Japanese Lead Doesn't Translate Into Competitive Advantage
By Steve Wallage, Wed May 30 00:00:00 GMT 2001

Japan may be 12-24 months ahead of Western Europe, but their global success is not secured.

NTT DoCoMo has enjoyed great success with its data service, i-Mode. Users now surpass 22 million, and NTT DoCoMo keeps 9 percent of all content revenue. There are over 1,600 official and 40,000 voluntary sites supporting the service, which is based on the NTT DoCoMo-developed cHTML (compact HTML), rather than the much maligned WAP.

The success of i-Mode has left many European and US mobile operators running scared. NTT DoCoMo relationships now span the world - for example, AT&T Wireless in the US, SK Telecom in Korea and KG Telecom in Taiwan. These are all minority stakes -typically 15-20 percent.

Can this success be replicated in other markets, particularly as NTT DoCoMo seeks to grow internationally?

Equally with 3G. NTT DoCoMo is using the same 3G variant, W-CDMA (wideband code division multiple access) as European operators. It is also well ahead in its deployment plans for the technology.

Despite the delay from May to October in introducing 3G, NTT DoCoMo still believes that it will have six million 3G subscribers by the end of March 2004, and will be making a profit on 3G in the year beginning March 2004. Many European operators will be struggling to even have a full commercial 3G service at this point.

The other great opportunity for Japanese vendors appears to be the mobile terminal market. 3G handsets seem to favor them for three reasons.

First, they have first-mover advantages through their domestic market. Second, the size of the market for W-CDMA handsets will allow the Japanese vendors to develop economies of scale. Third, the success factors for 3G handsets are those areas in which Japanese vendors typically excel such as consumer electronics, miniaturization and entertainment.

A good example is Mitsubishi - it has strong capabilities in flash memory (fifth largest producer in the world), semiconductors (for example, working with Intel to develop a 3G chipset), and encryption technology to be used in 3G.

The lessons from i-Mode

European and US commentators have been in raptures over the success of i-Mode. Many have tried to identify the key lessons to be learnt.

For example, according to IT research company, Aberdeen Group, its success is due to: an open policy towards portals and advertising; availability of handsets and applications; and the always-on works well and easily.

According to research-led investment house Durlacher and Finnish VC group EQVITEC Partners, there are five key success factors: always-on capabilities, useful applications (despite low speeds), relatively low prices, low usage of fixed Internet access, and youth services such as messaging, ringing tone and wallpaper downloads.

The i-Mode success is undoubtedly due to some great marketing, but also due to the availability of packet networks; and the Japanese love of such devices and applications.It is also worth remembering that the Japanese ARPU (average revenue per user) is nearly double the Western European average.

But how successful is i-Mode in reality? There has been much debate as to how 'active' many of its stated users are and there is concern over the lack of quality content and the poor user interface.The big mistake of commentators is to somehow believe that NTT DoCoMo can emulate its Japanese success into other markets.

Will i-Mode even be offered in Europe and the US?

In Europe, NTT DoCoMo is working with Telecom Italia Mobile and KPN Mobile to offer mobile Internet services in Germany, Italy, the Netherlands and Belgium. The plan is to offer combined i-Mode/WAP handsets by the end of the year.

NTT DoCoMo is also taking a 25% stake in a mobile data company formed by KPN, and including the mobile portals established by KPN.

Yet there are major reservations about whether such offerings will ever develop. The future ownership of KPN Mobile looks uncertain, and Japanese press reports suggest that NTT DoCoMo is unlikely to increase its Dutch investment.

Given all the problems with GPRS handsets, the availability of combined i-Mode/WAP handsets will be a major hurdle.The high proportion of pre-paid users, eradicating the relationship between user and operator found in Japan, also creates a major obstacle to the rollout of i-Mode.

In the US, AT&T Wireless has exclusive rights to i-Mode, and is compelled to offer W-CDMA instead of cdma2000. It remains unclear whether it will offer the service, or how closely it will resemble i-Mode.

The current realities for the Japanese handset vendors

The Japanese handset vendors are still highly reliant on their domestic market. None has broken into the top six global vendors.

Europe has proved to be an extremely difficult market for them, other than one or two successful handsets. For example, Mitsubishi has had to downgrade expectations of European terminal sales from 16 million to nine million in the year to March 2001.

Most are also making losses on their mobile terminal business. Equally, the contracts for non-Japanese 3G infrastructure have rarely gone to Japanese vendors.

The latest trend has been one of alliances with Japanese vendors. Ericsson has teamed up with Sony to form a 50/50 joint venture, Sony Ericsson Mobile Communications. Its ambition is to be market leader in 3G handsets. Toshiba is working with Siemens, while Mitsubishi is widely rumored to be looking for a Western partner.

European commentators have perceived these deals as indicative of the challenges facing the Western vendors, and a further boost to the Japanese vendors. There is no doubt that Sony was able to negotiate a far better deal with Ericsson than it would have 6-12 months ago, and that Ericsson was desperate to reduce its exposure to mobile terminals. Yet, in reality, the Japanese vendors need these relationships at least as much as the Western vendors.

Such agreements do not have a good history - for example, the relationship between Sharp and Alcatel failed. The deal is also not exclusive - Ericsson has not ruled out further deals with other vendors, and it already has a 3G-handset agreement with Matsushita, while Sony has mobile chip-design agreements with Phillips and Nokia.

The two sides seem to have kept their own subsidiaries, though it would seem to make more sense to have put them into the joint venture. For example, Ericsson will retain its outsourcing agreement with Flextronics.

Many of these deals are likely to fail, and not go close to meeting their planned targets.

How valuable is the Japanese lead?

Historically, the Japanese market has moved in different ways to Western markets. For example, the Japanese developed PDC (personal digital cellular) as their 2G standard rather than GSM or CDMA. Color terminals are highly popular in Japan, though have yet to make an impact in Europe.

The Japanese market and culture is very different. The market is also likely to develop very differently in Europe, where business users will become the important early market for GPRS and 3G.

Due to the high cost of handsets, business users being more likely to be early adopters, and price-skimming strategies adopted by operators. Yet, about 60 percent of Japanese i-Mode websites are entertainment, 20 percent are informational and only the remaining 20 percent are transactions and database applications.

First-mover advantages are limited

The early bird catches the worm, but the early worm gets eaten. Put another way, its the second mouse that gets the cheese. First-mover advantages are limited for three main reasons:

First, plagiarism rules - every mobile operator has learnt from i-Mode. In fact, mobile operators are highly skilled in copying the best ideas - take the examples of pre-paid or tariffing ideas. On the terminal side, Western vendors will continue to develop partnerships to offset the advantages of Japanese vendors.

Second, execution is key. The real challenge for the Japanese companies is to take advantage of any short-term lead that they have. In the past, they have been unable to do this.

Third, marketing and branding are vital. Local knowledge and content partners are key to success for a service such as i-Mode. The impressive content partners and brand of i-Mode has no value in Europe.

Equally, the lack of operator and channel relationships for the Japanese handset vendors is a major weakness.

The future battlegrounds

According to the Japanese telecommunications council, of spending on 3G between 2001-2010, 67 percent will go on services compared with 11 percent on mobile terminals. i-Mode will soon look like an early generation of mobile content and transaction services.

The challenge for the handset vendors is to move up the value chain. The Western vendors seem better equipped to develop value-added services - for example, early efforts in areas such as wireless application service provider (WASP) and portals. Initiatives on areas such as mobile security (MET) or wireless instant messaging (wireless village) have been established by Nokia, Ericsson and Motorola.

So many mobile commentators conclude that Japan is 12-24 months ahead of Europe - which is well ahead of the US. This is far too simplistic and has little bearing on competitive advantage.

In fact, US m-commerce companies are very well positioned for global success. But that's another story.

Steve Wallage works and writes for the451, a website that offers critical news analysis, comment and opinion on the technology, communications and media industries with an emphasis on their convergence. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.

Most recently, he was a principal analyst at Gartner Group tracking the voice, data and IP service markets for the carrier, vendor and financial community. He predicted how these markets are likely to grow, and helped develop the business plans of leading vendors while analyzing key trends in the market.