Lately Japan has been like a Sumo wrestler with a bad case of the flu. Its economy is the second largest in the world after that of the United States, but its decade-long economic slump continues with no end in sight. Unemployment and bankruptcies are at near-record levels; the value of the Japanese yen against the U.S. dollar has dropped 15 percent in the past year; and the government is forecasting a weak 1.2 percent economic growth rate for 2001. Japan hasn't had a string of business successes since the 1970s and 80s when its companies were beating up on their competitors around the world and awe-struck business school professors everywhere were teaching the management concepts of the "Japanese miracle."
Japan was hoping that in May the world - the wireless world, anyway - would again be talking about its economic and technological prowess when NTT DoCoMo was scheduled to launch the world's first third-generation mobile Internet services. Although the launch has been delayed until October 1 of this year, NTT DoCoMo is still expected to provide the world its first glimpse of 3G services.
Anywhere is everywhere in Japan
DoCoMo (the word in Japanese means "anywhere") is Japan's leading mobile services carrier. With a market share of about 55 percent, it dominates a very active wireless market in which it competes against two other mobile carriers, Japan Telecom's J-phone and KDDI's "au". The Japanese government estimates that there are currently about 65 million wireless subscribers in Japan, a penetration rate of 52 percent of the population.
DoCoMo's market dominance gained substantial momentum in the last two years with the phenomenal popularity of its i-Mode service, the world's first mobile packet data service, a second-generation PDC (Personal Digital Communications) system based on TDMA (Time Division Multiple Access), with HTML (HyperText Markup Language) and Java capabilities, that transmits at a slow but dependable 9.6 kbps.
DoCoMo now has 22.5 million i-Mode subscribers, adding some 50,000 new i-Mode subscribers every day. Subscribers pay a flat fee of about $2.40 per month, which permits them to send and receive email and short messages, download music and popular cartoon characters such as Bandai's TarePanda (saggy panda), perform banking transactions online and surf more than 20,000 mobile-enabled Web sites. Many sites are free, but some 350 sites – including CNN, Bloomberg News, Nikkei News, Dow Jones and Sony – charge a flat fee of $1.00-2.50 per month - for access.
News sites are the most popular, followed by hobby and entertainment sites. DoCoMo bills and collects fees from its subscribers for access to these sites, charging the sites 9 percent of the fees for collection services. Subscribers spend an average of $16 per month for these incremental services. The keys to i-Mode's success have been savvy marketing, an easy-to-use content selection menu, and site-access collection services that enable the subscriber to pay a single monthly bill.
It's the brand stupid, or is it?
Today, at the dawn of the mobile Internet, it appears that DoCoMo's 3G launch will have an enormous influence on the development of the mobile Internet in Japan and elsewhere around the world. While there are risks to being the first to break new ground in any endeavor, there can be significant rewards.
A "first mover" often establishes the framework of competition, influences the direction of development, and captures strong brand recognition. In the case of DoCoMo, its 3G launch will benefit from the success of its existing i-Mode service - DoCoMo will continue to use i-Mode as a service brand following introduction of its 3G service - and i-Mode will facilitate the migration of its existing customer base to 3G service.
"The success of i-Mode is largely due to the marketing side and its first-mover advantage" says Makio Inui, an analyst at Nikko Salomon Smith Barney, Tokyo. "It is important to remember that i-Mode is a brand, not a technology. In a sense, i-Mode proves that being successful as a wireless portal has very little to do with technology."
Yet technology issues have had a great deal to do with preparations for the rollout of DoCoMo's 3G service. DoCoMo settled upon W-CDMA (Wideband Code Division Multiple Access) as its 3G technology in 1996 and began testing transmission in October of that year. Testing of the technology, and collaborations with potential 3G handset manufacturers, occupied much of DoCoMo's 3G efforts in the following years.
Indeed, it is DoCoMo's technological need for greater voice transmission capacity that has spurred its early push into 3G, according to Satoshi Nakajima, president and CEO of UIEvolution, Bellevue, Washington, a developer of interactive applications for wireless technologies. "Because DoCoMo's 2G spectrum is so full, the quality of its voice call transmissions is rapidly deteriorating, especially in downtown Tokyo," he says. "DoCoMo needs 3G just to keep up with its growing number of voice customers."
But haste makes waste, especially when it comes to technology. A DoCoMo spokesman said this week that, due to technical difficulties, the company cannot guarantee a "100% stable" service until October 1. The spokesman said, however, that an "introductory service" would be offered during the interim for which there would be a fee for communications time but not a basic fee. Fees for 3G handsets would also be waived.
DoCoMo's initial 3G service, following the "introductory service",will be rolled out in Tokyo and parts of Yokohama and Kawasaki. Service for Osaka and Nagoya is now expected sometime in 2002, with service to all other major Japanese cities to be achieved by late 2002 and nationwide coverage (97 percent of the country) by the end of 2004.
At the outset, the service will provide packet switching speeds of up to 64 kbps for uploads and 384 kbps for downloads (compared to the 56 kbps of today’s typical Internet modem). Eventually, the company hopes to achieve transmission speeds of up to 2mbps.
Home runs on your handset
The handsets and terminals to be marketed at the time of inauguration of DoCoMo's 3G service will be (1) a basic, compact handset with i-Mode capabilities plus transmission of still photographs and video clips, (2) a video transmission handset with the basic capabilities plus visual phone and streaming video transmissions, and (3) a data-dedicated terminal for high speed data transmission. Photo and videoclip transmissions are expected to be particularly popular uses. The face of a caller will be displayed on the handset of the person receiving the call. A subscriber will be able to request automatic transmissions of videoclips of baseball home runs or soccer goals as they happen.
The big question for 3G in Japan is: Will customers buy it? In other words, will there be sufficient demand for 3G's additional features, or will customers stick with 2G i-Mode and other less costly services?
"I am skeptical about the willingness of customers to pay for data-intensive features such as streaming video and music downloads," says Nakajima. "It will cost more than $10 to download one megabyte of MP3 music. Until competition drives down the transmission price of such streaming services, they won’t be very popular."
Another big question is whether DoCoMo can successfully export its 3G business model overseas. During the past two and a half years, DoCoMo has spent some $15 billion to acquire minority stakes in wireless companies outside Japan, including 15 percent of KPN Mobile in the Netherlands, 20 percent of Hutchison 3G UK, 20 percent of KG Telecom in Taiwan, and 16 percent of AT&T Wireless in the U.S. Industry analysts believe that other possible investment targets are wireless carriers in South Korea, China and France.
DoCoMo's strategy is believed to be two-fold: first to enable its Japanese customers to use their phones (2G i-Mode and 3G) almost anywhere they travel, thus strengthening DoCoMo's market share at home, and second to realize license revenues and portal fees from i-Mode usage around the world. Reportedly, DoCoMo will be pressing its invested companies to roll out GPRS (General Packet Radio Services) and other packet systems that will facilitate the early introduction of i-Mode. In addition, there is the potential that DoCoMo's investments in these companies will increase in value.
DoCoMo's international ambitions will enjoy a strong "first mover" advantage if its 3G launch goes well. In addition, unlike many European and American carriers that were granted licenses on the basis of huge auction payments, burdening their operations with debt for years to come, DoCoMo and Japan's two other wireless carriers were granted their licenses for free (subject to revenue-sharing with the government). "Japan's licensing plan will help DoCoMo concentrate more on growing its business and creating a vision for the future," says Krishna Kishore, director of Global Telecommunications Consulting, Telcordia Technologies, Inc., Morristown, New Jersey.
Kishore cautions, however, that much of DoCoMo's success with the Japanese might not transfer easily to another country. "DoCoMo's real challenge with the international expansion of i-Mode is not with the technology but with issues that have more to do with demographics and with the consumer's cultural moorings and behavior. The chat, fashion and animation content model that has worked so well for i-Mode in Japan, especially with the youth markets, might not succeed in a more conservative market such as the UK," he says. "Service providers outside Japan are focused more on mobile multimedia applications for business customers."
On the technology side, two additional factors favor the adoption of i-Mode applications outside Japan. First, i-Mode is compatible with HTML, the Internet's browser programming language, while many other wireless systems, especially in Europe, are only compatible with WAP (Wireless Application Protocol), requiring Web sites to write new WAP programs for wireless delivery. Consequently, i-Mode displays Internet content more easily than WAP systems do.
The second technology factor that favors i-Mode adoption outside Japan is the prevalence of handset manufacturers in Japan that are now marketing on a global basis. These manufacturers - they include Matsushita Electric (Panasonic), NEC, Mitsubishi Electric, Fujitsu, Kyocera, Sony and Sharp - constitute a large body of competitive developers for i-Mode technologies and applications, assuring the availability of handsets with cutting-edge capabilities and designs. By contrast, handsets for European markets are dominated by just two manufacturers, Ericsson and Nokia, which might not respond to evolving technologies and tastes as effectively.
With so many positive factors ushering in DoCoMo's 3G launch, is anyone concerned that Japan's faltering economy might spoil the party? "Not at all," says Inui. "Wireless growth has nothing to do with a country’s economy. In fact, with i-Mode's tremendous success, Japan was the first country to prove this!"
Even a sick Sumo wrestler needs his i-Mode.
David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in Asia-Pacific business opportunities.