Cellular Invasion Gear

Back to Contents of Issue: February 2001

Japan's wireless operators are thinking world domination, but they'll need a helping handset.

by Daniel Scuka

IT'S NO LONGER A secret that Japan's wireless network operators want to expand their wildly successful mobile Net services overseas. Recent months have seen NTT DoCoMo, for one, buying stakes in European, American, and Asian operators. Such actions have generated intense debates amongst analysts, industry watchers, and mobile developers on why the wireless Net is so popular here. Chat rooms and mailing lists are hosting impassioned arguments on the matter, with a focus on download speeds, killer content, and Japan's pent-up frustration with expensive dial-up fees.

One factor not up for (much) debate is the key role played by handset design and pricing in making mobile access here useful, fun, and cool. Japan's low-cost handsets, which, with their funky colors, high-res full-color screens, high-quality audio, and expandable memory capabilities, are classic Japanese manufacturing successes, will have to be exported as well if i-mode or any other Japanese wireless service is to succeed in the US or Europe. But to date, the makers here have done a remarkably poor job of selling their devices overseas, where Motorola, Ericsson, and Nokia have grabbed the lion's share of the market.

Part of the reason for this is technical. i-mode phones usedby NTT DoCoMo, for example, are built to work only on that operator's PDC/P network (portable digital cellular/packet). Manufacturers have been reluctant to develop similar feature-rich foreign-compatible models without being certain of consumer market sales success overseas. "Foreign markets are more price competitive than the Japanese domestic market, which doesn't leave room for handset manufacturers to sell 'luxury' phones, like DoCoMo's, to the market," says Mark Yamano, who spent several years at Mitsubishi's handset sales company in the US and now heads e-business consulting and incubation firm Eupholink.

Compared to Europe's GSM (Global System for Mobile Communication) network standard, Japan's PDC standard is less technically demanding, and so the phones are not as robust, allowing manufacturers to get away with smaller antennas and batteries (PDC also sounds worse and drops connections easier than GSM). In other words, going into western GSM markets would require core changes to PDC-compatible devices.

Another reason is that Japan's handset industry is a rat's nest of tightly managed, closed-door, vendor-client relationships involving manufacturers, the network operators, retail distributors, channel partners, and outsource makers, and to date none of the players has had the confidence or ability to export the handsets overseas absent the guaranteed payback that the domestic system produces.

Typically in Japan, retailers or wholesalers buy the phones for some ¥30-40,000 from the manufacturers (who may themselves have outsourced some of the production), and retailers sell the phones for about ¥5,000 to ¥10,000 (double for high-end models) and receive an activation commission of ¥30-40,000 from the network operator. The operator, who earns about ¥4-5,000 per month, then hopes to keep the user long enough to cover the cost of subsidizing the handset (all operators offer steep discounts for multiyear contracts). Of course, in the end, the phone's cost is borne by the end users, whether in the form of hardware cost at retail or by subscription and airtime fees. "Carriers pay a subsidy to their agents to attract more subscribers, but recoup this cost by getting monthly air time from end customers," says Yamano. As long as the retailers receive the activation commission, they are incentivized to offer steep discounts -- and they do. The P209iS, the highly popular clamshell-design i-mode handset made by Panasonic, was offered at independent retail shops for around half DoCoMo's list price within a few months of its launch.

Further, network operators maintain tight engineering and specification control over the makers. Staffan Söerqvist, president at Ericsson Mobile Communications Japan, explains that NTT DoCoMo has its own research center where mobile phone R&D is carried out. Working in cooperation with selected phone manufacturers, DoCoMo creates specifications for each generation of mobile phone, and makers contribute to the research effort in return for a say in influencing the final specification. Makers who work with DoCoMo can start manufacturing development a couple months before makers that do not. With Japan's very short product lifecycles, DoCoMo's influence over the makers is continuously reinforced. "So far, DoCoMo's group members (including Matsushita, NEC, Fujitsu, and Mitsubishi) are the largest and most successful phone manufacturers in Japan. For the other (more than 10) manufacturers, it is very difficult to compete with these," says Söerqvist. While this system may not necessarily be fair, operators' requirements for continuous new features are honored, to the delight of end users.

Ultimately, the operators, who define the technical specifications and serve as wholesaler, are able to control what phones are available on the consumer market at what price, and the makers have so far been unwilling or unable to break out of this situation. Since profits for operators lie in acquiring as many users as possible and encouraging as much voice and data traffic as possible, the operators have had an incentive to keep handset costs low (or keep retailer subsidies high). As a result, Japanese mobile surfers enjoy some of the lowest prices in the world for some of the highest quality handsets.

But despite Japanese handset makers' reluctance to expand out of their cozy, surefire lucrative domestic market, there are reasons why they may find DoCoMo-inspired foreign expansion attractive. For one thing, any network that i-mode launches overseas is likely to be a 3G network based on the W-CDMA (Wideband Code Division Multiple Access) standard, which is expected to be the same worldwide. Japanese 3G handsets can be used "as is" on these networks and the makers can then apply their extensive global consumer electronics supply chains to handset sales.

Also, sales overseas should be boosted by Japanese handset makers' global reputation in consumer electronics. While the network operators haven't had to really play up the cool design aspect to push more mobile services, excitement around the handsets cannot be ignored. "Japan has done for mobile handsets what Swatch has done for watches -- made them a disposable fashion and pop-culture statement," says one mobile marketing manager here. When the teen crowd in Stockholm, London, and New York see how great Japan's pocket rockets really are, demand may explode. "Kids in the US want to use [the cool handsets], too," says Tom Wilhite, principal at a wireless startup in California.

In the competitive open European and US markets, the makers wouldn't be under DoCoMo's thumb. "DoCoMo will not control what the vendors will sell overseas unless the handset is branded as a DoCoMo handset," says Yamano, adding, "Nobody would buy such handsets anyway."

And when the Japanese makers arrive in Europe, they'll find at least one individual retailer eagerly awaiting i-mode's arrival. Colin Beale, owner of UK-based Web site imodesales.com, hopes to bring future customers more information on i-mode phones and services. "I was also struck by the idea that Internet phones would be a great product to retail to the many interested users in Europe and the USA," he says. Beale, clearly an optimist, doesn't seem to mind that i-mode is nowhere near being ready to launch in Europe.

Although the cool design of handsets has been a major factor for the success of mobile in Japan, the handset pricing, combined with a rational per-packet data and caller-pays-all voice pricing structure, has been paramount. In fact, for i-mode to succeed in Europe or the US, it may be that DoCoMo needs the handset makers to expand freely into the highly competitive foreign markets with their advanced manufacturing abilities in order to keep the handset costs down. NTT DoCoMo needing help -- now wouldn't that be nice to see?

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