Takeshi Natsuno: The Incrementalist

Back to Contents of Issue: June 2001

The man responsible for content management and business model strategy development at NTT DoCoMo says he wants an evolution, not a revolution.

by Chiaki Kitada and Daniel Scuka

IF YOU ASK TAKESHI NATSUNO about i-mode, or if you read his recently published book, i-mode strategy, you're likely to come away impressed with his entirely self-consistent vision of how the world's No. 1 mobile Internet service should evolve -- which is no surprise, considering Natsuno is one of i-mode's master architects.

Natsuno joined NTT DoCoMo after a coming of age of sorts at Hypernet, one of Japan's first (and much ballyhooed) Net startups. He had already left the free ISP by the time its brief run of fame ended in late 1997. As the thirtysomething explains in his book, the lesson he learned from Hypernet's multibillion-yen flameout was that a small group of highly focused people working on a revolutionary project can't always have a transformative effect on society at large. For that, you sometimes need to make incremental changes that the mass of people can easily adopt. He also noticed that Internet business outcomes continuously change due to unpredictable factors, an effect explained in part by complexity theory, a hypothesis invented in Santa Fe but enthusiastically propounded by Natsuno in i-mode strategy (Nikkei Business Publications Inc., 2000; Japanese only).

The book, in addition to presenting Natsuno's Hypernet experience and complexity theory, provides a behind-the-scenes look at the management concepts applied while formulating the i-mode strategy, lots of analytical data, and an explanation of the technical details behind the service's operation.

Of course, there's nothing complex about Japanese keitai surfers' love of i-mode; the wireless Net service long ago surpassed expectations in terms of subscribers, independent content providers and, of course, DoCoMo revenue. The operator's revenues from i-mode content fees alone, according to one analyst's estimate, should be around ¥3.6 billion for fiscal 2001 (and rising rapidly). But it would be a mistake to ascribe i-mode's success entirely to Natsuno. Others, notably Keiichi Enoki, the DoCoMo senior vice president, and Mari Matsunaga, a marketing-savvy former Recruit magazine editor who has since written her own book called The i-mode Incident, also helped launch the service. However, there is no doubt that Natsuno, a bilingual, articulate, Wharton B-school grad, is one of the most passionate strategists behind i-mode. His book has become a mini-bestseller, with 26,000 copies sold since its release last December (10,000 is considered a great run for a business book in over-published Japan).

With DoCoMo's expansion overseas to Europe (this year) and the US (next), author Natsuno won't have time for many autographing sessions. Successfully transplanting the i-mode model overseas will be his toughest challenge yet -- mobile surfers outside of Japan have been badly burned by the technically sophisticated but unwieldy WAP v1.0, and may avoid like the plague anything redolent of "wireless Internet." But for the Japanese carrier, i-mode's success overseas is vital for a host of reasons, including convincing other carriers to adopt the W-CDMA wireless network standard for their 3G system, providing additional licensing and commission revenues (the carrier badly needs to expand sources of income), and -- not the least -- prestige. The Japanese have been trying without success since 1979 to get the rest of the world to adopt made-by-NTT wireless technology -- including the J-TACS and PDC standards, both used only in Japan -- and they finally have a fighting chance with i-mode. The company is relying on Natsuno, executive director in the Gateway Business Department and responsible for content management and business model strategy development, to help pull it off. Senior editor Chiaki Kitada and editor at large Daniel Scuka met with Natsuno at DoCoMo headquarters in Tokyo. Extracts of their conversation appear follow.

Takeshi NatsunoOn the Internet way of thinking
On this kind of business platform, there is always a chicken-and-egg formula. Even though everybody says, 'This is great infrastructure, you know, Wow!,' solving the initial chicken-and-egg problem always becomes a big, big barrier to entry. So to solve that, what we have done is very simple: We used [Internet protocol] packet-standard technology. In the i-mode system, rather than developing new technology to create wireless Internet access, we adjusted our network to de facto standard Net technology -- [using] HTML and HTTP. This is what I call the 'Internet way' of thinking, rather than the 'telecom way' of thinking. For the telecom industry people, technology is something to develop. But with the Net, the way of thinking is that technology is something you choose from [standards that have already been established]. What I have introduced is a win-win-win business model. But, in the telecom way of thinking, the business model for wireless infrastructure has first priority. You know, telecom people always tend to think 'to develop,' or 'to make'; maximizing profit is the first priority for them. But with the Internet way of thinking, the first [and] shortest path to maximizing profit is to maximize third-party content providers' profit. This is a kind of Net play. That's why I mention complexity theory in my book -- in complexity theory, there are [many] factors, and all are related to each other -- it's very, very fragile. So it's hard to know if this business model will work. So, always, I [emphasize] that models should be flexible enough to provide an incentive to others, and [if so], it's going to lead finally to our business profit. That is what I proved.

When it comes to the IT business, either it develops way beyond your projections, or it doesn't bud at all.
- from "i-mode strategy"
In the summer of 1993, I went to Wharton business school with an eye to gaining Internet experience. I thought our lives would become enriched and more convenient through the Internet, by using AOL for travel arrangements and shopping. When I returned to Japan in 1995, I wondered, Why can't I get the same services in Japan?
-from "i-mode strategy"
I don't think you can transfer the i-mode network itself overseas. Even if you do, it won't work -- i-mode is a business model, not a system. It would be ideal if a local telecommunication company understands the essence of the i-mode business model and stimulates service providers and manufacturers so as to create an environment for [an i-mode network] to self-organize.
-from "i-mode strategy"

On the richness of content
I have four different criteria for content for the global Internet space. The first is freshness. Freshness is very important because [the cellphone] is a Net device. In Europe you can find a lot of content that is revised only weekly. So freshness is very important. At the same time, depth is very important. The reason is very simple. Many people say that, because cellular phone screens are small, you can't deliver a lot of content. By making deep linkages, you can provide more and more. [And] if the user is satisfied, usually they'll use [the service even more]. So depth seems to be necessary, even though we have small screens. The third criteria is, in direct American English, 'stickiness.' Not like with PlayStation, [where you might] play for 10 hours and then just finish -- that's not the type of content we need. We need something you can try, like a fishing [game], five times a day -- but if you want to get a high score, you have to play for three months! This is the type of content we need. And finally, the fourth is clear benefit. I'm not saying clear 'profit'; rather, I'm saying benefit. In the US, benefit means a lot of things -- and not just [cash] benefit. [I also mean] enjoyment and satisfaction for killing time -- these can be called benefits. Or looking up a restaurant when planning a date. So clear benefit is very important.

On using personal connections at i-mode's launch
Personal connections alone cannot contribute a lot. Personal connections can be a sort of first entrance; the content providers have to have the confidence to get in, to spend the money, right? That is normal. When I joined NTT DoCoMo, I was from the Internet industry, and I had a lot of personal relationships with the leading experts in the industry, but that only helped [get the discussions going]. They listened to me, but for them, [the i-mode concept] was a new experience. NTT DoCoMo hired outsiders to talk to them; that's fine if they listen. But only by providing a real business model, a real incentive to them, and by lowering technology entry barriers for them to join this platform -- by using a de facto standard technology -- was I able to get 67 companies to provide content for i-mode's first day. Even at that, I refused almost the same number of offers at that time because of the quality of content. Some banks said, 'If I can post just our telephone number on [the site], then I can do that.' But I just refused -- I'm sorry, but content should provide high- quality, interactive functions. Content should [provide] added value from the first day. Some -- many -- of our newspaper partners, as well as many others, said, 'I can provide contents, if it's OK to provide it easily [simply].' But I refused that. [Editor's note: Providing content to i-mode requires dedicated manpower.] So [we] selected 67 companies to provide content at the start. On February 21 [1999 -- the day before i-mode's formal launch], I had 69 content providers. One day before the service launched, I checked all the content. [I refused] two companies because of the quality of content, not because of [the companies'] size. Once you damage subscribers' first perceptions, they never come back to your service. That, unfortunately, is what happened to the European market. The first impression is very, very important. That is, again, the Internet way of thinking.

In boxes: Excerpts from Natsuno's i-mode strategy. Copyright © 2000 Nikkei Business Press. Used by permission. Translation by J@pan Inc staff.

Takeshi NatsunoOn content and e-commerce revenue
The content market over i-mode is pretty big -- $14 million per month. But this number excludes e-commerce activity. [Content is the] only charge we add to the subscriber's bill. And I just talked to one of the e-commerce players, a securities brokerage, and its transaction volume over i-mode is ¥80 billion per month! Of course their commission is less than 1 percent, so their [e-com] activity maybe is less than $8 million, but it's still big, right? By combining PC and cellular phones with branch [sales], you can earn more money -- sometimes not just as cash, but maybe by decreasing [costs] in the existing value chain. So maybe [i-mode] is a part of the value chain to the customers rather than a tool to create new [sales]. Many people misunderstand the benefits of the IT revolution, which are not to bring new business, but to make your value chain more efficient. Technology can always be used to [boost existing] business, rather than to create new business models. In this sense, there are other ways for content providers to earn money or save money by using cellular phones. So that's why [i-mode based] intranets and extranets are kind of booming in Japan right now, because they [allow businesses] to save more and more money.

I encountered the complexity theory in economics classes at B-school. I was captivated by the theory, and started applying it to explain the Internet when I was a vice president at Hypernet. When I was struggling with the business, it came back to me -- complexity means starting incrementally new things that cause social change.
- from "i-mode strategy"
Most people are conservative. They don't accept extremely new things.
-from "i-mode strategy"
The IT revolution has closed the curtain on the era when one leading company could become a pioneer and the winner in a new field. But technology created by only one company is not acceptable to users any longer because business today is based on de facto standards.
-from "i-mode strategy"

On the i-mode portal
Even now, i-mode subscribers can [add their own] bookmarks, [so] it's not our portal. Our portal is the i-mode [menu], but you [have to] push [the button] to reach our portal. Here you have bookmarks. [Shows i-mode phone.] I have Yahoo mobile here. By selecting the Yahoo bookmark, without even going to our portal, you can get to Yahoo.

On the i-mode strategy
My strategy is simple: vertical evolution as well as horizontal evolution. Vertical evolution means from the 501-series handset, to the 502, to the 503 [Java-capable], et cetera. Our handset capability is growing gradually, but this should be an evolution, not a revolution. I always distinguish between the two -- everybody loves to say 'third generation.' [Granted], 3G is a kind of revolution, but I prefer to use 'evolution,' because subscribers cannot use revolutionary technology -- it's too different. Evolutionary technology, they can use. We have already sold 1.8 million Java handsets in Japan, as of [April 14]. If you walk down to Shibuya you'll see the young kids with colored hair using Java technology in their hands. Can you believe that? It's because of the evolution of the handset. It's very smooth to use Java after [you] get accustomed to the download limit on the graphics. So that's why I'm [targeting] evolution, not revolution. And the same goes for i-mode [itself]. I'm introducing vertical evolution for the handsets; the 501, 502, 503, [up] to the 3G phones and the 504 -- it's all evolution. I'm also going to pursue horizontal evolution, which means car navigation connectivity, PlayStation connectivity, et cetera. We have already sold more than 10,000 cables [specialized to connect the PS2 to the Net via i-mode phones]. And now when you are at home, you can use [your i-mode handset] as your core connectivity tool -- with PlayStation, and [soon] you can connect your TV as well. Two weeks ago, we [agreed to add connectivity] to Coca Cola vending machines; six months ago we initiated an alliance with the Lawson convenience store chain. So all these activities [represent] the horizontal evolution.

In boxes: Excerpts from Natsuno's i-mode strategy. Copyright © 2000 Nikkei Business Press. Used by permission. Translation by J@pan Inc staff.

On profitability for official content providers
There are now 900 [official] content providers offering some 1,600 sites. Some mass media reports have said our content providers are not making money. There are some content providers who cannot earn money. Out of 1,600 [sites], around 500 are for-fee; the others are free because they can earn money in a different way. For example, Tsutaya Online is selling DVDs and earning more than ¥100 million per month. [As I mentioned], some of the securities brokerages are earning ¥800 million per month -- it's very profitable. So those 1,100 free content sites have already found some way to [stay in] this business. Of the remaining 500 [for-fee] content sites, only 50 percent have more than 10,000 subscribers. 10,000 subscribers is a kind of magic point, because $30,000 is pretty big money for a small company with [limited] human resources [it costs ¥100, ¥200, or ¥300 per month to subscribe to a for-fee site]. But some content providers -- they've already got 2 million subscribers! That means [they're] earning $4 million per month, [depending on the fee]. Companies like Index, companies like Cybird, companies like MediaSeek -- these three are only doing business on the wireless Internet. And more than 50 percent of their revenues come from i-mode. More than 50 percent! Why can they go public? I mean, if it's not profitable, they couldn't go public, right? Is the market so stupid? I don't think so.

On specialized content for 3G i-mode
Remember, I said 'evolution.' Evolution means no particular content; evolution means that [at the start of i-mode] for banking activities, you [didn't] need email. For newspaper content, to see headlines and body, you didn't need video. But after you've got [basic] information [delivered to the handset], maybe you need some extra functionality, like video. You know, our way is a smooth evolution into 3G -- for the content providers too. For the headlines and news text, [news providers] are already providing news and even small graphics. So for them, it's natural to attach [graphic] content to the body and headlines, rather than converging headlines and body text into video. So, we'll never change the name of i-mode, but with 3G, i-mode should be the same, right? It should be 'enhanced i-mode,' in essence. In foreign countries, and even in Japan, other people are saying, '3G is a revolution for everybody,' but it [won't] happen.

On creating i-mode 'complexity' overseas
Complexity theory originally comes from the Santa Fe laboratory -- it's not even Japanese! [Laughs.] The theory works everywhere. The problem is [applying it] to the telecom industry. If you don't understand complexity theory from the telecom industry side, you cannot find opportunities to make profit in that business. Unfortunately, it seems to me that the Internet business is already complex -- 100 percent complex! [Look at] Yahoo and [the other dot-coms]; they're all complex. So I think that from the business point of view, the US market is much, much better for the i-mode business model because the percentage of people who understand Internet business is much, much larger than in Japan. But the problem is on the platform side, with operators and vendors. They do not fully understand Internet business, [and] that's why they tried to introduce wireless-specific technology [i.e. WAP] to the Internet community -- and it failed. So now they are changing their minds and they're starting to change, and we are contributing a lot [to that] standardization and organization. So I think that in the future the US market [for i-mode] will be bigger even than in Japan. The richness of Internet content is much, much better in the United States. Is the business model for i-mode overseas different than that in Japan? Actually, the business model is pretty similar to, say, AOL's. The only difference is that we don't expect so many big companies to really, really attract so many subscribers [as in Japan]. [But] our business model is pretty similar to that in the Internet space.

On i-mode services and features required to build a global base
Again, this [relates to] complexity. If I could imagine [everything required to build a global base], that [would not be faithful to] complexity [theory]. In the past three years in Japan, many things have happened -- many unexpected things. [Take the growth] of the entertainment business [on i-mode]. I didn't expect so much entertainment content could really work on the i-mode platform. And I'm sure [we're] still missing a lot of business opportunities. [As content providers] buy in and create more complexity all over the world, I'm sure many people will start to find [their own content niche]. A good example is ImaHima. The ImaHima [founder] is originally from India, I think, but he found a new niche area on the i-mode market. [Note: ImaHima is a social networking, dating, and match-making service on i-mode. See "On Our Radar Screen," page 62.] His viewpoint is totally different from the Japanese one. Oh, sure, he's a good Japanese speaker, but his viewpoint is different from [most] Japanese, who tend to think, 'It's very bad to do something different from others.' That's why we've aligned with AOL. I'm getting a lot of feedback from the AOL people; they are getting a lot of feedback from me. All this interaction continually contributes [to i-mode's growth]. That is the power of Sony -- that is the power of a global company, right? If we speak only to Japanese people, we're not going to be so successful. We have to be global. That's what all industries have already [discovered]. That's what makes the Net very interesting.

On Japanese i-mode users roaming to other i-mode networks
With 3G, [this is possible]. They can see the same portal, and the billing is simple. The connection itself would be provided by local providers, just like if I want to see a Nifty [large wireline ISP] Web site from the US or an AOL site from Japan. Once the local provider networks are connected to the Internet, [there's no problem]. What's happening for the PC-based Internet world will happen for the wireless world. Local connections will be provided by local providers, and content, email, and services -- not all, but the main services -- will be provided by the mother country's service. It's not unreasonable -- because most [US] travelers would access [i-mode] to get information about, say, Paris by going back to the US service, because they can't read French. And all the people from Japan who visit France, they'll go back to the Japanese [i-mode sites]. So it would be kind of unusual if all [the i-mode] servers were the same.

On existing Japanese content providers moving overseas with i-mode
Some can, others cannot. [This] means you can differentiate by the universality or globalness of the content. For [animated] characters, like Disney, they're already global. But for the Asahi Shimbun, [or other] newspapers, it's not global content, right? So in the Internet space, there is a clear differentiation between global content and local content. Maybe in terms of volume, 80 percent of the content should be local -- something like that. In the US, East Coast people would rather be reading the New York Times than the Los Angeles Times, whereas Angelenos hate the New York Times. [Smiles.] But some content is very, very global. In Japan, classical music [is popular], and in the US, pop -- these kinds of things can be global. So there is a clear differentiation. Will we help our content providers move overseas? Yes and no; yes means well, you know, we are helping our partners, like KPN Mobile, to set up a win-win business model with [their] content pro-viders. In that sense, indirectly we are helping content providers. But by no means are we directly sponsoring our content providers [to move overseas]. [Of course], we are always introducing new business opportunities to our content providers, especially to [those] with attractive content, but nothing more than that. And, of course, you know I'm always asking [our operator partners] to provide a preferable relationship to our [existing content] partners.

On attracting content providers overseas
For local operator partners, it's the same situation [as when we] started in Japan. There's no country difference, actually. [It's a question of] how to select the best technology. The first content portfolio I had was mainly for the Japan [audience], and [we were] not so focused on entertainment content because [such] content requires a critical mass of users [to succeed]. The selection of technology is heavily related to [this]. If [content providers] had to deal with WML [WAP's Wireless Markup Language], it would be too tough. With HTML, it's much better because it's very easy for [them]. So, technology selection [is important]. We are [also] now at the stage of implementing handsets for the global market.

On overseas content providers' understanding of i-mode
[For those] already providing content on the PC-based Internet, the i-mode business model is normal. But for some people who are just providing WAP content, and not also providing content for the PC-based Internet, the i-mode business model is very bad, because, you know, for them, to get money from the operator is the main mission. There are some people who [call themselves] WAP content providers. What is the difference? I cannot understand -- what is different between providing mobile content and 'normal' content? I hate the term 'm-commerce' because [this is just a] part of e-commerce. For brokerages, for example, which path the user takes to go to their Web site doesn't mean anything.

On defining the i-mode concept
There are three main factors. The first is [selecting] the most appropriate technology for the third-party content providers. It's very important, because normally in the telecom industry, the most appropriate technology, or the most appropriate development of technology, means for [the operator's benefit]. The second is selecting the best business model for the third-party content providers. The third factor is having marketing understandable to ordinary cellphone users. What we have done is never mention 'Internet' or 'Web-based' or anything like that. We are [simply] application-oriented, but in other countries, or at the other telecom carriers in Japan, [they have slogans like], 'It has finally come to your hand: browser-adapted phones -- we are opening a new world for you ...' This is the typical techno-speak. We never say anything like, 'Java has finally arrived.' Instead, we call it 'i-Appli' -- a cute word.

On controlling the i-mode portal overseas
It will totally depend on the policy of the [partner network] operators. Our business model is to allow everybody to provide content to our platform. That is the main strategy for us; of course it's a decision for our partners [to make on their own] also.

On lessons from failed ISP Hypernet
If you have the technology and talented people, but the market demand doesn't need that, you're going to lose. That is what I learned -- and it cost me a lot. The first mission I had when I joined NTT DoCoMo was, personally, 'Don't repeat tragedy,' -- in addition to launching business development. So that's why I wrote up [the i-mode] business model very, very, safely. What I learned in the past is that revolutions aren't for everybody. Of course, [at Hypernet] I got 300,000 subscribers for one year -- which was great. But it wasn't great for our advertisers. So I didn't want to repeat that. [i-mode] is great for consumers, right? And of course for the content folks and for the telecom people; compare that to WAP, which is great for telecom people -- and not at all for consumers.

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