WW-22 -- The Dirty Little Secret of Japan's Wireless Webs

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J@pan Inc Magazine Presents:
W I R E L E S S W A T C H
Commentary on the week's wireless news from Japan
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Issue No. 22
Tuesday, September 4, 2001
Tokyo

INDEX
+++ Viewpoint: The Dirty Little Secret of Japan's Wireless Webs
+++ Noteworthy News
- NEC Phone Glitches Point to Tough Challenge Ahead
- Mobile Gaming in Japan: Breaking the Color Barrier
- Japan KDDI Pres: No Cap Tie-Up Plan With Foreign Cos
- Wind River Dominates Market for Japan's FOMA Base
Stations
+++ Events
+++ Sign of the Times

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+++ Viewpoint: The Dirty Little Secret of Japan's Wireless Webs
(Rather long this week -- perhaps better to print and read on paper.)

After watching the development of Japan's wireless webs for some 18
months now, we have to admit we're as impressed today as when we ran
our first wireless Internet feature in J@pan Inc magazine in June of
last year (see link below). There is no doubt that what has been
achieved here is a first, or rather a string of firsts: The first
usable, useful, and socially significant mobile Net access services;
the first way to earn significant revenue on the Internet for a
spectrum of content and service providers; the first full-color,
highly advanced, fun-to-use pocket handsets; and -- as we've said
before -- the first wireless Internet revolution, with huge
potential, anywhere.

But lest we inadvertently overhype wireless in Japan, we'd like to
set the record straight on what Japan's wireless webs are -- and what
they're not. We'll also take this opportunity to reveal the dirty
little secret of Japan's mobile business -- a secret that isn't
discussed much in polite company.

First, the straight facts on wireless in Japan.

To start, the carriers control the complete service envelope, from
the handsets and the billing plans to the service providers and the
content on the tiny screen. Those of us who work in Japan and who use
the wireless Net every day via NTT DoCoMo, KDDI, J-Phone, or DDI
Pocket tend to forget how weird this really is.

Consider what it would be like if a single corporate entity
controlled the wireline surfing experience. It would be as if a
single corporate brand name (Microsoft? AOL? Intel?) would:

** Sell you your PC
** Set the technical and commercial standards for the monitor, video
card, hard disk, sound card, and all other hardware, with only some
of these standards being made public
** Create and sell the operating system, applications, browser, mail,
and entertainment software (like Winamp or RealPlayer)
** Provide your ISP account, your mail account, and all of the Web
services that you use
** Control a large number of the Web sites that you regularly visit
** Serve as gatekeeper for the kind of content and services that the
sites offer
** Send you a single, unified bill each month for your usage of the
service and your access to some of the Web sites
** Know precisely which Web sites you visit, how long you spend
online, and how much and to whom you send mail

Wow!

While the Internet may as yet be an emerging phenomenon, we think
it's safe to conclude that if any single corporate entity ever tried
to wield this degree of control over netizens' wireline surfing
experience, there'd be shooting in the streets (at least in countries
that have Second Amendments).

And now here's the DLS: Those content and service providers, largely,
do not make any profit -- whatsoever -- on their mobile Web efforts
in Japan. Sure, a small number of major brand owners are profitable,
and there are more that earn revenues. These include the usual
suspects: Cybird, Bandai, Tsutaya, Disney, some of the gaming houses,
and some of the ring tone download sites. But the vast majority of
the 45,000 non-official, and at least half of the official, i-mode
sites, are not profitable.

Granted, we don't have the spreadsheets at hand to prove this hunch.
But we hear a thunderous silence whenever we ask someone what their
i-mode, J-Sky, or EZweb site costs them, and how much they're
earning. It's human nature to blow your horn when you're being
successful and to pipe down when you're not; and there's an awful lot
of piping down going on.

Also granted, not everyone wishes to make a profit, or even earn any
revenue at all, from their wireless Web site, which is perfectly
valid. Tiny sites can be used to provide services or content whose
costs are leveraged in many other ways, including marketing, sales
promotion, value-add to existing big Web sites, or value-add to
existing offline efforts (like retail shopping, for example; Tsutaya
is a prime example).

But the fact is, few wireless Web sites are profitable in their own
right, and we've seen again and again how content and service
providers spend substantial amounts of cash to port their content or
services to wireless, only to see revenue come in at slightly above
zero. Why do they do this?

Mainly, they think they have to -- because wireless is **the** buzz
technology in Japan these days. Also, if they wish to become official
sites, one of the carriers tells them that they have to provide
mobile services that in practice require significant backend
integration to achieve, forcing them to spend much more than
otherwise. Ouch! Also, they do it because everyone else is, and in
Japan, that's important.

But don't for a moment think that Japan's wireless Webs have achieved
something that the Web at large hasn't (i.e. a foolproof profit
model).

Finally, to answer the question that many of you, perhaps, thought
the title of today's viewpoint meant: Yes -- there's porn on the
mobile Internet in Japan. OK, not exactly porn (the screen
resolutions don't support high res images -- yet), but there are
plenty of adult-targeted services, like "dating" services and drug
sales (Did anyone say Viagra or Ecstasy?).

Are these making money? Again, we don't know for a fact, but we guess
so. Remember -- building effective tiny screen Web services is just
as expensive (if not more so) than building regular Web sites. If the
"deai" dating and spam offers of drug sales weren't effective (i.e.
profitable), they'd quickly end. But they haven't.

Japan's wireless webs have, to date, proven to be hugely successful
and profitable for the carriers, certain of their content partners,
and few others. Sure, we've been impressed with what's been achieved.
We'll be far more impressed when the likes of DoCoMo, KDDI, and
J-Phone figure out how to spread the wealth around a little.

--Daniel Scuka

"Unwired: Japan Has the Future in its Pocket," June 2000
http://www.japaninc.com/mag/comp/2000/06/jun00_unwired.html

+++ Noteworthy News
(Long URLs may break across two lines.)

--> NEC Phone Glitches Point to Tough Challenge Ahead
http://biz.yahoo.com/rf/010828/t129480_2.html
Source: Reuters on Yahoo, August 28

EXTRACT: Technical glitches in increasingly complex Web-surfing
mobile phones will find no easy fix and even NEC's popular phones
have narrowly escaped a costly recall, an executive at Japan's No. 2
handset maker said. NEC's top-selling Net-enabled handsets made for
dominant mobile operator NTT DoCoMo had software glitches earlier
this year, Ben Nakamura, NEC's senior vice president for mobile
terminals, told Reuters in a recent interview. "Compared to other
makers, we were spared (a recall) just narrowly," Nakamura said.
"Much of that had to with our experience with computers and
software." The electronics giant's N503i phones were at the top of
sales lists for DoCoMo's latest 503i-series Java i-mode phones.

COMMENTARY: This item is the first public comment we've seen
acknowledging that NEC's 2.5G handsets were in just as much trouble
as Sony's and Panasonic's (Sony suffered a 420,000-unit recall in
May; Panasonic, a 230,000-unit recall in January). We already knew
about NEC's 3G handsets being recalled by Manx Telecom prior to the
start of the Isle of Man's 3G test network in April, but until now,
there was little word of trouble on current-generation NEC i-mode
cellys.

In this case, users reported that the speaker on some NEC handsets
died after the phone was switched to "silent setting." Some also lost
email messages and bookmarks under certain circumstances. DoCoMo
confirmed the problems and says that they replaced the NEC models
free of charge. (This author remembers seeing the notices in DoCoMo
shops in June, and wondering why there was no coverage in the press.)

To save its bacon, NEC is doing what Sony did: tying up with a bigger
partner. Last week, NEC said it would partner with Matsushita
Communication (and parent Matsushita Electric Industrial Co. Ltd.)
for 2.5G and 3G technology focusing on Europe and "the rest of the
world" (we guess this includes home turf). Sony is presently
integrating its handset division with Swedish telecom equipment maker
Ericsson, and a new JV is due to launch next month. Our Deep Source
in Ericsson says: "It makes sense. It ties Ericsson's engineering
know-how with Sony's brand-building and marketing smarts."

--> Mobile Gaming in Japan: Breaking the Color Barrier
http://www.anywhereyougo.com/scrape01/Article.po?type=Article_Archives&p...
Source: Anywhereyougo.com, August 29

EXTRACT: In the land of the Rising Sun, home of the PlayStation, they
have taken mobile gaming to the next level -- color. Using Compact
HTML, or cHTML, i-mode has the distinct advantage of being easier to
program for. But HTML alone cannot provide the necessary canvas for
gaming. Earlier this year, NTT DoCoMo began offering the i-Appli
service to its customers. Based on Sun Microsystem's Java programming
language, developers have started to port existing cHTML-based games
over to i-Appli. Users download the Java game on to their mobile
device and can play offline to avoid any unnecessary service charges.
Hudson Soft has provided i-Appli games to the i-mode service from the
beginning. Some of its featured games include "Star Soldier," a
shooting game that was shown on NTT DoCoMo's TV ads, "Miracle Quest,"
a role playing game (RPG), and the racing game "Miracle GP."

COMMENTARY: Make no mistake: Java is what's saving i-mode right now.
DoCoMo has tacitly acknowledged this fact by reporting ARPU (average
revenue per user) for Java users separately from non-Java users (see
link below). In July, one investment bank analyst estimated that, as
of June, Java users were generating 425 packets per day of usage (on
average) compared to 180 per day for non-Java users -- a huge
differential. J-Phone introduced Java in July, and already the Java
handsets are the top sellers.

Nonetheless, even Java packet usage is now falling. By now, it should
be down to 348 packets per day (including the 400 free anti-spam
packets), according to the analyst (who requests anonymity) and it's
unclear how Big D can turn this around. "Wait for the 504i-series
handsets," responds our Deep Source at i-mode. Hmmm... DS's hope may
not be misplaced: If the new handsets feature expanded onboard memory
and the ability for Java apps to directly access hardware (as is
rumored), then the Java environment could be significantly enhanced,
leading to another boost in usage and more change in DoCoMo's cash
register.

Latest NTT DoCoMo Quarterly results
http://www.nttdocomo.com/new/contents/01/whatnew0810.html

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--> Japan KDDI Pres: No Cap Tie-Up Plan With Foreign Cos
http://sg.biz.yahoo.com/010830/15/1dshd.html
Source: Dow Jones on Yahoo, August 30

EXTRACT: KDDI doesn't plan to pursue any capital tie-ups with foreign
telecommunication carriers because it thinks it can achieve its goals
through other kinds of business agreements, said KDDI President
Tadashi Onodera.

COMMENTARY: We think Onodera-san may be making a mistake. If
anything, the domestic wireless industry is becoming even more
competitive -- and the technology, tougher. Sony is tying up with
Ericsson for handsets, NEC is tying up with Matsushita, J-Phone is
being taken over by Vodafone (the world's largest cellular telco),
and PHS is being given a new lease on life by JCI -- Japan's first
VMO (which, incidentally, is focusing solely on data). DoCoMo is
deeply connected with a whole hockey sock-ful of foreign partners.
Sure, KDDI has great foreign **technology** partners, including
Qualcomm for its crown-jewel cdmaOne (soon to be cdma2000 1xEV-DO)
network and Williams (US) for the bandwidth reselling business. But
we think KDDI needs to (a) partner with a foreign operator for
operations and data services, and (b) divest its money-burning PHS
network.

--> Wind River Dominates Market for Japan's FOMA Base Stations
http://www.nikkeibp.asiabiztech.com/wcs/leaf?CID=onair/asabt/news/139153
Source: Nikkei AsiaBizTech, August 29

EXTRACT: The manufacturers supplying antenna base station
infrastructure gear for NTT DoCoMo's new third-generation (3G)
mobile-phone service called FOMA have all adopted the VxWorks
real-time operating system for use in base station equipment. This
means that US-based Wind River Systems, the developer of VxWorks and
already the world's largest producer of such real-time OS products,
has the whole FOMA market to itself.

COMMENTARY: This is interesting. It nicely illustrates the fact that
telecoms technology, and in particular, mobile technology, is fast
becoming a global industry, and no one country, or company, can claim
independence or go it alone. Ericsson, for example, is the biggest
supplier of infrastructure to NTT DoCoMo and J-Phone for 3G. This
item also mentions that most of DoCoMo's 3G handsets use the
Japan-developed uITRON (read as "mu"-ITRON) real-time OS, and that
several makers may be opting to use the EPOC OS developed by UK-based
Symbian.

+++ Events (ADVERTISEMENT)

** Bluetooth Seminar at WORLD PC EXPO 2001, September 20, 2001, Tokyo

With cooperation from the Bluetooth SIG, Nikkei Electronics will hold
a technical seminar focusing on Bluetooth, the short-distance
wireless data communications technology, for development engineers.
Mr. Thomas Baker, the leading figure at the SIG, will provide the
keynote speech, and persons in charge of drawing up specifications
will give lectures on the details of the high-speed spec for "Radio
Enhancements" and on the specifications for 3G cellular phones drawn
up by NTT DoCoMo and others.

In addition, Sony will provide its perspective on Bluetooth
applications in the near future as a company keen on commercializing
Bluetooth products, and a panel discussion on Bluetooth logo
certification -- indispensable for commercialization of Bluetooth
products -- will be conducted by four panelists from Japan's leading
Bluetooth qualification test facilities (BQTF). Simultaneous
translation (Japanese <--> English) will be provided.

For further information please visit:
http://dk.nikkeibp.co.jp/dk/seminar/010920e.html

----

** Next Generation Mobile Content Strategies, 11-13 September 2001,
London

Next Generation Mobile Content Strategies goes straight to the heart
of mobile content development. By examining case studies from
industry leaders, delegates will gain invaluable insight into the
mobile market today.

For further information:
http://www.metelecoms.com/mobilecontent6.htm
Email: karineb@marcusevansuk.com

+++ Sign of the Times
Mari Matsunaga's book, "The i-mode Incident" will finally be
available in English. It appears that she found a translator and
publisher in Singapore (Chuang Yi Publishing Pte Ltd.), and the book
is due out in the fall under the uninspired title, "The Birth of
i-mode." We think it odd she couldn't find a US publisher. At last
count, we were aware of five books with "i-mode" in the title due to
be published in the US this fall, all targeting software or business
development types. Doesn't that indicate adequate interest in
English-speaking markets?

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SUBSCRIBERS: 1,030 as of 4 September 2001

STAFF
Written by Daniel Scuka (daniel@japaninc.com)

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