Unwired: Japan Has the Future in Its Pocket

The world may never catch up. In the US, where an ongoing standards war has yet to fully play out, cellular services remain balkanized. In Europe, generally acknowledged to be significantly ahead of the States with its efficient 2G (second-generation) services, modest Net access based on the new WAP (Wireless Application Protocol) standard is only just getting started.

In Japan, meanwhile, more than 7 million people already access the Web via tiny mobile devices. Hundreds of sites here cater to the small screen, and magazine stands are packed with the TV Guide wannabes of this young medium. Japan is the test bed for the world's wireless future.

It's happening in Japan for three simple reasons: technology, economics, and demographics. While other areas are still talking about WAP, 3G, and high-speed wireless, Japan is the first nation to enjoy fulltime, always-on mobile access via cell phones (keitai) operating on packet-switched networks, where subscribers pay based on the amount of data sent or received, not on airtime. The gadget-crazy Japanese are themselves part of the reason for this. Nowhere else are device manufacturers as driven to miniaturize, innovate, and ply on the features by a consumption-minded public. Nowhere else is there a mass concentration -- the Tokyo area -- of some 30 million affluent cell phone lovers forming an easily accessible market luring big-name, cutthroat competitive network operators, and nowhere else is there such a large Net-curious population stymied from traditional wired surfing due to expensive dialup telecom and ISP access fees.

Demographics is perhaps the most important animus behind Japan's unwired revolution. Consider, for a moment, the wired access situation in the US. eMarketer reports that this year the number of active online households in the US should grow to 33.7 million, and include some 76 million adults. Certainly a big number, but dialup accounted for 92 percent of consumer online access in 1999, leaving a tiny 1 percent surfing via wireless. And despite the growth in high-speed cable, DSL, and satellite access, by 2002 about 80 percent of US surfers will still connect with a 56K dialup modem, IDC says. What this means is that today and for the foreseeable future, some 76 million US adults will continue to access the Net at pokey speeds via hard-wired PCs. What's amazing is that despite these Stone Age limitations, it's this population of click-and-wait surfers that's been fueling the Internet boom of the past six years.

Wired access in Japan is even more dismal. According to eMarketer, Japan's PC penetration rate is only about 20 percent, and although PC sales are booming, this rate is nowhere near the 41 percent in the US. In Japan, homes are tiny, PC prices are still not considered cheap, and wired infrastructure is expensive to install. Getting online via wireline dialup is prohibitively expensive; surfers here are paying through the nose, and Japan is seriously hobbled by the world's highest combined telecom and ISP fees, at $67.12 per 20 hours, compared to the next highest, India, at $42.30, and the US at $30.05 (see chart). If a Japan Internet revolution depends on home users accessing the Net via wired PCs, it has about the same prospects as a 95-pound sumo wrestler.

But now stop and look at Japan's wireless access situation, of which access via keitai -- cell phone -- is the most popular example. According to the Mobile Computing Promotion Consortium (MCPC), there were 60 million mobile phone subscriptions as of March, and this should grow to 66 million by 2001 and 80 million by 2004 -- meaning next year 63 percent of Japan's population will be using mobile phones.

The cell phone is quickly becoming as Japanese as the kimono. Japan seems to be experiencing what will in time come to other countries: the advent of the mobile phone as fashion accessory, and the rise of a phone culture. "You get your own information in your own way," says Ray Tsuchiyama, director of business development for Japan at Tegic. "This is lifestyle. It's an aesthetic thing. If I own a PC, it's just kind of there at home or at the office. I can use anyone's PC to logon. But my phone becomes part of me." Tsuchiyama foresees people in Japan starting to use different handsets for different occasions. "You're going to have a nice silver, sleek one for a party, and a ruggedized one for sports."

"Cell phones here are fashion accessories and toys above all," says Tim Clark, president of Internet consultancy TKAI.

Jim McGrath, business development manager at Motorola Japan, draws on personal experience to explain the phenomenon: "Why these [mobile services] are so popular and successful in Japan is clearly the content, and the proliferation of good handsets." He's clearly delighted with his new cdmaOne phone. "It's a Sony cdmaOne handset with 64-Kbps high-speed packet data service," he enthuses. "It's very small -- fits in my hand beautifully! It's got a large LCD screen. The voice quality is fantastic. On the train, when I'm going to the office, I can stroll all over the Internet -- now I'm picking up news services from the US."

Which brings us to content. Go to any magazine rack in Japan and leaf through a mobile Net publication. You'll see page after page of websites geared specifically toward the small screen. Sites that let you read the news, check your stocks, trade your stocks, get the weather, do Web searches, convert currency, reserve a car or hotel room or flight, check train schedules, see if that video is in stock ... the list seems endless, and the number of these sites is growing at a furious rate. (See sidebar.) It's all there in your sleek little pocket rocket.

In the early days of Japan wireless, "content" consisted simply of voices talking, which callers could generate in spadefuls with no outside assistance. "Now you're seeing content and application providers come in," says Nigel Rundstrom, vice president of Nokia Mobile Communications, adding, with a trace of awe in his voice, "The applications provided so far are only the tip of the iceberg."

Speaking of applications, it should be noted that many companies are making money off their small-screen sites. Not much (in most cases), but they can charge small sums and have the amount show up on the user's phone bill, not unlike Minitel in France. Charging a big-screen surfer 50 yen to access the weather report wouldn't work because no one would bother entering a credit card number for that. But with the keitai the phone company handles all the billing. Of course, the phone company also takes a commission, in the case of NTT DoCoMo 9 percent.

Examples of companies making money this way include Photonet, which lets users download pictures from its servers; the online brokerage from Daiwa Shoken; and Sakura Bank, which lets users check balances and make payments and transfers. Some of the services are very clever and show signs of near-genius marketing ability. Game software maker Bandai provides a new animated character everyday for your small-screen wallpaper. Some 1.1 million i-mode users have signed up for the service and are paying ¥100 per month, meaning the company is raking in about $10 million per year simply by providing one tiny graphic daily from its huge collection of animated characters.

"Look for licensors of other pop culture icons and characters to emulate Bandai's extraordinary success in the fee-for-service sector," says Clark.

But while keitai-based e-commerce presents plenty of new opportunities for companies like Photonet and Bandai, it also introduces new challenges. This isn't just e-commerce, after all, but m-commerce -- mobile commerce. It's trickier. Companies must figure out how to best satisfy on-the-move subscribers via a small screen during "microniches" of time -- the four minutes, say, that a potential m-shopper spends waiting for a train at Shinjuku station each morning. Such microniches account for a large chunk of the usage for I-mode, says Jeffery L. Funk, associate professor at the Kobe University Graduate School of Business Administration. But m-commerce companies must also cater to the "twiddlers" -- users just messing around with their keitai. "Observe the young folks twiddling -- or simply staring at -- their cell phones at coffee shops," says Clark. "Some of them are playing games. The handsets with larger displays are adequate for fairly extended viewing." The trick for m-commerce sites is to captivate both the caffeinated twiddlers and bored commuters.

Though an entirely new wireless order is emerging, it has counterparts to the hardwired world, with equipment makers, software developers, network operators, infrastructure builders, access providers, content generators, security specialists, ASP hosts, hardware resellers, et cetera, all aiming to cash in on the mobile Web opportunities that many feel will dwarf those of the wired Web.

"The value chain has expanded, the number of suppliers has expanded, and the number of foreign suppliers participating in the Japanese market and the opportunities for them have expanded tremendously," says Funk. He points to the large number of keitai software suppliers. "Access is a major supplier of browsers, and there's a whole set of other software suppliers -- including American [firms]."

As cool as the current keitai phenomenon is in Japan right now, it's nothing compared to what's coming. For advertisers, cell phones will provide a direct path to some 60 million savvy Japanese consumers. "For the first time in history, companies can have direct access to people's pockets," says Magnus Nervé, mobile multimedia product manager at Nippon Ericsson. "Suddenly, anytime of day, you can get a message into your pocket -- a direct link from an advertiser or seller of a service to the consumer. That is mind boggling."

That is also just the beginning of keitai marketing opportunities. "Say for example you're walking in Shinjuku, and the [mobile access] server knows where you are," says Tsuchiyama. "You walk by an izakaya [bar], and 'ginnnnng' -- your phone rings. The izakaya gives you a spiel -- they'll give you a 20 percent discount right now if you go in. People do not like telemarketing, but what if you get paid for receiving a marketing call? And you can make X number of [free] calls later based on the number you accept." Some of the new marketing approaches will prove intrusive, but others will be welcomed.

Big names recently convened in Tokyo at the 3G Mobile Summit to discuss the possibilities of the small-screen economy. Attendees included Oracle, Lucent, Qualcomm, Intel, ARM, Microsoft, a slew of well-known international mobile players, and many cutting-edge Japanese ventures like Photonet and Cybird. Though opinions differed on specific future scenarios, all agreed that Japan's wireless future would play out through a technology known as W-CDMA (Wideband Code Division Multiple Access), a third-generation -- aka 3G -- umbrella standard. (Click to see sidebar)

So what's the killer app of Japan's 3G future? "I think more calls will be made to databases than to people," Tsuchiyama says. "Databases and the agents that exist to retrieve information, that filter queries -- that's going to be a big draw."

"There will be all kinds of telemetry applications," Tsuchiyama says. "All kinds of devices will be connected to wireless networks, so if you lose your laptop, it'll call you and say, 'Someone's taking me away,' or your car will call and tell you that it needs gas, or a vending machine (see Vending Machine - related article "Hooking up the Boxes") will call some database and report that it needs more cans of Coke. The majority of calls will not be between people, it'll be between machines. Communication of bits becomes very crucial."

Digital cameras integrating with cellular handsets should also create some interesting wireless applications, says Clark. "The ability to take a digital photograph and immediately transmit it to a remote location is already proving extremely powerful in the US in applications such as emergency medicine, law enforcement, real estate, and insurance investigation," he says.

Some think keitai-based video will be big here. "The hot technology will be in high bandwidth terminals -- those terminals that are bringing down streaming multimedia," says Motorola's McGrath. "The devices that are going to become more popular are video devices -- some already exist today. Also, handsets that have more computing power, similar to what you might see in a Palm Pilot today."

And then there's Bluetooth, a wireless networking standard under which devices of any kind will be able to communicate over short ranges. So a small hard drive in a briefcase, for example, could store the video data being received by a keitai.

Others aren't convinced about video, however. "There are multimedia videoconferencing phones out there now," says Tsuchiyama. "Why isn't anyone buying them? There is a cultural answer to that. People don't want others to see them in certain situations. What if you're naked? What if you haven't put on your makeup? There's all sorts of cultural reasons why you wouldn't want to be seen. Also, people expect full streaming video quality, and it's not there yet."

Clark agrees: "It's not popular now on the desktop, so why would it suddenly become popular on a cellular telephone or wristwatch? Of course, there will be some highly specialized business applications, and a few consumer gadget enthusiasts will certainly buy into the service, but this will be quite a small market. It will be too expensive to use portable videoconferencing for casual communications and entertainment, the way cellular telephones are used today."

The top pick for upcoming killer app is music. A lot of m-com dreams -- and nightmares -- hinge on whether customers will be willing to pay two or three hundred yen to hear their favorite tunes through headphones attached to their keitai. If Japanese customers can buy the latest hit Western songs at lower prices (about $1 to $2 each) through US online music distribution services, the sales of Japanese record companies could be devastated. For that matter, so could sales of the Walkman (see Walkman, in related article "Hooking Up the Boxes").

In August, NTT Communications will launch a service called Arcstar Music that will let visitors download music from various websites to their keitai. One of the participants will be Liquid Audio Japan, flush with cash from its IPO on Mothers the end of last year.

Of course, keitai surfers need a place to store their tunes, which means new types of hardware must follow. "Think about a handset that has a Memory Stick in it," says McGrath. "Think about plugging a 64MB memory stick into your handset and being able to load two hours worth of your favorite MP3 music that you purchased through a (mobile) Net distribution service."

In the end, of course, it's all anyone's guess. One thing is clear, though: everyone is taking the Web keitai very seriously. Five and a half million users signing up for i-mode in the first 13 months of service is a pretty good indication that something big is going on.

What's scary is that this revolution is in beta. Many small-screen offerings are still clunky and user-unfriendly. For example, says Tsuchiyama, "it's very important to save information, so when a user connects, what they previously did -- play a game or download their horoscope -- [is remembered by the host site], so they don't have to input all their personal information again." The millions of Net phone users in Japan today are essentially beta testers who are willing to put up with imperfect offerings. What happens when the services go 2.0 or 3.0?

But is any of this applicable to the rest of the world, or is it another Japan-only fad? "Japan is a mutant market," says Clark. "It's unlike anything else in the world. In the US, business needs drive most cellular usage. In Japan, the need for consumers to carry around cellular handsets drives cellular telephone usage."

"The Internet is where most information today is stored -- a sort of virtual information megastore," Nokia CEO Jorma Ollila said recently. "We foresee over 1 billion mobile-phone users in the world in 2002, [and] in our estimates the number of mobile phones connected to the Web will exceed the number of personal computers connected to the Internet in the year 2003. This means that the future will not be PC-centric but mobile-phone-centric." Of course, in Japan, mobile phones already outnumber traditional fixed-line phones, and unwired surfers should surpass hardwired surfers next year, not 2003.

Japan's mobile Net boom is fostering -- today -- new companies, new business models, and new ways of using the Net. Whatever develops here is likely to also develop in other places, like the US -- ironic since Japan is a few years behind the States in terms of the Net in general. But it's not surprising: Japan has always had a way of taking great ideas from the rest of the world and making them its own -- and then exporting them.

The Race Is On

NTT DoCoMo's i-mode mobile phone service is proving to be a spectacular success among salarymen, housewives, and Shibuya teenagers alike. Measured by subscriber base, the service is by far the winner in the mobile phone contest, which pits i-mode against the "EZ services" (click to see sidebar) offered by both IDO and Tu-Ka, and the J-Skyweb service offered by J-Phone. By early April, i-mode had signed up 5,692,164 subscribers, well ahead of all its competitors. Not bad for a service that started in February 1999.

Source: Nikkei BP AsiaBizTech

For the customer, i-mode consists of a simple cellular phone furnished with a smallish screen that can display text and small graphics and that can typically hold eight to ten characters horizontally and six to eight lines vertically. The phone can be used like any regular cell phone for making voice calls, but by pressing a special "i" button, the user is logged on to a central gateway server operated by DoCoMo. i-mode operates over a packet-switched network, which means that customers pay only for the data transmitted, regardless of the time spent connected. Currently it costs ¥0.3 per 128-bit packet (there's also a ¥300 monthly service fee). The initial default text displayed consists of menus linking to official DoCoMo i-mode content partner sites. To be viewable under i-mode, websites must be reformatted using compact HTML, a subset of HTML. In practice, the system works so smoothly that users are not readily aware they are on the Net and downloading data via TCP/IP the same way they would using a desktop browser.

As of mid-April, surfers were accessing some 448 official and 9,200-plus unofficial i-mode sites, with new ones being added at the rate of 100 per day, according to OH! iSearch. Because i-mode operates under the cHTML standard, it's easy for webmasters to take existing sites and make i-mode-compatible versions. (To prepare a WAP-compatible site, a Web designer has to use HDML, incurring a small but not insignificant learning-curve cost. There are free tools that assist in creating HDML pages, but still ...) Among the official i-mode site services are banking, ticketing, travel services, entertainment, financial services, trading, and shopping. Unofficial sites provide, well, almost anything -- much like the Internet at large. Chat, personal ads, restaurant guides, movie reviews, and the predictable adult-oriented sites are all well represented (click to see sidebar).

Cell phone surfers in Japan can also choose to access the Net via the J-Skyweb, EZaccess, or EZweb Net services offered by DoCoMo competitors J-Phone, IDO, and and Tu-Ka, respectively. Some of these services are technically superior to i-mode. EZaccess, for example, offers 64-Kbps access speeds, versus i-mode's 9.6 Kbps, and J-Skyweb is the way to go if you like sharp color on your screen (though i-mode has color, too). Nevertheless, subscriber numbers are not as impressive. The second-largest subscriber base -- some 1.1 million -- is claimed by IDO and Tu-Ka, whose EZ services subscribers can access a small but growing range of WAP-based sites that use HDML (Handheld Device Markup Language), which is similar to but incompatible with i-mode's cHTML. Like i-mode, cdmaOne is a packet-switched network, and users pay between ¥0.1 and ¥0.27 per packet depending on the service mix selected, plus a ¥200 to ¥400 per month service fee. cdmaOne phones are similar to i-mode phones, with similar screen resolutions and other features. Site services accessible via the competing systems are in many cases similar. There were some 180 WAP-enabled sites operating in Japan as of February this year, according to the Tu-Ka Group, and doubtless many more have been added since.

J-Phone's J-Skyweb service accesses sites that are encoded using MML (Mobile Markup Language), which is largely similar to i-mode's cHTML (the difference lies in the types of images supported). According to J-Phone, there were 108 websites accessible via J-Skyweb as of mid-March. Due to the similarities between the markup languages used to encode i-mode and J-Skyweb sites, one industry watcher says privately that DoCoMo is likely to be more worried about competing with contents offered via J-Phone than via either of the EZ services.

Finally, surfers in southern Japan's Kyushu region can access the @contents service provided by a company called H. This service allows browsing via the company's PHS network, and users pay only for the amount of time used; there's no monthly fee.

The biggest difference between NTT DoCoMo's i-mode service and the competition lies in the number of websites accessible; i-mode is by far the champion, although the EZ services do offer access to any WAP-enabled website in the world, not just those in Japan. Of course, some content providers are simply hedging their bets by preparing multiple versions of their sites to accommodate all flavors of mobile surfers.

The big question, though, is why has i-mode in particular taken off? Although the jury is still out, it's clear that i-mode's success is partly due to Japan- and DoCoMo-specific reasons, and partly due to the universal attraction of mobile communications and Net access. Interestingly, when i-mode started, DoCoMo made little mention of "the Internet" or "the Web" when promoting it. This was primarily to encourage Net novices to give it a try. DoCoMo also has tremendous brand strength amongst its nearly 30 million voice service subscribers.

DoCoMo: Unstoppable

Though founded just eight years ago, NTT DoCoMo has the highest market cap in Japan. Higher than Toyota, higher than Sony, higher than Softbank, higher than NTT itself. In US dollars the market cap comes out to something like $36 billion. As of April 14, a single share (TSE 9473) would set you back ¥3.75 million. What's really frightening is that this obscene valuation could actually be justified. One merely need argue that DoCoMo is both the AOL and the Microsoft of Japan. We'll follow through with this line of thinking.

AOL is the largest ISP in the US; DoCoMo, though still strictly a wireless provider, is now the largest ISP in Japan. AOL makes money off the content providers listed on its service, though in the early days it was the other way around. DoCoMo also makes money off its content providers, skimming 9 percent from every transaction. AOL is known for its ease of use. DoCoMo offers a prepackaged, menu-driven system so smooth you don't even realize you're on the Net.

DoCoMo could become the biggest wireline ISP as well. It recently joined forces with NTT Data to launch Dreamweb, a wireline ISP. "DoCoMo is now the biggest ISP in Japan," says Kobe University's Funk. "They are the big Internet portal, so compatibility between wireless and wireline becomes important. They could become the leading wireline Internet [access] provider."

Now for the Microsoft comparison. The Redmond giant beat Apple to a pulp by having the most users. Because it had the early lead, more developers chose to go with Windows than Mac. As more developers went with Windows, more users chose Windows because it had more stuff developed for it. As more users chose Windows, developers decided to É and on and on, until everyone grew so sick of hearing about how many millionaires and billionaires Microsoft had spewed out that the US government finally had to intervene.

For DoCoMo, subscribers are the key, and in one sense the circle for DoCoMo has already started. "The content providers make everything for i-mode first because there are more i-mode subscribers," says Funk. Sounds familiar.

And now DoCoMo is making ties with, you guessed it, your good friend Bill. Mobimagic, a 50-50 joint venture between DoCoMo and Microsoft announced in October, will work to make the Windows CE operating system more suitable for wireless communications. Mobimagic's first business is likely to be a gateway service allowing mobile workers to access company servers using wireless devices.

"I think the key thing that's been started is this Mobimagic with Microsoft," says Funk. "It's very possible that DoCoMo will be able to create the OS standard and the application standards for mobile phones. They've got a huge number of subscribers."

These two major players working together, one owning the wireless platform and the other owning the OS and mobile access software, could form an unbeatable combination in Japan's 3G future. And although the WAP standard required by 3G technology is not presently compatible with i-mode, that could change. DoCoMo has proposed that the WAP Forum include the i-mode specifications in the WAP standard. That's not all. Last month, the company acquired 15 percent of Dutch cellular operator KPN Mobile, and sister company NTT Communications purchased US Web hosting and ISP firm Verio for $5.5 billion.

A major paper in Japan concluded that, "as a consequence, the i-mode specifications are likely to be introduced into WAP specifications."

Does this mean DoCoMo could become a dominant wireless player in the US, or elsewhere? Might its headstart be not just in Japan, but worldwide?

It's questions like these that make DoCoMo's market cap easier to understand. Of course, there's nothing preventing the other mobile network operators from catching up with DoCoMo ... but then, you could have said the same thing about Apple 15 years ago.