Exporting Japan’s Revolution – Company Business and Marketing
Joe Ashbrook Nickell
Emboldened by the explosive growth of i-mode in Japan, NTT DoCoMo has teamed with AT&T Wireless to bring the wireless Net service to the States. But do Americans really want it?
JAPAN’S NET BOOM — an explosion that happened faster than America’s mid-1990s discovery of the Web — has taken place not on desktops, but in the palms of consumers’ hands. On practically every street corner and subway platform in Tokyo, people can be seen peering and pecking at tiny mobile phones connected to the Web through a service called i-mode. Everyone from teenagers to seniors uses the phones, occasionally to send e-mail or read news, but mostly to entertain themselves with such offerings as cartoons and astrology. The creator of i-mode, NTT DoCoMo, now wants to conquer the world by making its service just as popular on the streets of Europe and America.
I-mode allows always-on Internet access and two-way e-mail via a digital cellular phone. Boasting a smart combination of entertainment and business content — and a cute Pokemon-like character on the screen — i-mode has introduced the Net to more than 17 million consumers in Japan in two years, making its parent company, 8-year-old mobile phone giant NTT DoCoMo, the fastest-growing Internet service provider in history. At its current rate of growth, DoCoMo could become the world’s largest ISP, passing 15-year-old America Online sometime next year.
But DoCoMo has even bigger ambitions. It has launched a risky global investment strategy to become the worldwide leader in next-generation, broadband wireless Internet services. By offering download speeds 100 times faster than existing wireless Net access, the theory goes, mobile phones could become all-in-one communication, entertainment and information devices. Users could download and listen to music from the Net, replacing portable GD players; they could read a book; keep their calendar; check e-mail; even watch television or movies-all from one device, anywhere.
DoCoMo will begin the wireless broadband rollout in Tokyo in May and intends to spread the technology around the world via minority stakes it has purchased in wireless carriers in Asia, Europe, South America and, most recently, AT&T Wireless in the United States. More than half of DoCoMo’s $14.5 billion in investments went to AT&T Wireless, which brings DoCoMo a globally recognized partner and entree into potentially the most lucrative market in the world.
Why is this strategy risky? Today, few people outside Japan subscribe to wireless Net services despite widespread availability. DoCoMo’s strategy rests on the assumption that what works in Japan will work elsewhere, but the local market isn’t quite like the rest of the world: Very few Japanese own PCs, but some 50 percent carry mobile phones, so i-mode makes perfect sense in Japan. That’s hardly the case in the United States, where consumers, already accustomed to the Internet framed by a large screen and navigated with a keyboard and mouse, have so far shown little interest in wireless Net services.
But DoCoMo officials shrug off critics, pointing to the 17 million i-mode subscribers in Japan. “The winner is clear here. We have proven our success with that real number [of subscribers],” says Kei-Ichi Enoki, i-mode’s managing director. “U.S. users have never seen our services, the services that work’
AT NTT DOCOMO’S offices in Tokyo’s Sanno Park Tower building, a row of women in identical pink dresses greets visitors at a reception counter. Employees in dark suits shuffle quietly from the elevators toward their offices. DoCoMo goes about its business with a sobriety that belies its aggressive goals.
With a $366.2 billion market cap, NTT DoCoMo is the third-biggest company in the world, behind Microsoft and General Electric. DoCoMo’s charge is led by Chairman Koji Ohboshi, who transformed DoCoMo from an anemic also-ran when it was spun off from powerhouse Nippon Telephone and Telegraph in 1992 into the world’s third-largest wireless phone service provider today. To build i-mode, Ohboshi assembled a crack team of visionaries in 1997 — perhaps none so representative of the company’s personality as Knoki, the head of i-mode since its inception.
Slouching in his chair, Enoki is relaxed and friendly. He frames DoCoMo’s ambitions in strikingly benign terms. “We are not Vodafone. We will not do takeover deals,” says Enoki, referring to the British wireless-services giant that, through acquisitions of companies including America’s AirTouch and Germany’s Mannesmann in recent years, has become the world’s largest wireless-services company.
Nevertheless, DoCoMo’s foreign investments place the company squarely in the world’s hottest mobile communications markets. In the Asia-Pacific region, home to 35 percent of the world’s mobile phone users, DoCoMo has spent $927 million to gain inroads via minority stakes in Hong Kong-based Hutchison Telephone Co. and Taiwan’s KG Telecom. In Europe, where mobile phone penetration is 60 percent or higher, DoCoMo paid $3.8 billion for a 15 percent stake in Dutch mobile services provider Royal KPN and has set up offices in the U.K., Munich, Paris and Geneva. As for the United States, where mobile phone penetration has lagged, Enoki believes the time has come: “Think about Japan three years ago,” he says, referring to a time when mobile phone use in Japan was less than half its current level. “The U.S. is just around that stage right now. This might be the best time to launch our business there.”
In each investment, DoCoMo has taken a 15 percent to 20 percent equity stake in return for its cash. But DoCoMo recognizes there are some things money can’t buy. “I admit our weakness is the level of experience in the overseas markets,” says Kiyoyuki Tsujimura, DoCoMo’s international expansion chief. “The knowledge of the local market is absolutely necessary. We do not know their markets well enough, [so] we need partners.”
DoCoMo’s rollout of broadband wireless service in Japan will come at least a year before its competitors begin offering the service. Vodafone hopes to offer wireless services to limited markets in 2002, but is making no promises. Deutsche Telekom is aiming for a year later. In the U.S. market, AT&T Wireless is the only major player to announce a third-generation release date, aiming for limited deployment in 2003.
But gaining a head start has some drawbacks. DoCoMo will be forced to fight a rear-guard battle to make sure companies that follow its lead use its technology, W-CDMA (wideband-code division multiple access). But several other standards have been proposed, including a Chinese technology backed by Siemens and a variation of W-CDMA developed by Qualcomm that could be incompatible with DoCoMo’s.
The Wireless Application Protocol Forum, a body made up of most European wireless carriers and other technology companies including DoCoMo, has settled on a limited standard. It will bring together Europe’s WAP technology and i-mode – but only at the level of content scripting. Forum members and other carriers around the world have been cagey about pinpointing which underlying technology – W-CDMA or a competing standard – they will use to bring third-generation services to market.
With European and U.S. companies lagging far behind DoCoMo’s broadband rollout, W-CDMA could be obsolete by the time the rest of the world catches up. That’s why DoCoMo has actively pushed its technology around the world through equity partnerships.
For instance, by investing $9.8 billion for a 16 percent slice of AT&T Wireless, DoCoMo has access to the U.S. market via its third-largest wireless carrier, with 15 million subscribers. According to the deal, DoCoMo grants free, exclusive license to AT&T Wireless for all i-mode technology. In exchange, AT&T Wireless will adopt DoCoMo’s W-CDMA. Says AT&T Wireless Services President and CEO Mohan Gyani: “W-CDMA is exactly where we’re going.”
KEI-ECHI ENOKI believes that i-mode’s success in Japan was not only inevitable, but also proof that consumers around the world will take to wireless Net services. “We will all eventually have our own wireless phone. The PDAs and PCs will all be secondary,” asserts Enoki. “We humans, it does not matter whether we’re American or Japanese, we are all lazy in nature. It’s just too much for all of us to carry two devices around.”
Whether or not Net-enabled mobile phones come to dominate the world, Enoki gets much of the credit for their popularity in Japan. In late 1997, DoCoMo’s Obboshi brought together a team, led by Enoki, to create an Internet service for mobile phones, targeted to Japanese business people. DoCoMo was nearing a critical time of transition: Subscriber growth for voice services was projected to begin slowing, and increased price competition meant that voice revenues on a per-user basis would continue to decline. Ohboshi argued that expanded data services would excite business users. Enoki, however, recognized opportunities in the broader consumer marketplace.
Under Enoki’s guidance, i-mode enlisted Web content providers offering news, banking information and entertainment such as horoscopes and downloadable cartoons. Some 65 content providers were offered free space within i-mode’s startup screen, a simple scroll-and-click portal site not unlike the earliest version of Yahoo. Enoki and his team designed a network that gives consumers quick access to content: Turn on the phone and you are instantly connected to the Net; and you can stay connected without racking up per-minute charges. Consumers pay approximately $2.75 a month, plus a usage fee based on the amount of data downloaded and uploaded. I-mode’s advertising never mentions the Internet, focusing instead on specific applications: Check your bank balance, read your fortune, get the latest news – anywhere, anytime.
I-mode was introduced to the public Feb. 22, 1999, and success came swiftly. Five months after i-mode-enabled phones hit stores, the company had 1 million subscribers. Another million subscribers were added in the following two months. Today, the company is gaining subscribers at an incredible rate of 50,000 per day. Early on, content providers began to take notice and made their Web content i-mode-compatible. Even companies that were unable to score coveted space within the i-mode portal joined the fray, encouraged by the effectiveness of word-of-mouth to promote “unofficial” sites. About 32,000 official and unofficial content providers have made their sites i-mode-friendly.
With its growing user base, i-mode has brought DoCoMo new sources of revenue. In addition to the subscription and per-packet data charges, DoCoMo takes a 9 percent cut of its subscription-based content services. Japanese entertainment company Bandai, for example, now bills more than $1 million a month to subscribers of its Itsudemo Charappa daily downloadable cartoon service. The most popular subscription-based i-mode service, Itsudemo Charappa features Pokemon-style characters that can be used as customized startup screens or simply as digital collectibles. Advertising on the service, while still in its infancy, has begun to bolster the bottom line as well. Altogether, DoCoMo earns an average of $18.70 per month per user for i-mode services, on top of voice revenues.
I-mode’s success is also the result of unique market conditions in Japan. When i-mode first hit stores, there was pent-up demand for Net services, yet little preconceived notion of what surfing the Net was like. Home PCs and landline Internet service never gained mass-market status in Japan, due largely to the high cost of Net access and low fixed-line phone penetration. Because installing a home telephone line can cost $700, more Japanese consumers have mobile phones than home phones. Dialup Internet service carried an additional per-minute charge until just recently. So Japanese consumers, unaccustomed to the large screens and keyboards that accompany Internet browsing for most Americans, saw i-mode on its own terms: a mobile phone with information services accessed through a simple, intuitive device.
Much has been written about i-mode’s appeal to young consumers in Japan; indeed, the sleek, tiny phones dangle conspicuously from the wrists and backpacks of many Japanese teenagers. But Japan’s young trendsetters have never accounted for more than 5 percent of total subscriptions. I-mode’s success has instead come in the hands of adult consumers in their 20s to 40s — commuters looking for a subway diversion, info-junkies on the move, professionals with precious little family time seeking a way to communicate with their kids. Nine out of 10 subscribers initially sign up for i-mode service to access e-mail and use instant messaging; yet more than 50 percent of usage time is spent perusing entertainment content.
Cultural factors in Japan also account for some of i-mode’s popularity. In a city where casual conversation with acquaintances is rare, direct eye contact with strangers is considered rude and talking into mobile phones on trains is discouraged, i-mode fills a uniquely Japanese package of needs: It provides something to stimulate the mind, a silent communication tool and an object to focus on, forming a social barrier to unwanted attention.
I MODE’S INSINUATION INTO Japanese life offers as many points of caution as it does hope for the rest of the wireless world. Most major wireless carriers in Europe and the United States have been offering wireless Net services for six to 10 months now; their failure to convert a mass of subscribers to the service reflects both a misguided strategy and cultural resistance.
Europe was the first area outside Japan to see wireless Net services built around WAP. Yet the offerings, which debuted last April, failed in their initial offerings to incorporate three key elements of i-mode’s success: unlimited content, always-on service and per-bit (rather than per-minute) pricing. And European Net-ready handsets are small and hard to read, unlike i-mode-ready handsets in Japan. While few European carriers have released subscriber numbers, clearly none has achieved even moderate success in pushing wireless Net services, despite Europe’s proven love affair with mobile communications.
Several American carriers began offering limited Net services last summer, led by AT&T, Sprint and Verizon. But the services were just as anemic and ill-marketed as those in Europe. “If you look at most [wireless Net] services out there today, they talk about the wireless Web. There’s an expectation that we as an industry can’t quite meet,” admits Steve Krom, VP of marketing for Internet and data services at Cingular, the second-largest wireless communications carrier in the U.S. with 19 million subscribers. “As we get the right networks in place, have better and better handsets and as we nurture a broader [content] developer community, I think you’ll start to see greater penetration.”
But getting there will depend on forces beyond the control of wireless carriers, content providers and device manufacturers. Regulatory tangles at the Federal Communications Commission, which have held up third-generation spectrum allocation, are slowing the build-out of wireless broadband networks in the United States. AT&T Wireless hopes to be first out of the gate, offering commercial broadband wireless service in limited markets in 2003. But even that timeline may be optimistic. Meantime, a wireless service called GPRS, offering download speeds midway between today’s i-mode services and broadband third-generation services, is due on the market from most American and European carriers at least two years before widespread U.S. deployment of third-generation service. GPRS will offer wireless Net access speeds of about three times most Americans’ current desktop Net access speed — fast enough for most data needs and even some multimedia applications. By the time true third-generation systems debut, fixed-lin e broadband services such as DSL and cable will have penetrated more households, making the American market for broadband wireless service narrower and more fickle by the time it appears on the market.
A more fundamental challenge exists in the American market and, to a lesser extent, the European market. Americans are showing significant hesitation to adopt even the first generation of wireless technology. According to a survey of 9,000 North American households last summer by Forrester Research, fully one-third of Americans say they’re “not at all likely” to ever purchase any wireless communications services — voice or data. Even worse: Almost three out of four people surveyed are not at all interested in receiving data such as news or weather on a mobile phone. In Europe, the outlook is hardly rosier: While half of Internet users in Britain say they want e-mail access on their mobile phones, 20 percent say they aren’t interested in mobile access to any kind of Net services.
DoCoMo’s Enoki says Americans simply haven’t seen the kinds of third-generation services his company envisions — services ranging from one-touch, instant-access e-mail to a Net-connected equivalent of Sony’s Walkman, one of the great consumer electronics successes of the 1980s. Demand, he insists, will soon awaken.
“The American [carriers] do not understand the wireless phone market for nonbusiness consumers,” says Enoki. “It does not matter whether you are Japanese or American; you choose to use the most convenient tool that works for you … The No. 1 [Internet access] device will be a cellular phone.”
And if nothing else, DoCoMo may simply increase its investments around the world and bask in the returns from a wireless services market that, one way or another, most believe is bound to stick around. “For at least three to five years, we are going to keep our ‘minority investment’ strategy,” says international expansion chief Tsujimura. “After that, who knows, we might shift ourselves to a ‘capital heavy’ strategy.”
With plenty of cash, a technological head start and the kind of wisdom that can only come from experience, DoCoMo could hardly be in a better position to capitalize on wireless Net services in America and Europe. Now, if consumers will just pick up the phones.
Joe Ashbrook Nickell is an Industry Standard contributor based in Missoula, Mont. Michele Yamada is the Industry Standard’s Tokyo bureau reporter. Aaron Pressman and Bruno Giussani also contributed to this story.
Worldwide Wireless Web
NTT DoCoMo leads the race, but gaining
subscribers outside of Japan remains a challenge.
COMPANY HEADQUARTERS NUMBER OF WIRELESS
AT&T Wireless Redmond, Wash. 300,000
BT Cellnet London Not disclosed
China Mobile Hong Kong Not disclosed
Cingular Wireless Atlanta Not disclosed
(SBC and BellSouth)
Deutsche Telekom Bonn, Germany 10,000
France Telecom Paris 450,000
KPN (Koninklijke PTT The Hague, Not disclosed
Nederland) Mobile Netherlands
NTT DoCoMo Tokyo 17 million
Telecom Italia Rome 162,000
Telefonica Moviles Madrid, Spain 500,000
Vodafone Newbury, England 1.1 million
AT&T Wireless United States
BT Cellnet United Kingdom
China Mobile China
Cingular Wireless United States
(SBC and BellSouth)
Deutsche Telekom Austria, Czech Republic, Germany,
Hungary, United Kingdom, others
France Telecom France; joint ventures in
KPN (Koninklijke PTT Belgium, Germany, Hungary,
Nederland) Mobile Indonesia, Netherlands
NTT DoCoMo Japan
Telecom Italia Italy
Telefonica Moviles Latin America, Morocco, Spain
Vodafone Asia, Europe, Middle East,
COMPANY EXPECTED ROLLOUT DATE
OF MIDDLEBAND SERVICE [**]
AT&T Wireless Mid-2001
BT Cellnet June 2000
China Mobile Mid-2001
Cingular Wireless March 2001
(SBC and BellSouth)
Deutsche Telekom June 2000
France Telecom Currently testing middleband;
no rollout date given.
KPN (Koninklijke PTT December 2000
NTT DoCoMo Company will not disclose
Telecom Italia January 2001
Telefonica Moviles Company will not disclose
Vodafone Trials are under way
(**.)MIDDLEBAND SERVICE, OR GENERAL PACKET RADIO SERVICES,
ENABLES USERS TO ACCESS THE INTERNET WITHOUT HAVING TO DIAL
IN TO A NETWORK FOR A CONNECTION.
COPYRIGHT 2001 Standard Media International
COPYRIGHT 2001 Gale Group