The Other i-modes

Fifteen million happy non-DoCoMo users can't all be wrong.

Ranked 5th, but still in the running: Astel's PHS service

THE ENDLESS MEDIA COVERAGE of Japan's dominant wireless carrier, NTT DoCoMo, is not unjustified. The operator's numbers are certainly spectacular, and DoCoMo leads the wireless market here with 36 million mobile subscribers (59 percent of the market, as of March 31), 23.2 million of which use DoCoMo's wildly popular i-mode wireless Internet service (as of May 7), accounting for some 63 percent of all Japanese mobile surfers. The casual observer could be forgiven for concluding that wireless in Japan equates to DoCoMo and little else. But i-mode is not the only wireless service, and DoCoMo is not the only carrier. In fact, competitors J-Phone, KDDI, DDI Pocket, and Astel are racking up some pretty impressive numbers with zero help from DoCoMo, thank you very much.

BIGGEST RIVAL
KDDI is the No. 2 wireless carrier in Japan and the perennial challenger to DoCoMo's lead. The company was created through a merger of DDI, IDO, and KDD (the former state-owned overseas long-distance monopoly carrier) in October 2000, and presently offers mobile services on a PDC (portable digital cellular) network operated by the Tu-Ka Group and on the packet-switched cdmaOne network operated by Au (launched in July 1998). cdmaOne's data rate is 64 Kbps, one of the world's highest (and at least as fast as DoCoMo's much-touted 3G network due for launch about the time this issue hits the streets).

Construction of the cdmaOne network was widely seen as an attempt by KDDI to differentiate itself from the rumored poor voice quality on DoCoMo's PDC network. cdmaOne allows roaming for Japanese subscribers traveling in compatible carrier areas in the US (including Hawaii), Canada, Korea, Hong Kong, and Australia. "Unfortunately," says Credit Suisse First Boston telecom analyst Mark Berman, "KDDI's roaming service is not yet attractive, since it is too expensive and so far only offered in some big cities." Although cdmaOne is technically superior to anything DoCoMo has (not counting 3G), the firm faces some serious hurdles, especially with the weakness of its new "Au" brand, which serves as a sort of virtual mobile carrier. Also, much of the company's subscriber base is still tethered to the older PDC network. Says Berman: "KDDI is trying to compete, especially with J-Phone, by offering a special discount to students. But it should market the fast cdmaOne data services to high-end users and give its existing PDC users good incentive to migrate to cdmaOne, thus unifying services."

Consumers seem to be confused about the plethora of services, technologies, and rate plans KDDI is offering, and, as of January 31, the carrier's market share of new wireless subscribers has dropped to 15 percent, while both DoCoMo and J-Phone have increased theirs, to 70 and 16 percent, respectively. Launching EZWeb has certainly helped boost the operator's sagging bottom line. While average annual voice revenue per user (ARPU) has been falling (down 8 percent year-on-year to ¥8,200 for 2001, according to one investment bank's estimates), EZWeb users have been contributing a tidy ¥1,500 in Net usage fees in addition to the voice fees, and generating some 35 million page views. The same report estimates that by 2005, ARPU should be up around ¥10,000, with data and Internet fees contributing about 20 percent.

By comparison, another brokerage report places NTT DoCoMo's 2001 ARPU at around ¥8,130 for non-i-mode users (voice only) and about ¥8,740 for i-mode users (the additional data usage gives a 10 percent boost).

NEXT IN LINE
No. 3 operator J-Phone seems to be benefiting from KDDI's confusion. While it may be the smallest of the three main carriers, J-Phone is the creative underdog and continually pushes the envelope on cutting-edge services and fields handsets sooner than its bigger competitors, says Scott Driggers, CEO of Kevo International, a wireless consultancy that works with Japan's wireless carriers. J-Phone has created a young and innovative brand image and was the first operator in Japan to start SMS (short mail service) and Internet email on cellphones (in 1997). "Being relatively small has kept the company sharp and competitive, and it comes up with new services and ideas targeting their main customer base -- young users," says Driggers.

Its wireless Internet service, J-Sky, could overtake KDDI/Au's EZWeb in just a few months at the current growth rate, according to CSFB's Berman. He points to J-Phone's deployment of sophisticated new handsets with 65,000-color TFT displays (thin film transistor -- the same technology used in high-end flat-panel monitors) and integrated cameras, and unique services like J-Sky Station, which pushes area-based content and marketing promotions to opt-in subscribers at a preset interval. "J-Phone also offers corporate discounts in central and western Japan, which have boosted the service's popularity," adds Berman.

According to John Garrett, J-Phone's general manager of sales planning, the operator sees itself as a leader, challenger, and first mover, offering innovations to suit the mobile lifestyle of young people rather than offering technology for technology's sake. Accordingly, 15- to 19-year-olds comprise the largest portion of J-Phone subscribers, giving it the edge over No. 2 operator KDDI in that (lucrative) slice of Japan's keitai-using demographic (about a 25 percent share compared to KDDI's 21 percent).

J-Phone director Philip Marnick claims the carrier's ARPU is among the world's highest, as its subscribers "use the phone a lot." Calculating one voice call as equal to one email message or one mobile Web page access, he says J-Phone now carries more data than voice traffic, with about 300 million data "calls" per month (versus 200 million in July 2000). "We carried more email on our network in February than all four German operators combined," says Marnick (the firms doesn't release precise ARPU data).

COMPETITION HEATS UP
Competition in Japan's mobile Internet seems to have entered a second phase, as many of the current services can already be regarded as 2.5G, or second generation--plus (voice plus full data). The DoCoMo competitors in particular are doing everything they can to deploy new services and cool terminals, all the better to compete with the 900-lb i-mode gorilla. All carriers' handsets are becoming more refined, with bigger color screens, integrated cameras, and more sophisticated Internet and email services. KDDI, for one, has started offering advanced email functions allowing users to send and receive image and sound file attachments and messages of up to 5,000 characters, while J-Phone has just unveiled plans to add 3-D graphics, enabling surfers to manipulate characters (spin, enlarge, shrink) downloaded to JAVA-enabled cellphones. As each pursues new technologies and greater market share, some real differentiation is starting to take place between Japan's wireless Web service providers. Here are some of the points to watch.

JAVA
Unlike the proprietary JAVA specifications deployed by NTT DoCoMo on its i-Appli JAVA service (launched in January), J-Phone will use the J-Blend real-time OS in the onboard environment. J-Blend is based on the standard Mobile Information Device Profile (MIDP) established by cellular operators, manufacturers, and OS vendors in Japan and the US under the leadership of Sun Microsystems. KDDI and DDI Pocket will likewise conform to the MIDP standard, and KDDI has already announced its first new JAVA handset (the C407H). As a result, JAVA programs developed according to the MIDP spec will run on devices offered by KDDI, J-Phone, and DDI Pocket, but not DoCoMo, potentially giving these carriers a competitive distinction over DoCoMo, at least in the eyes of the growing legions of content developers -- who should be motivated to develop JAVA applications for the three MIDP-using mobile services first. Of course, i-mode still has the lion's share of JAVA users, but there's no reason why savvy marketing couldn't change that.

The competitors' JAVA services will also have fewer application restrictions than DoCoMo; J-Phone will have an application download limit three times more generous than DoCoMo's (30KB versus 10KB), and KDDI, five times (at 50KB). (Ironically, one symptom of DoCoMo's hypersuccess is that the network is straining under the weight of subscriber traffic and crashes on occasion.) J-Phone will start its JAVA service in June, KDDI's will come sometime this summer, and DDI Pocket's will launch later this year. DDI Pocket is also launching nationwide packet switched service with a speed between 32 and 128 Kbps this June and will allow its handsets to automatically switch between circuit switching and packet switching, depending on the volume of data to be transferred. Using the circuit switched system at 32 Kbps, subscribers could download a 250-KB file for just ¥10, whereas an i-mode user would pay ¥600 using that service's packet-only system.

BROWSING
With the adoption of a common standard markup language, XHTML Basic, for wireless handset microbrowsers, competition between the mobile Internet services in Japan will further increase, since XHTML Basic--format content developed for one platform will also be accessible by customers of the other platforms. In the fourth quarter, microbrowser-maker Access will release its XHTML Basic-compatible Compact NetFront Plus browser to handset manufacturers who supply Japan's operators. Access plans to market the browser widely to cellphone makers inside and outside Japan, thereby exporting knowledge and expertise gained at home to other countries and starting head-to-head international competition with both Openwave's recently announced multi-platform microbrowser and Microsoft's Mobile Explorer browser.

This new generation of microbrowsers will be offered as a solution for 2.5G and 3G mobile terminals and is designed to bridge current mobile Net services with upcoming high-speed 3G wireless networks. This should allow true global roaming between participating carriers (although early 3G adopters in Japan won't be doing much roaming until other 3G networks are built elsewhere).

THIRD GENERATION
The first carrier to start 3G services in Japan will be NTT DoCoMo, which was due to test-launch its FOMA ("Freedom of Mobile multimedia Access") 3G service at the end of May, followed by KDDI in October this year, and then J-Phone in June 2002. All three companies are adopting IMT-2000 technologies, an international 3G standard developed by the International Telecommunications Union (ITU), but each network's system will differ somewhat. While NTT DoCoMo and J-Phone will both deploy all-new W-CDMA (wideband code division multiple access) systems (which will still be mutually incompatible since DoCoMo is using a slightly different flavor of W-CDMA), KDDI has opted to roll out its 3G services based on cdma2000, a technology developed by US-based Qualcomm. cdma2000 is an evolutionary upgrade from KDDI's present 2.5G cdmaOne network, and the operator does not have to replace existing base stations in the initial phase. As a result, DoCoMo and J-Phone will both incur large 3G capital expenditure costs, while KDDI will get its 3G network up and running much cheaper.

Fierce global competition is expected between W-CDMA and cdma2000 standards, and what happens in Japan -- the first market to roll out both technologies -- is expected to generate a lot of industry attention. Additionally, Japan is seen as an especially valuable testing ground for the new 3G services because it already has advanced 2.5G technologies, which will hopefully allow a smoother transition from 2G to 3G. Industry watchers are particularly keen to see what kind of services are going to be popular on 3G, how the pricing for the new service will be structured, and who will use the new networks. But as NTT DoCoMo has already pointed out, there is no reason for excitement just yet, as there isn't a lot of killer content available to take advantage of the better bandwidth. Customers who do sign up for DoCoMo's launch will also find that their expensive new 3G handsets only work in the Tokyo and Yokohama areas and that usage costs will be much higher than on the existing 2.5G network (although these should fall fairly quickly). DoCoMo users will have speed on their side, though. DoCoMo's 3G service is expected to provide 384 Kbps download, which will be reached over the next few years as DoCoMo tests its network and slowly ramps up from this year's 64 Kbps, to 115 Kbps, and then all the way up.

3G users are expected to download much greater amounts of data when music and video services are finally online, but the current transmission fees on all carriers (between approximately ¥0.1 and ¥0.3 per 128-byte packet) are too high -- it would cost roughly ¥6,000 to download a 3-minute MP3 song at present rates. Carriers here have already said they will reduce packet fees to 1/100 of the current level. The likely outcome for the next couple of years is that the 2.5G and 3G networks will run in parallel, with higher bandwidth applications dished up over the 3G pipe. As NTT DoCoMo will be the first major carrier worldwide to start 3G services and therefore the first to see who is going to use the services and at what price level, the other carriers will be watching its progress with eagle eyes.

J-PHONE WAITS
In March, J-Phone announced it would delay its planned 3G launch from this December until June 2002, which is about the same time that the Japanese carrier's major shareholder Vodafone is expected to launch UK 3G services. By delaying the launch, J-Phone will be able to integrate the latest changes in the W-CDMA technical specifications, says general manager Garrett. In the meantime, the company will concentrate its energy on existing 2.5G PDC (portable digital cellular) network subscribers, while planning for customer migration to the 3G network next year. Nonetheless, for Vodafone and the other major foreign shareholder, British Telecom, the Japanese market and its early transition to 3G is an excellent test bed where they can learn firsthand from J-Phone's experience, presumably exporting and leveraging that expertise to markets outside Japan. J-Phone, Vodafone, and BT combined have a total subscriber base of 182.5 million users, and Garrett says, "This is an interesting perspective when you compare to the international alliances that NTT DoCoMo is building for its global expansion plans." Yoshikazu Muramoto, deputy manager of J-Phone East, adds, "[Exporting] our expertise and knowledge to global markets is of course very interesting. This is not limited to exporting the latest technology, but also includes the business models, for example." The company hopes to establish roaming agreements with W-CDMA network operators worldwide, utilizing partners Vodafone and BT.

TERMINALS
Given the fact that 3G is going to be deployed globally, and considering Japan's early entry, Japanese handset makers also have a good chance to gain a significant competitive advantage both domestically and in Europe and the United States; this may constitute a serious threat to local handset makers in these markets. Late April rumors of a tie-up between the cellphone divisions of Sony and Ericsson would also help pave the way for Japanese handset technology to gain serious market share overseas.

NEC and Matsushita (Panasonic) in particular may have a strong head start in the European market, as they were expected to have 3G handsets ready for NTT DoCoMo's May launch in Japan, giving them immediately exportable experience. Even prior to 3G, top-tier maker Sharp had announced a deal with BT Wireless that will see Sharp supply BT customers around the world with advanced 2.5G handsets incorporating cameras. The first models to be launched in the UK will be a version of the phone recently introduced by J-Phone in Japan with a tiny camera in the back of the handset. "European manufacturers are preparing to introduce color screens this year but will struggle to compete against Japan's near two-year lead," said one J-Phone spokesperson.

A global operator like Vodafone, the world's largest mobile company, is likely to seek economies of scale by sourcing Japanese phones it can sell worldwide, and the European manufacturers will have to match Japanese skills or expect to lose. The Sharp-BT deal clearly highlights the threat and the value of BT's and Vodafone's investment into J-Phone and its parent company Japan Telecom. For the first time, DoCoMo will be unable to squeeze the handset makers into providing their best technology to it first (a long-standing domestic practice).

In other words, it appears that competition against DoCoMo from domestic operators with the smarts, savvy, and tenacity to win 15 million--plus mobile Net subscribers is going to help export Japanese handset technology and mobile Net service know-how to the rest of the world, helping bring utterly cool pocket rockets to Europe and Japan. And the little guys are doing it all by themselves. J-Phone, KDDI, and DDI Pocket: Go get 'em!