WW-40 -- Handset Doom and Gloom; PDA Joy

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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 business of wireless in Japan
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Issue No. 40
Monday, January 21, 2002
Tokyo

INDEX

+++ Viewpoint: Handset Doom and Gloom; PDA Joy

+++ Noteworthy News
--> Mobile Phone Shipments Down Again
--> J-Phone Aims for Summer Showdown
--> Downloads, Phones Hurt CD Output
--> TTP Signs Wireless Deal with Matsushita

+++ Sign of the Times
Low-tech Solution for de-Pocketed Pocket Rockets

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+++ Viewpoint: Handset Doom and Gloom; PDA Joy

While the last issue of Wireless Watch boldly predicted that 2002 would be
FOMA's year, Japan's wireless industry overall may be in for a shakeup.

In November, net additions (net new subscribers on all networks) fell below
500,000 for the first time in -- get this -- five years! And this trend is
likely to continue according to at least one analyst. (The one bright spot is
J-Phone, whose subscriber growth is 60 percent faster than the market overall,
with the highest ratio of Internet-enabled subscribers.)

And despite lots of future promise, DoCoMo's 3G network isn't generating a lot
of interest just yet. We told you last week that a senior DoCoMo executive
admitted that "150,000 (3G subscribers by the end of March) may be a bit tricky
considering we have only about 30,000 or 40,000 now."

The NEC N2001 FOMA handsets are now listing for less than the cost of some
503i-series 2.5G (PDC) handsets -- and this price discount comes only three
months after going on sale. Clearly, retailers are getting edgy about sales and
are discounting so as to get the handsets off the shelves. But it looks like
there is little consumer demand to fuel 3G handset sales.

Wait -- it gets worse. On Tuesday, Reuters quoted Qualcomm Japan president Ted
Matsumoto, who said, "For the current year, 3G won't exist in an acceptable
form; The applications aren't there yet." Matsumoto predicts that the real
battle for 3G will be next year. On Wednesday last week, it was reported that
domestic shipments of cellular and PHS handsets dropped a whopping 24.2 percent
in November from the year previous to 3,229,000 units, marking the sixth
consecutive month of decline (see first news item below). PHS is in even worse
shape, with November marking the ninth straight month of declining handset
sales. Yikes! But perhaps unsurprising in view of the five-year low in net
additions.

Further, last fall, one legal advisor to a major wireless carrier here mentioned
that he'd been approached by a large handset maker to help introduce them to
smaller handset software developers -- developers that could help the handset
maker port attractive new software-based services to its handsets. Clearly,
makers are getting a little desperate to boost sales, whether in Japan or
overseas. (Who cares, as long as sales go up?)

So, in summary, we've got steeply falling 2.5G and 3G handset sales, record low
numbers of new subscribers, discounted 3G handset prices, and the head of
Qualcomm saying there are no applications to attract new 3G subscribers.

Hmmm. Is there, you may ask, any good news?

Well, who says that wireless access has to be provided by a handset? It appears
that wireless operators both here and elsewhere may be able to rely on growing
enterprise and consumer interest in PDA devices to help boost the wireless
market. PDA shipments are growing. According to a market survey conducted by
Nikkei Market Access, global PDA shipments in 2000 exceeded 10 million units, a
four-fold growth in three years.

In the past several months, NEC, Matsushita, and Toshiba have all -- for the
first time -- launched Palm- or Pocket PC-based PDAs. All also make cellphones,
and all are obviously committed to boosting sales without relying only on
handsets. Palm, Handspring, and Compaq, among others, have beefed up their
existing PDA lines, in part to counter the increased competition from the
Japanese makers.

The newest PDAs all have between 8 and 64 megs of RAM memory, and most have
color screens, making them much more sophisticated than devices available just
six months ago. Several of the Sony models, for example, are billed as "personal
entertainment organizers" and can play back multimedia files. New Pocket PC 2002
devices are also equipped with updated audio and video file players. Most
importantly, almost all new (as well as existing) PDAs have integral Compact
Flash or PC Card slots that can accommodate wireless modem cards.

You can bet your Pachinko money that the carriers have not failed to notice
this. DoCoMo, for one, has developed a new PHS modem card that integrates voice
communications with data access. The Compact Flash card inserts directly into a
PDA or notebook PC; existing PHS wireless modems from DoCoMo actually have phone
numbers assigned, but they can't be used to make voice calls. For the carriers,
a wireless voice and data user is a wireless voice and data user, whether that
use happens on a handset or on any other device.

In addition, PDAs have the added benefit of freeing the carriers of onerous
device subsidies. People here are willing to pay JPY40,000 (for the Sony Clie
760, for example) for a PDA, while they won't pay the full JPY60-80,000 for a
cellphone (JPY60,000 is the estimated subsidy paid by one carrier to its handset
suppliers).

While "traditional" handsets may be suffering Japan, it looks like 2002 may
(also) be the year of the PDA -- the wireless-enabled PDA, that is.

--Daniel Scuka

Japan Facing Tepid 3G Cellphone Take-up in 2002
http://biz.yahoo.com/rf/020118/t114383_2.html

PDA Markets to Make Next Move, to Share Common Architecture
http://www.nikkeibp.asiabiztech.com/wcs/leaf?CID=onair/asabt/fw/147266

NTT DoCoMo Technology Turns PDAs into Mobile Phones
http://www.nikkeibp.asiabiztech.com/wcs/frm/leaf?CID=onair/asabt/moren/1...

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

--> Mobile Phone Shipments Down Again
http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nb20020116b1.htm
Source: Japan Times, January 16

EXTRACT: Domestic shipments of cellular and PHS handsets dropped 24.2 percent in
November from a year ago to 3,229,000 units, marking the sixth consecutive month
of decline. Increased shipments of third-generation mobile phones failed to
offset the impact of slowing demand for new subscriptions and the latest models,
said the Japan Electronics and Information Technology Industries Association
(JEITIA). Shipments of PHS handsets fell by 3.7 percent to 236,000 units,
marking a ninth straight monthly fall.

COMMENTARY: Note that the decline in PHS handset sales, which include PHS
wireless data modems, was less than the 19.2 percent drop recorded in October.
That month, carriers here launched flat-rate data access plans, and this is
thought to be a major factor in slowing the PHS sales decline.

We think Japanese makers will be even more keen to establish overseas
partnerships, like the fall 2001 Sony-Ericsson deal, and to develop handsets
that are easily customized in different markets. Before this can happen, though,
the makers have to cut the umbilical cord and learn to survive without the
massive (some say obscene) device subsidies provided by carriers here. They will
also have to learn to do their own R&D.

--> J-Phone Aims for Summer Showdown
http://www.mformobile.com/default.asp?Redirect=main.asp?pk=24595
Source: BWCS on M for Mobile, January 14

EXTRACT: The Vodafone-controlled Japanese mobile operator J-Phone has set a June
30th deadline for the launch of its own 3G services. Company president Darryl
Green is reported to be switching the focus of company investment in
infrastructure to the W-CDMA network at the expense of its 2G network. J-Phone
says it will roll out 3G services in Tokyo, Yokohama, and Kawasaki, and plans to
achieve nationwide coverage by the end of 2004. Tests of the new service are
scheduled to kick off next month with a series of trials involving the
transmission of video images from mobile phone handsets via J-Phone痴 network.

COMMENTARY:

If the company meets its self-imposed deadline it will be the first Japanese
operator to compete with DoCoMo in the provision of 3G services. It would also
be the first Japanese company to launch its 3G network on time. ;-) This
announcement comes after an intensive, top-down review by senior management of
all aspects of J-Phones network services. We heard there were no sacred cows and
few stones were left unturned. Expect the first marketing target to be J-Phone's
own, mostly young subscribers who tend to graduate and drop the carrier's overly
youth-oriented handsets for "adult" models from DoCoMo. Maybe the carrier's cost
of acquisition for 3G subscribers will be noticeably lower than DoCoMo's?

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--> Downloads, Phones Hurt CD Output
http://www.asahi.com/english/business/K2002011800388.html
Source: Asahi Shimbun, January 18

EXTRACT: The mounting phone bills of young shoppers and the lure of downloadable
music available free of charge over the Internet dealt a double blow to the
recording industry last year. Production of compact discs and other music
software in 2001 fell below the level of the previous year for the third
straight year, according to the Recording Industry Association of Japan (RIA).
Association officials say phone-crazed young people are racking up ever-larger
bills on their phones, leaving them with less pocket money for CDs, records, and
tapes. Record companies are trying to cope with changing shopping habits by
reducing output.

COMMENTARY: Pay attention to this story -- it is really, **really** important.
In the US and elsewhere, the music industry didn't (and doesn't) understand the
Internet, and has been unconscionably slow to adapt digital distribution
methods, preferring to rely on tried-and-true pressed discs. Yuck!

Now, with wireless, the music industry really has no choice but adapt or die,
and this trend has already started. Moreover, there is no way that subscribers
will pay JPY2,000-plus to receive an album by wireless, so prices will have to
come down (CD singles have been hit particularly hard by declining production).
In the US, where the music via the Net is booming, production of CD singles fell
by about 40 percent in 2000. Wireless will only accelerate this.

NOTE: Music Media Watch is a brand-new addition to J@pan Inc's collection of
weekly newsletters. MMW provides in-depth news and commentary on the major
developments in Japan's fascinating and fast-moving music media industry (send
mail to "editors@japaninc.com").

--> TTP Signs Wireless Deal with Matsushita
http://money.iwon.com/jsp/nw/nwdt_rt.jsp?cat=USMARKET&src=201&feed=
reu§ion=news&news_id=reu-l17169902&date=20020117&alias=/alias/money/cm/nw
Source: Reuters on iwon.com, January 17

EXTRACT: British wireless technology company TTP Communications Plc said on
Thursday it had signed a licensing deal with Japanese electronics giant
Matsushita Electric Industrial. The agreement will allow Matsushita to use TTP's
dual-mode chipsets, which can be used on both current GSM and future 3G wireless
networks in the Japanese company's mobile terminals, TTP said in a statement.

COMMENTARY: Dualmode 2G/3G phones are expected to play a major role in Europe,
the US, and -- despite the DoCoMo hype -- in Japan. J-Phone, for one, is hoping
to use dualmode phones to launch its 3G services later this year. TTP signed a
similar agreement with Toshiba in 2001.

(We heard from a chip industry analyst today that Japan's chip industry is
looking flat. He doesn't expect any sort of PDA boom, for example, to help boost
sagging sales.)

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+++ Sign of the Times

Low-tech Solution for de-Pocketed Pocket Rockets

Have you ever bent over and had your cell phone fall from your breast pocket and
straight into a puddle, gutter or even a toilet? A Saga man has come up with a
simple yet innovative solution. The invention of Naotoshi Kuratsu, a 52-year-old
company president, is a pocket-sized resin-foam board with a plastic frame. The
key to the item is the high degree of friction provided by the resin foam that
keeps a cell phone or a pager from sliding out of the pocket even when the user
bends forward. The inventor said he came up with the idea when he realized that
the doormat at his home did not slide thanks to its resin-foam backing. After
spending five months developing the device through trial and error, Kuratsu
applied for a patent for his invention in May 2000. Kuratsu said he has shipped
a total of 26,000 units so far at 600 yen each. His business partners include
large companies in Tokyo and Osaka, one of which has been buying 2,000 of the
phone holders at a time.

"Company Head Invents Pocket Cell Phone Holder," Yomiuri Shimbun, Jan. 12
http://www.yomiuri.co.jp/newse/20020121wo33.htm

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

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