WW-88 -- KDDI 3Q Rock'in Results and BREW Comes to a Boil

Wireless Watch Japan Mail Magazine
Commentary on the Business of Wireless in Japan
Issue No. 88, Tokyo, Monday, February 10, 2003
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in this issue
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++viewpoint: KDDI 3Q Rock'in Results and BREW Comes to a Boil

++wireless notes:
** Movie Keitai (A5304T) BREW Mobile Phone with Camera
** WWJ Alumni Moves to the Big Time

++noteworthy news:
--> Matsushita Missed Boat on Camera Phones: Exec
--> Softbank BB to Market Cordless IP Phone with Wireless Router Function
--> KDDI Earns $256.5 Million on Popularity of 3G Service
--> Smart Phones Dial Up Dynamic Deal for Shoppers

++events (promotion):
Service Sector Entrepreneurship in Japan: Successfully Leveraging Overseas
Business Practices and 'Outsider' Insight

++overlooked data:
** TCA Subscriber Data for 1-31 January 2003
** PHS MOU Touts New PHS Data-based Telephony Voice Service

++sign of the times:
Mobile Phone Chitchat Sparks Fatal Bashing

++subscriber statistics, corrections, credits, administrivia

---------------------------

++viewpoint: KDDI 3Q Rock'in Results and BREW Comes to a Boil
--------------------------------------------------------------------------------

It's another one of those weeks: there's so much happening on Japan's mobile
Internet, I'm not too sure what to cover first. Let's start with KDDI's 3Q
results, released to analysts last week.

CSFB sr. telecoms analyst Mark Berman put out a note to investors in which he
stated that KDDI's CDMA 1X (3G) subscriber ARPU fell 4 percent in Q3 (September
to December 2002) versus Q2 - ending up at 9,240 yen. As a result, 3G ARPU was
21 percent higher than KDDI's Au average (3G plus 2G), down from 25 percent in
Q2 and 38 percent in Q1. "The 1X user is effectively spending about 1,600 yen
per month more than KDDI's au division average," said Berman.

It looks like this positive difference is trending down - a phenomenon that I've
seen here before; initial high usage rates of new technology tend to drop off
over time (this happened with Java). Nonetheless, the 3G ARPU results are pretty
darn good and the carrier must be pleased. This makes DoCoMo's FOMA results look
decidedly weak (see "KDDI Earns $256.5 Million on Popularity of 3G Service"
below).

Berman warns, however, that with a typical handset cost of 37,000 yen in the
latest quarter (down from 42,000 yen in the first half), "it will require about
23 months to cover this cost for upgrade customers." He goes on to state that
this creates a difficult situation for KDDI, wherein there's lots of room for
concern for the cost of the 2G-to-3G upgrade cycle. Remember, too, that KDDI has
committed to launching a 1X EV-DO upgrade in late 2003. Will it have to commit
to another two-year cycle to convert subscribers to the new system? If so, the
expense half of their balance sheet may get a little out of control no matter
how strong the revenue side remains.

To be fair, President Onodera has said that the 1X EV-DO upgrade will be
limited, but, as Berman points out, they will still have to expend capex funds
to create the service (and I hear it's a much more expensive upgrade than the
switch from cdmaOne to CDMA 1X is). Berman ended by maintaining his NEUTRAL
rating for investors.

In other KDDI news, the carrier issued a statement at the end of January
outlining its BREW (Binary Runtime Environment for Wireless) plans; the carrier
had previously committed to a roll-out before the end of March 2003 (that would
be next month). BREW is Qualcomm's answer to Sun's Java, and provides a similar
onboard execution environment, i.e., the cell phone can download and run
miniprograms, although there are significant differences in how the two are
implemented.
http://www.kddi.com/english/release/2003/0129-1/index.html

Basically, Java is open and it costs third-party developers nothing to create
mobile Java applications, but the carrier assumes the not-insignificant burden
of creating a provisioning system (to allow handsets to access and receive Java
apps downloaded over the air interface), and also has to worry about testing,
security, billing, etc. And there's no guarantee that the developer will earn
any revenue. BREW solves most of these problems for both the carrier and the
developer, but both have to pay Qualcomm ($$), and the company inserts itself
into the carrier-subscriber relationship as content source - something that I
can't imagine any Japanese carrier going along with. I guess this will be
modified for Japan; in a later Viewpoint, I will present extra information on
how the system will work (especially how the billing will operate and how
developers will have their BREW apps tested and certified). In the meantime, if
everything in the press release comes to pass, it will be a pretty impressive
system.

The first BREW phone capable of over-the-air download, Toshiba's A5304T, is
scheduled for release later this month, and three applications will be
preinstalled: NAVITIME (navigation app that provides map information showing
info such as traffic jams and walking routes), Heart Mail (for sending mail
containing pictograms and animations), and Team Factory (enabling group members
to immediately confirm the current status of friends or associates). I think all
of these already exist as Java versions or as preinstalled BREW apps (available
on KDDI's first, none-downloading, BREW phone released last spring).
Significantly, IBM Japan has teamed up with KDDI to offer mobile WebSphere
Everyplace access, among other services.

All in all, this looks pretty interesting, but I'll be interested to find out
more details. Also, Java has a serious head start and a significant chunk of
developer mindshare; 2003 is shaping up to be even more interesting than '02.

Finally, I was asked earlier today for my opinion on why camera phones took off
as they did in Japan.

My response was along the lines that a camera-on-a-phone makes for a perfect
combination of a fun, social activity (taking snaps when out with friends at a
bar or pub) with a way to send them off to absent pals (those still stuck at the
office due to an Evil Boss, say). I worked at Fuji Xerox for a couple of years
in the middle 1990s, and we often went out for office get-togethers or Happy
Hour on Friday evenings. There was always a raft of (print) photos to look at on
the following Monday morning ("Oh look, Taka-kun was trying to steal kisses from
Furu-chan - and look how drunk Yuki got!!").

Now consider this real-life, human activity in a newer era when everyone has a
cell phone - it's not too difficult to see why camera keitais took off as fun
consumer toys. And, as we reported in WWJ Video No. 46, NTT DoCoMo is due to
launch the first million-pixel-class CCD camera phone in the first half this
year, and that should, I think, help boost commercial and non-play applications.
http://www.wirelesswatchjapan.com/vp/46.shtml

-- Daniel Scuka

++wireless notes
--------------------------------------------------------------------------------

** Movie Keitai (A5304T) BREW Mobile Phone with Camera
http://www.kddi.com/english/release/2003/0129-1/index2.html
Speaking of BREW on KDDI, the carrier has released pictures and specs for the
first BREW handset capable of receiving apps downloaded over the air. The
Toshiba A5304T has, of course, a camera, and looks like a nice piece of kit,
with Movie Mail (up to 15-sec. video-clip mail), a 2.3-inch low-temperature
polysilicon TFT LCD screen (they say it's the biggest "in the industry"), a
310,000-pixel CCD camera (with flash and 6.6x zoom), the "CHAKU-UTA" ring-tone
system (CD-quality ring tone download), and EZnavigation (GPS data). Price TBC.
Available end-February.

The BREW environment is accessed by pressing the BREW key, and the carrier says
that "about 20" applications will be ready. Since Qualcomm is the application
aggregator, apps created for BREW in the US, China, and Korea should run on the
handsets - although I still don't know whether KDDI will allow such apps to be
accessed or downloaded. Three apps will be preinstalled (see Viewpoint above).

** WWJ Alumni Moves to the Big Time
http://www.labusinessjournal.com/
Not exactly a 'Wireless Note,' but very cool nonetheless. WWJ contributing
editor and long-time J@pan Inc freelance writer Michael Thuresson recently
joined the editorial staff of the LA Business Journal, a cutting-edge city
journal that does a great job of interpreting that weirdest of American cities.
Michael will serve as their first tech reporter, and his knowledge of the
American business presence in the Japan and Asian-Pacific markets (much of which
is connected to Los Angeles) will be a great addition to the magazine. Michael
wrote last week:

"Whoa guys, I just went through one killer week! This is one busy paper -
everyone going at 1,000 mph. My first day was Monday. For the first hour, I
got settled, met people, and was then promptly placed on deadline for 3
articles due Thursday."

Thanks for all your great work at WWJ, Michael; we wish you luck, and hope
you'll be able to send in the odd news item on any Japanese mobi companies that
show up in LA.

++noteworthy news
--------------------------------------------------------------------------------

--> Matsushita Missed Boat on Camera Phones: Exec
Source: Japan Times, Feb. 6 (print version only; page 9)
Matsushita, Panasonic, camera

EXTRACT: Matsushita Electric Industrial Co. missed its goal of capturing 25
percent of Japan's cellular phone market because of its late introduction of
camera phones, the head of the company's mobile communications unit said.

COMMENTARY: An interesting story that illustrates just how significant camera
phones have become to success in Japan's market. This story states that
Matsushita (Panasonic) finished 2002 with less than 20 percent of the domestic
market, compared to its previously stated 25-percent goal (although the
company's share of the global market notched up from 3 percent in 2001 to
between 3.5 and 4 percent last year).

Panny rolled out its 504i handset in June 2002 - later than other 504i makers.
Although the handset was an ultra-slim beaut, it lacked a camera. Unfortunately
for Panny, June was also the month that Big D launched its first camera-equipped
"i-shot" phone (a clone from Sharp of the original J-Phone "Sha-mail" handset).
Panasonic could have offered a handset bundled with free lifetime tickets to
every Glay and KinKi Kids concert and it still wouldn't have been able to get
any camera-crazed DoComo teen buyers to pause for more than a microsecond before
spending dad's cash on the Sharp model.
http://panasonic.jp/mobile/p504i/

At home, NEC is in the lead, and is making its presence felt not only by
providing one of NTT DoCoMo's top 504iS-series 2G i-mode phones (which does have
a camera), but also by pouring a lot of R&D effort into FOMA (aka W-CDMA) for
both the domestic and the European market. (And NEC's doing well despite last
month's recall by DoCoMo of N504iS phones due to overheating problems; only 8
out of 800,000 handsets sold were affected, so it might be a little bit of
overreaction.)

In related news, Dow Jones reported that Sony would start making CCD cameras for
cell phones.
http://sg.biz.yahoo.com/030210/15/376k8.html

---------------------------

--> Softbank BB to Market Cordless IP Phone with Wireless Router Function
http://neasia.nikkeibp.com/wcs/leaf?CID=onair/asabt/news/229268
Source: NEAsia Online, Feb. 3
Softbank, IP telephony, cordless, WLAN

EXTRACT: Softbank BB Corp will start selling a cordless Internet Protocol (IP)
phone called the "BB Phone Station" in February. The new phone is being
manufactured by Sharp Corp., and will have a built-in ADSL modem and IEEE
802.11b wireless LAN broadband router. The stand-alone phone will make it easy
for people to use the "BB Phone" IP phone service by the Softbank group. Users
will be able to access the network via the "Yahoo! BB 12M" ADSL service. If they
sign up for the "Yahoo! BB 12M + Wireless LAN" service pack, users can create a
home-network built around the phone's wireless router function.
http://www.softbankbb.co.jp/press/2003/p0127.html

COMMENTARY: The boundaries between fixed-line and wireless - and between
licensed and unlicensed spectrum - communications are becoming blurred. With
this system, you receive a WLAN base station that provides wireless connectivity
for your home PCs; you also receive a cordless phone handset that communicates
with the base station via 802.11b then accesses the PSTN by making and IP call.
By using a second cordless handset, you can make **two** phone calls at once,
with each of the two phones being used for completely separate calls (you would
need two Yahoo BB phone line accounts from Yahoo, though). The unit should
retail for around 45,800 yen (extra handsets will run you 12,800 yen apiece). In
nine years living in Japan, I have never, ever, seen any consumer-targeted
technology or business model that threatened to grab market- and mind-share from
domestic 900-lb gorilla NTT; now I have.

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---------------------------

--> KDDI Earns $256.5 Million on Popularity of 3G Service
http://sg.biz.yahoo.com/030205/15/372we.html
Source: Yahoo, Feb. 5
KDDI, 3G, revenues

EXTRACT: KDDI Corp. reported group net profit of 30.87 billion yen for the
fiscal third quarter, while boosting its full-year-earnings forecast by five
billion yen, citing healthy consumer demand for its flagship "au" mobile-phone
service, lower marketing costs, and restructuring. For the quarter ended Dec.
31, KDDI posted sales of 695.08 billion yen and operating profit of 56.80
billion yen. It was the Japanese telecommunications provider's first release of
quarterly earnings. The company didn't provide year-earlier numbers for
comparison. One of the main factors behind KDDI's solid earnings has been strong
demand among consumers for its third-generation mobile-communications service,
based on "CDMA2000 1x" technology developed by U.S. wireless-telecommunications
company Qualcomm Inc. KDDI's introduction of a movie-mail service and advanced
preinstalled features on "au" cellphone handsets have also led to increased use
of data-communications services, resulting in higher average revenue per user
from these services.

COMMENTARY: In a mail message to investors, CSFB telecoms analyst Mark Berman
provided the following synopsis of KDDI's Au revenues:

** CDMA 1X ARPU (3Q): 9,240 (voice 7,080, data 2,160)
** Total AU ARPU (3Q) (cdmaOne 2G and CDMA 1X 3G combined): 7,640 (voice
6,440, data 1,200)

Compare these figures to NTT DoCoMo:

** 3G FOMA ARPU (3Q) = 7,750 (voice TBA, data TBA)
** 2G ARPU (3Q) (PDC 2G only): 8,200 (voice 6,430, data 1,770)

While DoCoMo doesn't release combined 2G & 3G figures like KDDI does, nor does
it break out voice and data from overall FOMA ARPU, it appears that overall 3G
ARPU on CDMA 1X is higher than on FOMA W-CDMA by 19.2 percent. Also, in KDDI's
case, 3G ARPU is higher than combined 2G and 3G ARPU (for both voice and data),
while in DoCoMo's case, 3G ARPU is lower than just 2G ARPU.

Clearly, FOMA is hurting, and provides significantly less revenue to the carrier
despite the network incurring greater capex costs this year (and next) than 2G
(which, obviously, is already fully built-out). KDDI, in comparison, has spent a
lot less to install the 1X upgrade. More grim news for FOMA!

---------------------------

Smart Phones Dial Up Dynamic Deal for Shoppers
http://mdn.mainichi.co.jp/waiwai/0302/0208phones.html
Source: Mainichi Shimbun, Feb. 8
KDDI, IC, e-wallet

EXTRACT: What better tool than a mobile phone to have on hand after just ringing
up a supermarket bill? A select group of Japanese consumers will be able from
next month to use their mobile phones to pay for their groceries, according to
Shukan Shincho (2/13). "Until the end of August, we will lend out to 2,000
people a mobile phone containing an IC chip that will contain their name, credit
card number, validity date and PIN," a spokesman for telecommunications giant
KDDI Corp. tells Shukan Shincho. "When they go to pay for something they've
bought at, say, a department store, they simply aim an infrared port on their
mobile phone at a terminal owned by the store and the purchase will be recorded
and charged to their credit card."

COMMENTARY: Looks as though KDDI has added additional features to help boost the
trial. Users will have to enter a PIN number, and the IC chip will use PKI
security software for authentication. Further - get this - the IC chip is
designed to self-destruct if somebody removes it and tries to read the data.

This trial is one of several others recently announced, including usage of
mobile phones (instead of membership cards) for video rental, use of keitais as
train passes, and mobile credit card services (although this story also mentions
that Korean operators are already 6 months ahead on mobile CC payment services).

++events
--------------------------------------------------------------------------------
>> Renaissance Center Social Hour & Discussion

Service Sector Entrepreneurship in Japan:
Successfully Leveraging Overseas Business Practices and
'Outsider' Insight

** February 26 (W) Evening

Neeraj Jhanji, whose ImaHima service has attracted more than half a million
users, is probably the most successful foreign player in Japan's wild and woolly
mobile content scene. Come hear his success secrets, along with those of fellow
entrepreneurs Joichi Ito (Neoteny), Kevin McAuliffe (Newport Japan), and Allen
Miner (SunBridge) at a social hour/panel discussion to be held as part of
"Habitat Week" at Allen Miner's SunBridge venture habitat.

Place: SunBridge's Renaissance Center, Shibuya Mark City, Tokyo; Fee: 1,500 yen
More information & sign-up: http://www.japanentrepreneur.com/200301.html#3

** Ed's Note: This notice also appears in Tim Clark's excellent "Japan
Entrepreneur Report" newsletter. Tim's now spending more time at SunBridge
helping spread the word on how to create companies in Japan, and it's well worth
reading his newsletter if you're at all interested in Japan's venture business
scene.

++overlooked data
--------------------------------------------------------------------------------

** TCA Subscriber Data for 1-31 January 2003
http://www.tca.or.jp/index-e.html

The Telecommunications Carriers Association has posted the subscriber results
and stats for January.
--> DoCoMo: 2G PDC +157,000 | 3G W-CDMA +2,400
--> KDDI: 2G PDC -76,100 | 2G CDMA -469,100 | 3G CDMA 1X +639,000
--> J-Phone: 2G PDC 129,900 | 3G W-CDMA +3,500

PHS MOU Touts New PHS Data-based Telephony Voice Service
http://www.phsmou.org/hotnews/New_IP_Telephone.html

The PHS MOU says that a Kansai Electric Power telecoms subsidiary, K-Opticom,
has decided to launch a new mobile telephone service using a PHS data
communication card ("eo64") as soon as possible. The eo64 card with an
additional voice digitizer supports wireless Internet Protocol (IP) telephone
calls at low rates even while moving. The flat-rate service will cost 3,000
yen/month. Flat-rate voice calling via PHS - yet another spike in NTT's plans to
dominate the nations phone lines for ever and ever? ;-)

++sign of the times
--------------------------------------------------------------------------------

Mobile Phone Chitchat Sparks Fatal Bashing
http://www12.mainichi.co.jp/news/mdn/search-news/870725/mobile-0-5.html
Mainichi Shimbun, Feb. 1

A Tokyo student was arrested for fatally bashing an unemployed man after
the victim chided him for chatting on his mobile phone, police said.
Noriya Okubo, a Rissho University senior from Meguro-ku, was charged
with inflicting injuries resulting in death when he turned himself in at
the Osaki Police Station, accompanied by his parents. "When I was
talking on my mobile phone, he came up to me and whacked me in the
stomach," Okubo told the officers. "While he was holding me by the
collar, I beat him once. I feel sorry for the victim."

... I've nothing to add - this is entirely too weird for words ...

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WWJ video newsmagazine researched, edited and hosted and email newsletter
researched and written by: Daniel Scuka (daniel@wirelesswatchjapan.com) Michael
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WWJ video newsmagazine produced and edited by:
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