Thursday, July 13, 2006 Prologue to a series of three. During my trip to Japan, I was lucky enough to be given the chance to interview three of the big players in the Japanese mobile business. Before going to the actual meetings, it might be worth while to chat a little about the Japanese mobile market as a whole.
Introduction to the Japanese mobile market Comparing to the rest of the world, the Japanese mobile market is isolated. For years they have been insisting on using their own standards (PHS and PDC), if you were to travel to Japan in the past, none of your GSM handsets would work, if you were smart enough to pick up a CDMA handset outside Japan, perhaps less than 5 of them will work, and when they work, they are restricted to a few cities and within a very limited coverage area (the airport district for example). The difference in standards has not only created a huge barrier for consumers but also the manufacturers. Nokia tried to supply PDC handsets for J-phone in the past, but then the company eventually pulled out due to high cost and low return. Or put it another way, Nokia did not understand the Japanese market, what Japanese consumers want and what Operators expect from the device.
It is until the age of 3G that we finally see the Japanese market gradually opened up; NTT DoCoMo and Vodafone both have UMTS-compatible networks. However, up till today, non-Japanese manufacturers only supply a very limited amount of models to Japan: Nokia, Motorola, Samsung, LG and Pantech have taken their chance to score, and so far none of them have succeeded yet. This goes to the difference of not only the consumption but also the business model that drives the mobile frenzies in Japan.
The operator-driven business model Whilst few would question that Japanese and Korean mobile markets are the most mature in the world, not a lot of people would entirely agree with the model of how the phone business is run over there. The difference is that both of the two countries have their mobile business entirely operator-driven. In other words it is the operator that decides the trend and the product line.
Just one day before Vodafone KK was sold to Softbank, the failing branch of the UK mobile giant tried to rationalize their fate by attacking this operator-driven model, saying that it was backwards and uneconomical. And we all wonder why this model has been surprisingly workable in Japan for everyone else.
For all the four operators in Japan today they all have their own individual infrastructures: AU KDDI has the CDMA 2000 1x and EV-DO networks, NTT and Vodafone have their own separate PDC and W-CDMA networks, whereas Wilcomm has a modified PHS network. Notice that not all of them use the same standards, and even for the operators that use the same standards, they might use different or even additional frequencies. Normally one handset will only work for one operator, the cost for switching between operators is therefore exceptionally high, let alone the absence of number portability. (To date)
Japanese operators rarely release one handset at a time, but they usually release a whole batch that they call "series", terms such as Mova 505i, FOMA 902iS or V900 pop in here. Phones are released in quanta like this to match the progressing market trend and content development. The NTT FOMA 900i series has been one of the milestones for the company because it has completely shredded the bulky and ultra-battery-draining images of 3G phones; or the MOVA 505i series which has turned megapixel cameras from a luxury to a mainstream standard. Before that, a lot of planning work is needed, and this is when the manufacturers come in.
FOMA 902iS series
MOVA 505i series
There are mainly two selling seasons for mobile phones in Japan, the first one is around May (aka the summer line-up), and the second one is around Christmas. All the product announcements from all the four operators usually take place a month before the selling seasons. These are the money making months that the Operators will try to steal users from competitors or force existing customers to upgrade their not-so-old handsets. About a year before the product announcement, operators would approach the manufacturers to discuss deals with them; the concept of what will be hot in 12 months time and what not. The megapixel camera phones, the first WCDMA handsets all took more than 12 months to plan (in fact, a more realistic number would be 18 months). The teams will then brainstorm a request list of the basic specifications for the series. For example all of the handset must include electronic money, or GPS, or all of them must support downloading music and movies from the Operator's online store. Then the manufacturers would research and design their own handsets within the viability of the request list. Mitsubishi is famous for their sliders, Sharp is famous for their AVS screens and camera, SonyEricsson is famous for having exclusive design, Fujitsu is famous for the fingerprint scanning module and so on.
When it comes to the actual product launch, they say the W42S (model number) is an AU EV-DO Walkman manufactured by SonyEricsson. You would not know who made the phone unless you know what the S in W42S stands for, or that the Walkman brand comes from Sony. In Japan, the branding comes from Operators, manufacturers only serve as OEMs.
W42S by SonyEricsson The unique relationship between operators and manufacturers has made technology export extremely difficult. Since 50% of the developmental cost is borne by the Operator, the export of such technology will require the consent of both parties and also a third party which is the dealer overseas. Will the dealer be happy with the second hand design? Will the local operator be happy with their own products being used by a strategic opponent overseas? How much time do we have to fine-tune the devices to fit another platform on another network before the wow-factor wears out? And how much money do we have to put into one of these alien devices when we can just stock up from Nokia and Motorola painlessly?
Consumerism All mobile friendly cities in the world are usually marked by a fast turn over rate, this is no exception in Japan. You rarely see people using phones more than 2 years old in the streets, as the average shelf life of a model is usually less than a year and the average lifespan of a purchased device usually ranges from 5 to 12 months only. This might be a cultural thing, the craving for the newest, or it could be a marketing thing, that consumers are well aware of when to upgrade their phones, when to expect the prices to drop granted by the absolute pattern of the 2 selling seasons.
The pricing of an average phone is normally 20000-35000 yen for a new customer, which is well below the actual cost of development and production. The operators get the money back by selling contents and providing network services. And it is quite common to have monthly phone bills over USD100. (ARPU for FOMA users is 8650yen in Q1 2006)
Comparing to Korea, Japan has a slower penetration of internet (and broadband), the reason lies in the geography (cost) and also the living habits (substitute). The disproportionably high land value in the city centers drive citizens to live in the suburbs, a lot of Japanese spend more than 2.5 hours a day just on public transport. (For example living close to Chiba and working in Tokyo) What else can you do on a crowded train? Flip open your phone, listen to music and get online. By the time you get home, there is no need to use the internet on PC, as most of your email are SMS-alike, and why bother paying a fixed line when you already have unlimited access in office. This explains why NTT DoCoMo’s i-mode had the chance to become the world’s earliest mobile internet service platform to actually succeed in market, comparing to WAP in Europe. I-mode was then copied by other operators: AU’s EZWeb, J-phone’s J-sky (now Vodafone Live!). Since i-mode has started in1999, mobile internet has gained its momentum that at one point in Japan, the number of websites written specifically for phones was more than that for PC.
The year of 2006 With the introduction of one-seg territorial digital broadcasting service in April, the scheduled launch of HSDPA and number portability in the 3rd quarter, the year of 2006 is another strategic year for the Japanese mobile business. The end of megapixel camera chase and the continual penetration of 3G have made it ever so hard to force consumers to upgrade their handsets. If those who needed a mobile phone have already gotten one, if those who needed to upgrade 3G have already upgraded, then the cookie left will be the price and the image (design). As evidently seen in AU’s experience, when the company introduced the AU Design Project with shapes that you think can only be mockups at CeBIT, the company has surpassed Vodafone KK to become the second largest operator in Japan, with the highest new subscribers throughout the past 3 years. Before AU’s Design Project, the hip Japanese chase for the highest spec all-in-one handsets, now they chase for the ones with the coolest design and pick all the functions they need, to save some buck and bulk. They might need a Walkman, but they might not need a 3 megapixel camera. They might need a large keypad, but they don’t care about the screen. The idea of concept models has been introduced that certain devices were produced to answer the minority, these concept models serve as new swords to capture customers, and the sword will only be sharper this year.
Price competition will get fierce this year, which is uncommon in the Japanese market because of the high barriers to migrate between operators. The number portability will solve part of the "nuisance", you can switch as long as you are okay with buying a new handset. Also, the popularity of full html browser on phones has increased data traffic drastically. Since most contents on PC sites are free, operators will need to look for a balance to make money and compete in this new area. For example AU took the initiative to cap the charge for data traffic that gives people virtually unlimited internet usage (the double-teigaku scheme).
The year of 2006 will be an interesting year, with Softbank taking over Vodafone, the introduction of yet more new technologies, all operators will face competitions ever so intense.