Mobile Commerce

First there was B2C ecommerce. Then investors realized most companies couldn't make money selling goods or advertising on the Internet. The next hot thing was B2B ecommerce. But now B2B has become passe. People are now becoming giddy over the new new thing -- m-commerce. With Japan way ahead of the game in mobile commerce, investors are looking here to identify the innovators and to gaze into the crystal ball of what to expect in their own countries.

THE CARRIERS
In May, the cellular units of only three carriers applied to the Japanese government to operate the nation's next, third-generation (3G) wireless networks: Nippon Telegraph & Telephone (9432 or NTT), Japan Telecom (9434), and DDI (9433). Foreign telecom companies were noticeably absent.

NTT's wireless spin-off NTT DoCoMo (9437 or NTDMY) is the clear market leader in wireless voice and data, with a 70% share of the mobile Internet users in Japan through its i-mode service.

Following i-mode's success, other cellular carriers have also begun offering mobile Internet services. Japan Railway affiliated long distance carrier Japan Telecom offers J-Skyweb service through its cellular unit J-Phone. J-Skyweb supports sites coded in MML (Mobile Markup Language), which is similar to cHTML (compact HTML) supported by i-mode.

DDI subsidiary Tu-Ka and cellular company IDO offer their respective WAP-based services EZweb and EZaccess. Kyocera affiliate DDI and Toyota affiliate IDO, slated for a three-way merger along with long-distance carrier KDD (9431) in October 2000, are also co-marketing a mobile Internet service called "au."

Although DoCoMo posted record net profits in fiscal 1999, industry analysts wonder if it can sustain its high earnings growth given a leveling off of new cellular subscribers. While voice has been more profitable for the cellular operators than data, price competition is forcing the companies to try and upsell more data services to their subscribers.

THE CONTENT PROVIDERS
About one-fifth of the over 50 million mobile phone subscribers in Japan have Internet-enabled cellphones. While it may be tempting to infer that there are 10 million mobile Internet users in Japan, many of these users do not take advantage of the Internet capabilities of their phones beyond email and cannot be considered active Internet users. A market research study on i-mode usage conducted by InfoCom Research in April showed that email (82.4%) was the No. 1 reason for subscribing to i-mode versus viewing homepages (26.4%), the least cited reason.

Nevertheless, some pay content providers partnering with cell operators are making money, although perhaps not a lot.

Official sites, who have been approved and are listed on the menu screens of the mobile Internet services, can largely thank the billing services offered by the cellular operators. Cellular operators collect subscription fees for the sites by tacking the charges onto the monthly cellphone bills and, of course, take a small cut for themselves. For example, DoCoMo bills users from ¥100 to ¥300 a month per site subscription and pockets a 9% transaction commission, not counting revenue from data packet charges. This ability to process micropayments, still a sticking point for commerce on the wired Internet, has been a key to the success of early m-commerce in Japan. Japanese users have an aversion to giving out credit card numbers over the Internet and appreciate the convenience of receiving just one bill.

The subscription revenue model opens the door for other innovative approaches. Similar to affiliate programs on the Web, pachinko machine maker Sammy (6426) and portable terminal startup Index Corp. plan to experiment with a program in which developers submit cellphone games online and earn 6% to 10% of the monthly ¥150 subscription fees for those games accepted and incorporated into their pay site. Naturally, this business model is also being applied for to be patented.

i-mode's menu of over 500 official sites reads as a who's-who of B2C ecommerce (not dead yet) in Japan. Entertainment media companies offer melodies, wallpapers, idol photos, and games. Financial institutions offer online banking, stock quotes, and trading. Information providers offer news, navigation, and listings for jobs, restaurants, apartments, movies, and horse races. Ticketing services offer reservations for concerts, sports events, trains, planes, and rental cars. Shopping sites offer the usual online fare of books, CDs, games, and video.

Many of these official sites, however, are free services that offer either branding opportunities or value-added to brick-and-mortar services rather than actual revenue. Transactions other than subscription fees are not handled by the carriers' billing services, and users must still rely on credit cards or other traditional payment methods. And if the over 10,000 and growing unofficial

i-mode sites start offering for free the same kind of contents as the official pay sites, the pay sites may have to start considering other revenue models besides subscription fees.

The advertising revenue model which has flourished on the PC-based Internet will be more difficult on the tiny screen. Nevertheless, in Japan no virgin space on which an ad can be placed goes wasted. ValueClick Japan (4759) offers a pay-per-click text advertising distribution service called MobileClick. DoCoMo and Japan's largest ad agency Dentsu formed a joint venture called D2 Communications to test the effectiveness of mobile ads. While banner ads may prove inappropriate, text link ads may become popular because of the cumbersome nature of entering long URLs into the mobile phone even for the most dexterous youth. Mobile ads so far have shown to command significantly higher click-through rates than their PC-based cousins, although this may not be surprising given the relatively large amount of screen estate they occupy.

Marketers are already salivating over the prospects of one-to-one marketing with visions of pushing email and ringing alerts to users based on their location. If this kind of m-marketing gets abused, we can imagine an unbearable public cacophony of spam ringing in disparate melodies.

TO GO PUBLIC
M-commerce also brings with it new IPOs.

Cybird (see "Five Hot Startups"), a content developer and provider of several dozen services for major cellular operators such as DoCoMo, J-Phone, and DDI, intends to register on the OTC market. Cybird's sites, which range from celebrity news to fortune telling to surf conditions, receive about 6 million hits a day.

Embedded software company Access hopes to list on the TSE's Mothers market. Access develops a browser used by three out of four i-mode cellphone makers.

PhotoNet Japan, a group company of photo-processing chain operator Plaza Create (7502), plans to list on Nasdaq Japan. PhotoNet's official service for i-mode allows users to have photos developed and electronically distributed.

Net Village, an Internet solutions provider, also plans to list on Nasdaq Japan. Net Village's ¥200/month official service Remote Mail gives DoCoMo, DDI, and IDO cellphone users the functionality of ordinary email, such as long messages, not present in cellular short messaging services (SMS).

Because of the euphoria surrounding m-commerce, these IPOs will likely command high valuations, but are worth watching.

THE SECURITY GUARDS
In order for m-commerce to reach the next level, payment settlement solutions beyond subscription fees for the elite fold of official sites need to be realized. M-commerce issues will be synonymous with security issues.

Livin' on the Edge (4753) provides a payment service for unofficial i-mode sites, whereby a user clicks on a telephone link to place an order and is prompted by an automated voice to enter a credit card number. However, this still does not address the concerns surrounding credit card use on the Net.

This fall, Java-enabled handsets are to be introduced, and implementation of the Secure Socket Layer (SSL) protocol to safely transmit credit numbers may help alleviate these concerns a bit. US-based RSA Security (Nasdaq: RSAS) will provide DoCoMo with the software to employ SSL in these new handsets.

Mitsubishi Electric's (6503) encryption technology MISTY has been adopted as a standard encryption method for the next-generation W-CDMA networks. Mitsubishi Electric plans to expand revenue by building electronic authentication and settlement systems using MISTY.

Several different coalitions are exploring payment alternatives to credit cards. Fujitsu (6702 or FJTSY), DDI, and Citigroup are developing a payment settlement service for mobile devices which they hope will be adopted globally. With this kind of service, a user could make a bank transfer (already popular in Japan) for a restaurant bill or store purchase by entering the item number into a mobile device. J-Phone will participate too, but it remains to be seen whether DoCoMo will join or develop a separate system.

Next-generation mobile phones will become equipped with IC cards called the "User Identity Module" (UIM), similar to the SIM cards used in GSM-based cellular networks in Europe. Payment settlement can be made through bank transfers or telephone billing, but credit card numbers can be safely encrypted, stored, and transmitted by the IC cards.

Next March, DoCoMo along with Sony (6758 or SNE) will experiment with debit cards that can be replenished from a user's bank account through a mobile phone. But for a reality check, these technologies beg the question: Are they solutions looking for a problem? Debit cards and other forms of Net-powered cyber money have never really caught on. Do users really want to use their mobile phones to pay that vending machine, or would it be easier to drop down a few coins? (See "Getting Crazy With the Keitai") Bookseller Kinokuniya gets 10% of its online orders through mobile phones, so obviously there are gadget-toters out there who prefer the mobile alternative. Mobile commerce for the old-fashioned may mean mobilizing themselves to the store to pay cash.

PICKS AND SHOVELS
For the time being, the biggest benefactors of mobile use besides the cellular operators themselves will be the semiconductor and electronic parts producers. Since mid-1999 there has been a shortage of LCD driver ICs, LCD panels, flash memories, filters, and condensers because of the cellular boom around the world.

Japanese cellphone users replace their handsets as often as every year, which is good news for both handset and component makers. Matsushita Electric (6752 or MC) along with its communications equipment arm Matsushita Communication (6781) are Japan's top makers of handsets, under the Panasonic brand, but only capture a 10% share of the global market. Component sales are generally more profitable than handset sales, however. Like Japan's other electronics manufacturers involved in handset production, Matsushita is experiencing growth in mobile-related component sales but at the same time feels the crunch for those components in short supply.

Besides handsets and components, high-tech heavyweights such as NEC (6701 or NIPNY) and Fujitsu also gain from the cellular boom in providing wireless infrastructure. Comprehensive electronics manufacturers such as Hitachi (6501 or HIT), Toshiba (6502), and Mitsubishi Electric produce handsets and key components such as flash memory. Sharp (6753 or SHCAY) and Sanyo Electric (6764 or SANYY), who also produce handsets and flash memory, have expertise in LCD manufacture. Although the cellular boom is contributing to business performance, because of the breadth of their product offerings, ranging from toasters to industrial machinery, these electronics giants cannot be considered wireless pure-plays.

Family-held Seiko Epson, which owns 70% market share of LCD driver ICs and 40% share of mobile LCD panels, plans to go public next year.

Kyocera (6971 or KYO) and Murata Manufacturing (6981) are both leading ceramic semiconductor producers. Other semiconductor producers enjoying demand for mobile communication parts include Rohm (6963), New Japan Radio (6911), and Taiyo Yuden (6976).

A bit late in the game but not wanting to feel left out is Sony (6758 or SNE), who launched a semi-mobile version of its PlayStation game console called PSOne. Sony is also seeking to expand its share of the handset market. While some see the cellphone as the future omni-appliance handling voice, email, video, music, photos, and even our wallets, more likely we'll see separate unifunctional devices capable of being networked together through common protocols.

FINAL THOUGHT
The ultimate damper on mobile commerce plays may not be the next e-something or i-something investment fad, but any evidence showing that cellphones, like cigarettes, are hazardous to our health.