The Great 3G Showdown
By Dmitri Ragano, Tue Aug 06 00:00:00 GMT 2002

In the race for market leadership, Japanese operators are running in different directions.

What’s the best way to introduce 3G? DoCoMo and KDDI, the world’s two leading 3G operators, offer two antithetical answers. They have made fundamentally different decisions about everything from branding to air interface technology to pricing.

KDDI is building upon its existing brand and technology. DoCoMo started fresh with a sub-brand and technical standard that were radical departures from the status quo. KDDI wants to move all users to its 3G base as soon as possible. DoCoMo sees its 40 million PDC customers migrating gradually over the course of several years. KDDI has made 3G the lynchpin of all killer applications moving forward. DoCoMo is sprinkling applications like cameras, Java and video across three disparate standards of 3G, 2G and its cheap, high-data Personal Handyphone System (PHS).

It is too soon to draw any conclusions, but KDDI’s playbook for 3G certainly looks better at this stage of the game. The operator, which has a reputation as an underdog in the local market, has signed up 1.15 million subscribers in three months for its au brand service. The service uses CDMA 2000 1x air interface technology, an upgrade of the existing au network that sends data at 144 kilobits per second. KDDI predicts the service will reach 7 million 3G subscribers by next spring.

DoCoMo’s FOMA, on the other hand, is regarded as an embarrassing disappointment for the nation’s most powerful mobile company. The service has only signed up 115,000 customers in nine months despite a high-profile TV campaign featuring one of Japan’s most popular pop idols and tens of billions of dollars in infrastructure investment.

For observers in Japan, the reasons KDDI’s success over FOMA so far are obvious and directly related to choices around technology, brand positioning and handsets.

Because KDDI’s 3G service was based on backwards compatible technology and brand equity, the service was an easy transition for customers that leveraged all of benefits of the existing CDMA One network. The operator also worked with manufacturers to ensure that 1X handsets matched or surpassed preceding models in design, performance and pricing.

FOMA Foibles

FOMA, on the other hand, is based on W-CDMA technology, which is incompatible with DoCoMo’s 2G standard called PDC. DoCoMo only provides network coverage for W-CDMA in Tokyo and Osaka, which means FOMA phones are useless outside these cities until national coverage is completed in spring 2003 at the earliest. DoCoMo is also working on dual mode handsets that will enable users to access W-CDMA and PDC networks. But these phones will not be ready until next spring either.

On top of this, FOMA handsets have alarmingly poor design and performance in comparison to the operator’s sleek, elegant i-mode phones. FOMA phones are among the most expensive on the market (around 40,000 yen) and have battery life that is roughly one-fifth that of KDDI handsets.

Nathan Ramler, a telecom analyst at UBS Warburg investment bank in Tokyo says: “I try to use FOMA here at the office and the battery is always going out.” He adds with a laugh, “There is no way I would have one of these if I wasn’t a telecom analyst.”

DoCoMo officials freely admit that in the race to launch the world’s first 3G service last year, some of FOMA’s shortcomings caught them by surprise.

“We were the first in the marketplace and the consumer response was unexpected. The pricing and lack of standby hours due to short battery life were all part of the reason that FOMA didn’t catch on,” said Naokazu Kasahara of the DoCoMo Public Relations Department.

Nonetheless, the operator still stands firmly behind FOMA, but does not expect it to replace 2G as a mainstream consumer network by next year.

“At this moment, there are 40 million i-mode users on the PDC network. But that does not mean they will necessarily go to FOMA service,” said Kasahara. “We want to move to 3G in gradual stages. There will be too much confusion among consumers if we shift dramatically toward FOMA and it will be a big cost in rollout coverage.”

If DoCoMo is able to meet its target of FOMA coverage for 90 percent of Japan by March 2003, then Ramlser believes “that will be the inflection point where it can start to become relevant as a mass market product.”

2G Still Paints a Pretty Picture

None of FOMA’s troubles have detracted from DoCoMo’s power to continue its undisputed reign in 2G phones. This is evidenced in the latest June sales figures where the operator took more than half of the whopping 3.8 million phones sold that month. This summer, the operator has renewed its focus on 2G where it can deliver lucrative applications pioneered by rivals and deliver them to its i-mode constituency. An obvious example is i-shot, DoCoMo’s belated response to the camera phone craze set off by J-Phone’s “sha-mail” service one year ago.

“For a long time, DoCoMo didn’t want to launch a camera phone, they just want to push FOMA, which has a picture taking function. And they didn’t want to be perceived as following J-Phone. With the i-shot, they are sort of backtracking on this,” said Ramler.

DoCoMo’s multi-faceted approach couldn’t be farther from KDDI, which since March has focused on 3G as the denominator for all applications and handsets moving forward.

“1X is the common platform for all of au,” said Fumiko Kaneyama of KDDI at a presentation for the industry trade show Wireless Japan in Tokyo this July. “This includes camera phones, GPS, java, movies and music.” The five models on the market now offer combinations of these applications, but no one phone offers everything. (Only one current phone, manufactured by Toshiba, has a function for receiving movie clips.)

“The emphasis by KDDI is on 2G data usage, which is probably most appropriate for weaning people onto a high-speed data platform while the environment for 3G applications matures,” said Ramler.

Another element of KDDI’s strategy to increase subscribers is its heavy subsidization of 1X handsets. KDDI’s critics argue that the operator can continue to take losses as it brings on subscribers, many of whom are already au customers merely upgrading from a 2G handset. According to Ramler, KDDI subsidizes approximately 40,000 to 45,000 yen per handset in contrast to a 32,000 yen per handset at J-Phone and 30,000 yen for each DoCoMo phone.

J-Phone Takes Game Global

Both DoCoMo and KDDI will feel the heat next year when J-Phone unveils its own 3G network using W-CDMA, which is currently in trials. J-Phone entry will change the dynamics on several levels. For on thing, it is perhaps the shrewdest marketer of the three as it proved with sha-mail service that KDDI and DoCoMo have taken a year to emulate. But more than any other operator, J-Phone is a portent of internalization of 3G through its parent company Vodafone. J-Phone has already indicated it will contribute expertise in camera phones to Vodafone’s global service offering. It is easy to imagine that Japan could become the testbed for the world’s largest operator’s plans to dominate the next generation of networks.

“Anything J-Phone does is globally relevant,” according to Gerhard Fasol, CEO of Eurotechnology Japan. “For this reason alone, J-Phone’s trials are very important and may be immediately relevant for the DoCoMo/Vodafone power balance in Europe for example.”

Wireless geeks around the world will keep an eye on Japan for the next year, hoping to glean a few clues from a technology contest played out for the first time. The different strategies at play could spell doom for certain companies and technologies. Fasol, however, thinks the maturing mass market will be big enough that the several different strategies can succeed.

“In the end, some people may use FOMA for some particular applications at work,” said Fasol “They might use a PHS card for their PC wireless connection. They may use wireless hotspots in their lunch break and a wireless LAN at work. And then a KDDI or accelerated i-mode phone for their personal and business communications. There will be many families with 10 or more wireless devices on different networks for different purposes – my own family here in Tokyo is already close to this situation.”

Dmitri Ragano is a consultant based in Tokyo, Japan.