Mobile Shake Up

2006: A new era for the Japanese mobile phone market.
by Jack Turner

For foreigners living in Japan, calling home is an important aspect of life. However it is something that has always been an expensive undertaking. Even now, on a standard plan from any one of the major mobile companies, a quick call to home of 20 minutes a week adds an even quicker $100 to your monthly account.

2006 is set to mark the beginning of a new era in the evolution of the Japanese mobile phone market. Just as when color replaced black and white, this year is set to open up a new array of choices in the market, and a large drop in the cost of mobile calls.

The causes of this are three-fold; the Government has granted new spectrum allowing new companies to enter the market, the introduction of the heralded "number portability", and the increasing popularity of voice-over-IP (VoIP) telephony technologies. All of this spells good news and more choice for the consumer.

The spectrum of radio waves used by mobile phones is managed under the authority of the Japanese Ministry of Internal Affairs and Communications. For the first time since 1994 when spectrum was granted to Tuka and the Digital Phone Group (the predecessor to the current Vodafone), new spectrum licenses have been allocated free of charge to companies who have proved their willingness and capability. Places on the podium went to current ADSL providers Softbank and eAccess in the 1.7Ghz range, and a smaller venture company called IP Mobile in the 2.0Ghz range. This was relatively easy entry into an 8 trillion yen market, currently dominated by just 3 major players.

NTT DoCoMo is the perennial incumbent, with a 56% share of the mobile market. However they have already started to feel the strain from recent price wars and strong competition from KDDI's au, showing their first decrease in profit in 2004. KDDI's au, on the other hand, has shown a healthy growth in subscribers over the last few years as the major competior. This has continued to increase recently due to the new quality 3G services, such as chaku-uta. Vodafone has struggled, however, with their number of new subscriptions dropping in each of the past four years, with merely 40,000 in 2004.

The pressure in the mobile telephone business is being felt, and the pure voice market actually shrank from 1.5 trillion yen in 2003, to 1.2 trillion in 2004. This has shown the need for both the current major players, and the new entrants to introduce new innovations to increase profits and revenue streams. It also raises the question as to what business models the new entrants will adopt, and what tricks they will have up their sleeves. This new challenge is engaging some of the smartest and shrewdest minds in the IT industry, and is already heating up, almost a year out from the opening of service.

Softbank, with nearly 5 million subscribers in its ADSL business, although no-doubt building up to a major rollout, is already bearing the brunt of some criticism. Despite their large number of subscribers, and seeming omnipresence through Yahoo BB and the Yahoo Japan mega-portal, the company has in fact run at a loss for the past 4 quarters, accumulatively adding up to as much as 350 billion yen over the past 4 years. Much emphasis has been put on the large expense necessary to successfully enter this market, and whether and how the new entrants will be able to foot these costs. Softbank has, for example, announced a "vendor financing" strategy to lower its initial costs, meaning that they plan procure their network equipment from the vendors in the beginning, but pay later. Competitors saw straight through this, with NTT submitting a written statement to the Ministry questioning the companies financial health and sustainability. As Softbank's fearless leader summarized though, "this just shows who they are most scared of".

Matters were not helped though in February 2005, when Softbank attempted to sue the Ministry over its decision not to allocate the 800MHz spectrum to new market entrants. This issue was resolved, although it keeps coming back as a thorn in their side.

This said, Softbank submitted the colossal stack of required paperwork to the Ministry well before the cut-off date, and are rapidly preparing for rollout, aiming for around Autumn 2006. This will give them a year to think up the kinds of innovations necessary to really threaten the likes of DoCoMo and au. Ideas such as Softbank Hawks handsets streaming free live coverage of all home games are likely to be just the beginning.

Their most staunch competitor in the ADSL arena has been eAccess, and this fierce battle looks likely to continue into the realm of mobile. Contrastingly, eAccess has a very healthy balance sheet, with expected profits for this year up again on sales over around 60 billion yen. They have also raised nearly a billion dollars of investment for the dizzying task of establishing thousands of mobile base stations right across Japan.

The mobile subsidiary of eAccess, eMobile, will more likely introduce a competi-tive pricing system, with new improvements such as full-browser capable handsets. Their pricing and smart innovations are likely to see eMobile bolt out of the blocks. However in such a competitive market, they will need more than just that to maintain such a lead. Without the sheer size of Softbank, they have to think smart, and investing in establishing their own infrastructure has opened up another opportunity to create further revenue for themselves, as well as shake up the market even further.

An innovation employed in both Europe and the U.S is that of a Mobile Virtual Network Operator (MVNO), which is an unnecessarily long name for a fairly straightforward concept. This is where the mobile company effectively becomes the wholesaler of their network for other companies to provide mobile services. This infinitely lowers the barrier to entry, potentially affects profits for pure mobile operators, yet gives the network owner increased wholesale income. This has been very successful for European and U.S. companies such as Virgin Mobile and BT Mobile. The catch, of course, is that the bandwidth available for resale is limited and thus this only works for a limited number of customers. This, however, gels well with eAccess' current ADSL wholesale business, with Sony already announcing its interest in a MVNO with eAccess, and with no doubt more to come. Of the current mobile operators, Vodafone has also announced that it has some available bandwidth, and is discussing MVNO with a number of interested parties.

The first "moshi moshi" and "ima doko?"s on these networks are not likely to be heard until late 2006, which is set to align with the introduction of number portability. Currently, certain sets of phone numbers are allocated to each mobile phone company by the Ministry, and when a user changes between mobile phone companies, they must also change their number. The selection is usually limited, and users often change from one un-rememberable number to the next. From the latter half of next year, users will be able to take their numbers with them should they change providers. This convenience is seen to make it easier for customers to pick and choose between providers on the basis of their actual pricing and services, without having to worry about changing their phone number.

Number portability was introduced in Europe in 2000, the U.S. in 2003, and Korea in 2004, so Japan has been slightly behind the pace. At a glance, it seems as though this will add to the battle for market share between both the old and new mobile companies, and initially this may be the case. However given the fact that users will still have to change their email addresses and get used to a different handset, it is hard to tell how quick the novelty may wear off.

Another interesting development creating some hype in Tokyo is the endeavor by Livedoor to adorn the insides of the JR Yamanote line with wireless internet capability. For a mere 525 yen monthly fee, anyone with a laptop will be able to connect at up to 54mps speed. The catch is this -- subscribers must sign in using their Livedoor login through the homepage. This then increases Livedoor subscribers, and views of its homepage, bringing in extra advertising revenue to supplement the tiny monthly fee.

Whether the end result will live up to all the hype is yet to be seen, but they have nothing to lose. This undertaking is a sample of the type of new IT-centric business style that is creating waves in Tokyo, with young, creative and gutsy CEOs bringing new ideas and new business models to a society conventionally known for its rigidity. By October 2005, Livedoor established 2200 wireless LAN points on power poles around Tokyo, thanks to PoweredCom, and plans to establish another 4000 by the end of March 2006. They will initially invest only the base infrastructure costs of around 7 million yen, but with only the monthly fee minus the advertising revenue, they would struggle even to make this back.

This alone does not put Livedoor in direct competition with the mobile phone companies, but Livedoor is also a Japan agent for the voice over IP (VoIP) technology, Skype. They already sell Skype merchandise, such as headsets and USB cordless phones, through both their retail website and distributed through the major electronics shops, and are said to be planning a release of Skype enabled mobile phones. Coupled with their wireless network, providing both users have Skype (and of course Livedoor) IDs, this essentially enables users to make free mobile calls within the city. Chances are that this will be funded by some form of Livedoor advertising, albeit on the screen or perhaps by voice message. Users can then use the cheap SkypeOut option to call fixed lines. What then gets interesting is that this makes overseas calls to Skype IDs/phones also free. And it is innovations like this that may start to affect the current and new mobile operators.

Either way, this coming year we will see more new changes and choices than we have for a number of years. Which hopefully will work to get those mobile bills down. JI