMo is very technology driven, and it's difficult to convince their technology mindset of the value of moving overseas. Here in Japan, NTT dictates cell phone specs to the manufacturers -- they cannot do that in the US," says Takeshi Hosoya, analyst at Jupiter Japan.

There are also handset impediments to any US Net boom, i-mode or not, and some feel that manufacturers serving the US market will have to bring their offerings up to Japan's standards before mobile surfing catches on. In Japan, cellphones are getting smaller, lighter, and more sophisticated. The latest Internet-enabled models have 256-color screens, handle 111 x 80 pixel GIF graphics, and weigh in at between 70 and 80 grams. They'll fit in a shirt pocket and have standby battery lifetimes of up to 350 hours (about two weeks!). "People here think text is boring -- especially coming from the graphics-rich PC world. Until we get color graphics, mobile access won't become something that people, on an emotional level, think 'I've got to have'," says Squeezenet's Arp.

Nonetheless, the deal represents something of a triumph for NTT DoCoMo, and when the ink finally dries, there's no doubt the champagne will flow on the 37th floor of the Sanno Park Tower, DoCoMo's brand-new corporate headquarters in Tokyo. "The deal really authenticates DoCoMo's international strategy, which people have been criticizing, and now their future is really in wireless Internet. They were the first with i-mode -- these guys understand what the hell is up. By teaming up with AOL, not only do they get global exposure and a global name, but they're teaming with the best ISP in the world," says a senior wireless analyst at an investment bank here, who declined to be identified. "DoCoMo needs the [AOL] name -- they really need respect outside of Japan. That's what [DoCoMo President Kenji] Tachikawa really wants," he adds.

Tachikawa should be especially pleased with the boost that the deal brings to i-mode's open-standard compact HTML (cHTML) language, a tried-and-true solution that pushes the competing WAP standard, WML (Wireless Markup Language -- which is being promoted by industry heavyweights via the WAP Forum), even further to the margins. WAP has been adopted for mobile Web access in Europe and the US, but still suffers from technical problems, whereas the cHTML used by i-mode has few problems and is additionally compatible with Web browsers on wired PCs. "The WAP forum has adopted interoperability standards to enable i-mode-formatted sites to be accessed by WAP handsets. By first or second quarter next year, handset manufacturers will be producing i-mode-enabled WAP handsets, which is huge," explained the senior wireless analyst.

And if i-mode -- or some variation -- does generate a mobile Net boom in the US, what sort of content and services will be popular? Perhaps the same ones that are now taking Japan by storm, cultural differences aside. And here, services will only expand with the arrival of Java-enabled cellphones sometime early next year. GPS location-based services, bar-code scanning and inventory management, financial information, accounting, sales force management, and database access are all expected to be big. "Various companies here are interested in providing these services, and are looking for venture partners. The ASP model is good," says Masataka Kurihara, CEO of Tokyo mobile application developer Gluegent.

And Japan's two-year mobile headstart on the world -- US included -- may for the first time allow experienced developers here to follow i-mode's footsteps. Hiroshi Fujiwara, CEO of ISP Internet Research Institute, predicts "Japan could become the world leader in mobile application development."

And i-mode may be leading the way.

business