One Region Under a Groove
By Dmitri Ragano, Thu Jun 06 00:00:00 GMT 2002

Free flow of ideas across East Asia is incubating the mobile services of tomorrow.

International brotherhood is the theme for the World Cup this month, co-hosted by one-time rival nations Korea and Japan. Mobile operators are also getting into the act. Through a tie-up by Tokyo-based KDDI and SK Telecom of Seoul, soccer fans traveling to games in both countries can use CDMA 2000 phones to take snapshots and mail them home to friends.

This picture-mail roaming service is the latest example of the increasing integration of mobile services in these two countries as well as China (where subscribers can also get coverage for visits to the World Cup games).

In 2002, cross-border roaming may seem like a no-brainer. But in East Asia, some of the world’s largest and most advanced mobile Internet societies have evolved in relative isolation.

Japan, Korea and China all pride themselves in their cultural uniqueness and economic independence. During the 1990s, governments rolled out different flavors of digital cellular, which in turn left them confined to selling products and services in their home countries. Now with the prevalence of wireless data and the move toward 3G, these separate paths are converging and the cross-border exchange of ideas is accelerating.

Operators, who dominate the value chain, are leading the way. Shedding their past as solitary wallflowers, they are partnering aggressively throughout the region with an eye toward China and other developing markets.

KDDI and SK Telecom, in addition to their CDMA 2000 roaming alliance, have both established joint ventures with local operators in mainland China. SK Telecom, the most prolific deal-maker, has roaming partnerships with NTT DoCoMo of Japan as well as GSM and CDMA operators in China. (SK Telecom has a range of service relationships to accommodate operators with different technologies. For instance, SK Telecom’s deal with China Mobile lets Chinese GSM subscribers lease CDMA handsets when visiting Korea.)

Roaming Coverage for Ideas

While international coverage provides benefits for frequent travelers between the three countries, the more profound impact will be felt from the portability of business models, technologies and products that support growth of new industries. The sheer size of the markets in Korea, China and Japan, which together have more than 200 million subscribers, means that this convergence and adoption of mobile services can have a powerful influence internationally as well. Standards such as Qualcomm’s CDMA 2000 and Sun Microsystem’s J2ME, for instance, could establish an advantage over competing platforms due to the advocacy they are receiving from operators and content developers here.

Japan still leads the region in pioneering the latest technology and applications, with Java handsets and multi-media services such as video clips, music and game downloads becoming standard issue for the high-end of the market. Korea is close behind, however, and its entrepreneurial culture may make it better suited to propagating new business concepts internationally.

China’s technology is a few years behind but the country continues to cleverly adapt ideas from its neighbors and reconstruct them in a way that wins users in its own vast market. Foreign partners, looking for any foothold they can get into China, are eager to help lead the way. Matsushita and NEC of Japan recently announced a joint venture with Huawei Technologies based in Shanghai. The new company, called Cosmobic, will focus on development of 3G handsets in China.

The first building block for success is the business model. It was in Japan that operators established a viable business model for revenue sharing by operators and content providers. In China, operators have adapted this model to promote a broad content industry for SMS.

Inspired by NTT DoCoMo’s i-mode, China Mobile created a revenue sharing program called Monternet (a combination of the words Mobile Internet with Chinese characters that translate to “China Mobile Dream”). Under the Monternet system, the operator hands over 85 percent of SMS service fees directly to original content providers. (Despite its influence as a leader, DoCoMo actually has been slow to establish a business presence in China, focusing more on its investments in operators rolling out i-mode in Europe and the United States.), a pan-Chinese portal that has roots as a software development company, has introduced 500 different types of SMS services since Monternet started. Mont Gu, a deputy general manager of in Shanghai, credits this system with providing the right financial incentive for content providers. believes SMS applications are a key part of its strategy for revenue diversification to move away from reliance on web advertising. This is particularly important in China, where it is difficult for content and software developers to get paid for their work due to widespread piracy.

Another application developer in China that branched out to SMS is Tencent, the creator of the popular instant messaging service QQ. Tencent offers a mobile subset of its product that provides cross-platform messaging and client access between personal computers and cell phones.

The recent success of content in China has attracted interest from Tokyo-based Cybird, the most successful content provider in the Japanese market. Cybird is exporting its quiz game service “Nandemo Shindan” (“The Examination About Everything”) through a partnership with portal Chinadotcom and China Mobile.

“There is a big opportunity for SMS-based contents in Asia right now. The usage is very high not just in China but in Hong Kong, Taiwan, Singapore and the Phillipines,” said Toshi Iwata, Vice President of International Business for Cybird.

The Proselytization Continues

Korea is another country trying to build a strong base of content modeled after Japan’s example. But despite the high subscriber base for 2.5 G service, mobile Internet services are still not widely used in Korea.

“Even though half the phones have wireless Internet capability, the average customer only uses it once a month,” said Brian Uh, Director of Marketing for XCE, a middleware and application development company in South Korea. Uh believes the situation is changing, however, as operators enlist a growing number of content providers. XCE has partnered with SK Telecom to create handset middleware and game applications that can be downloaded.

XCE is one of many companies in South Korea that is betting that Java middleware and applications will be the next big opportunity for entrepreneurs in the international market place. The company developed XVM, a virtual machine and applications for SK Telecom’s java handsets. XCE is working with SK Telecom and independently to sell its software services internationally.

Uh said that his company and others believe the “Java boom” that is now catalyzing the phone market in Japan and Korea will go worldwide in the next few years. There are currently 300 Java applications offered by mobile operators in South Korea and 5000 in Japan. Uh said there is a development community of more than 65,000 coders in his country focusing on mobile Java. He wants to plant the seeds for business relationships that guarantee their software is not limited to their home market.

“We are focusing very aggressively on our overseas marketing plan this year,” said Uh. He sees two international opportunities for his company. First of all, XCE wants to export XVM as a standard virtual machine that operators can adopt as they upgrade their network for Java services. The company is already preparing to introduce its platform in Singapore and Israel. He believes that China will also introduce Java phones next year as CDMA networks gain acceptance.

The second opportunity for XCE is as an aggregator of Java content that sits on top of its virtual machine. XCE and SK Telecom are nurturing content providers in Korea to create a pool of Java applications that can then be exported. XCE is already introducing games by Korean development partners to be used with XVM in Singapore and Israel. In the future, the company hopes to be able to import killer applications by overseas developers into the Korean market as well.

Failure Teaches as Much as Success

As mobile entrepreneurs in Asia come closer together it will be important that they learn not just from the successes of neighboring countries but from the disappointments as well. Japan’s DoCoMo is praised for its role in teaching other countries how to effectively spawn a new industry for mobile content. But more recently, it also showed what not to do with the troubled rollout of its 3G service FOMA. After spending billions of dollars for Wideband CDMA network construction and an extravagant promotional blitz featuring pop star Hikaru Utada, DoCoMo only signed 105,000 subscribers to FOMA in the first six-months of service. KDDI, on the other hand, launched its own CDMA 2000-based 3G service with little fanfare this April and gained 334,000 customers during the first month.

For industry watchers here in Japan, the reasons for DoCoMo’s failure and KDDI’s success are obvious. In order to recover some costs for creating a new network, DoCoMo charged between 30,000 and 50,000 yen for FOMA handsets. In addition, its packet billing system applied to broadband services was very expensive and customers can expect to pay between 30,000 and 40,000 per month for frequent use of 3G services.

And to top it off, FOMA coverage has been limited to the Tokyo area, which means the phones are useless when traveling anywhere else in Japan. The FOMA naming also may have confused consumers, who were already familiar with i-mode and did not understand its relationship to the new brand.

KDDI, on the other hand, upgraded its existing network to CDMA 2000 to offer nationwide service without need for a major investment. Its handsets and service fees for 3G are not significantly higher than older models, so customers can enjoy multimedia services without making any of the trade-offs required for FOMA. It also used its existing “au” brand to promote new applications. This gave consumers enough context to understand that they were getting the same services as before, plus add-ons like movies and music.

Although it is still too early to tell, the success of KDDI seems to be a vindication that users actually do want the multimedia services enabled by 3G technology as long as they are offered at the right price with the right network service support. This is just another lesson to be studied and appropriated by neighbors across the region.

Dmitri Ragano is a consultant for Frontage-Razorfish in Tokyo, Japan.