Japan's Personal Handyphone System: Down for the Count?

Last summer, we wrote about the personal handyphone system's promise as a simple, low-cost, high-speed digital communications tool. (See "A Handy Way to Phone Home: PHS"; August 1995, page 26.) For a variety of reasons, PHS has failed to live up that promise, with subscriptions running at only 40% of initial expectations.

by Noriko Takezaki

Japan's Personal Handyphone System (PHS) was introduced to the Japanese market with great fanfare in July 1995. Initial predictions were that the new service, touted as an inexpensive alternative to cellular mobile phones, would attract almost 2.5 million subscribers in its first year. As the initial marketing hype showed, PHS handsets were expected to be particularly attractive to students, young businessmen, and housewives who needed something more convenient than a pager but less expensive and bulky than a cellular phone.

Contrary to the rosy expectations, however, PHS was severely bruised in the first round of its match with cellular phones. As of the end of December 1995, only 620,000 subscribers had signed up, and estimates of fiscal year 1995 PHS subscriptions had been revised downward to only about 1 million, just 40% of the original hopeful forecast.

It had been feared by many in the industry that introduction of the cheaper PHS service would adversely impact sales of cellular phones. Ironically, the opposite proved to be true. In an effort to compete with the new PHS service, cellular phone companies dropped their handset prices and service charges, which had the effect of enticing new cellular subscribers. Some 570,000 new cellular phone subscriptions were recorded in December alone, and at year-end the total number of cellular subscribers had surpassed 8 million.

Not a Rocky road to success

Originally, PHS was expected to enter the telecommunications ring as a tough challenger for cellular phones. But the cocky upstart proved to have a weak left hook.

Owing to the PHS microcell zone structure, its base stations have only a 100- to 500-meter coverage radius. This enables a drastic reduction in the base station cost per subscriber to about one-fifth that of cellular phones. PHS thus can offer lower usage charges than cellular services; the basic service charge for PHS usage is only about ¥40 per minute, compared with ¥150 to ¥190 per minute for cellular phone usage. Meanwhile, the handset unit price differs little, averaging about ¥30,000 for a PHS handset and ¥40,000 for a cellular unit.

Yet the fancy footwork of a cheaper service charge wasn't enough to attract the anticipated large numbers of users. Instead, PHS providers found, to their dismay, that the factor potential users attached greatest importance to was not the service charge, but connectivity. The smaller base station radius inherent in the PHS microcell zone structure means that 50 to 200 times more base stations are required for PHS coverage than for equivalent cellular phone coverage. (The typical PHS base station covers a radius of only about 200 meters, while a cellular phone base station covers a radius of 1,500 meters or more.) And PHS companies have so far neglected to install enough base stations to blanket all areas, which has led to numerous "dead zones" (areas of non-coverage) and caused complaints among PHS subscribers.

"We know that preparing sufficient infrastructure is our most imminent task," concedes a spokesman of NTT Chuo Personal. "However, a few more years seem to be necessary for the sufficient installation of base stations." The NTT Personal group, as a whole, will have 500,000 base stations by March 1996, and plans to increase that number to 1 million within a few years. But installing more base stations requires revenue, and NTT Chuo Personal has far fewer subscribers than expected so far. "We have not yet figured out the market very well," the spokesman admits.

Pushing to start operations with insufficient infrastructure has caused problems for PHS operator DDI Tokyo Pocket Telephone as well. In August 1995, the company experienced a signal propagation problem in several suburban areas in Tokyo, which prevented some base stations in those areas from properly transmitting to user handsets. The company was forced to shut down its service in the affected areas for almost a week to adjust the synchronicity of the base stations' signal propagation -- and thus affecting both its own reputation and the public image of PHS reliability.

Too little, too soon?

Due mainly to publicity about the insufficient infrastructure, and word-of-mouth from unhappy current users, potential PHS subscribers have stayed away in droves. In the Kanto area, which includes metropolitan Tokyo, NTT Chuo Personal anticipated having 175,000 subscribers by the end of March 1996. As of January 1, though, the company had signed up only about 70,000 users. DDI Tokyo Pocket and Astel Tokyo are also reviewing their initial forecasts. DDI Tokyo Pocket had planned on having 500,000 subscribers by the end of March 1996, and Astel Tokyo was counting on 300,000. By the end of December 1995, though, each had only about 100,000 subscribers.

"In addition to the shortage of base stations, we think another major reason for the unsatisfactory results is that we didn't give people sufficient information on PHS," laments a spokesman of DDI Tokyo Pocket. "We should have trained our sales representatives to give appropriate suggestions to customers for their selection of PHS, such as when and where PHS has advantages [over cellular phones]. The attraction of cheap mobile phone service alone obviously wasn't enough for marketing PHS."

PHS operators initially tried to promote PHS as a totally new concept of mobile phone service, with an affordable price. Their aim was to attract the vast majority of the general public that does not yet have access to cellular phone services. Inadequate marketing, however, left many people convinced that PHS was just another type of cellular phone -- and one with a narrower coverage area and lower connection quality.

On the ropes

How do PHS operators plan to get back on track? They say they will enhance the infrastructure for PHS to compete with cellular phones, particularly by increasing the number of base stations in the areas where needs are high, such as in buildings and underground.

Some industry analysts, however, caution that if PHS operators continue to target mainly the general public, their hard times will continue. "PHS operators should target the corporate market first for their business expansion," says Muneto Sawaki, a research analyst at Dataquest Japan. "If PHS can achieve a good reputation as a cheap phone service in the huge corporate market, such as for in-house communications, then it can become rooted in the entire Japanese society. However, considering the unfavorable image currently being spread in the market, it will be difficult for PHS to compete with cellular phones for a while."

There already are some activities among persons in the PHS business to target the corporate market. One is preparation for formal standardization of high-speed data communications via PHS at 32K bps, with the intent of connecting to ISDN (integrated services digital network) at 64K bps by using two PHS channels. The eventual goal is to realize a wireless LAN (local area network) via PHS. The interface specifications for such data communications were decided in December 1995 by the Association of Radio Industries and Businesses (ARIB), and the network specifications are scheduled to be set up by the Telecommunication Technology Committee (TTC) in April 1996.

Fancy footwork

In addition to these two formal standardization activities, another activity has been started to prepare for establishing de facto standardization of end-to-end data communications via PHS. The PHS Internet Access Forum, supported by the Ministry of Posts and Telecommunications, has been working on the de facto standardization of communications software and functional expansion of the operating system. The forum consists of over 70 member companies, including PHS operators, telecommunications companies, and computer hardware and software manufacturers. Foreign companies are involved in forum activities through their Japanese subsidiaries, including Apple Computer, Compaq, Hewlett Packard, IBM, Intel, and Microsoft. According to Masayoshi Wakao, managing director of ARIB, the standardization was scheduled to finish around March 1996, and trials will be conducted during the summer with the aim of starting wireless data communications via PHS in spring 1997.

Forum members are also discussing the possibilities for developing future PHS applications, including an e-cash application for electronic commerce and introduction of an IC card that allows easy changes of handsets. The IC card would store registration data for the handset, such as terminal number and the subscriber's information, which is currently being written in ROM (read-only memory) installed in the handset. Some members have even proposed that it could also be used as a commercial credit card.

"There are many such ideas, and most of them are technically possible," says ARIB's Wakao. "However, the crucial point is whether there is a need for such sophisticated functions for PHS in the market. At the moment, we have to carefully watch how the market is going to move."

If PHS operators cannot find a better way to develop the corporate market successfully, there is another possibility: coexistence with cellular phones. Some PHS manufacturers have shown interest in the development of "dual terminals" that can use both the radio frequencies for PHS (1.9GHz bandwidth) and for cellular phones (1.5GHz bandwidth). According to a spokesman for DSP Communications Inc. (DSPC), which plans to offer the technology for the dual terminal development to Japan, at least one manufacturer who makes PHS terminals for the NTT Personal and Astel groups has already started preparations for the development of dual terminals based on cellular phones.

"Considering the PHS's current struggle, the development of dual terminals [for connection with cellular phones] would be ideal for PHS operators, since cellular phones have been penetrating the Japanese market so well," said the DSPC spokesman.

Meanwhile, the Ministry of Posts and Telecommunications (MPT), a behind-the-scene promoter of PHS, views the business future with optimism. The MPT expects PHS subscriptions to reach 38 million in 2010, even though all PHS operators have revised their current business outlook downward. "It's amazing for a consumer electronics product to have nearly 700,000 users in just half-a-year," proclaims Shuichi Inada, director of the MPT's Multimedia Mobile Communications Office. "It has never happened before, even for TV sets. Also, the recent growing demands for ISDN will accelerate the growth of the PHS market in the near future."

Climbing into a new ring

In addition to promoting PHS standardization activities in Japan, the MPT has been active in overseas deployment of PHS. Several years have gone into negotiations with administrative authorities in the Asia-Pacific area and, owing to these efforts, the MPT succeeded in having PHS specifications adopted by Hong Kong and Singapore as one of their mobile phone service specifications.

"Actually, we targeted overseas Chinese in Asia first," says MPT's Inada, "because we know how powerful and influential they are in the area, and how accurately they assess new technologies. Once PHS gains a good reputation among them, it can be easily spread throughout the area. Their demands are pretty tough, though, particularly for handset price. But even on the price issue, we believe the Japanese manufacturers can make it, since a manufacturer recently introduced an ¥8,000 product for the domestic market."

In addition to Hong Kong and Singapore, the MPT has been promoting the PHS technology to other Asian countries, including India and Thailand. And Australia is thought likely to adopt the specifications soon for commercialization of PHS service there sometime in 1996.

Anticipating PHS's diffusion in the Asia-Pacific region, foreign manufacturers have been showing strong interest in entering the PHS product business. None of them has made a formal announcement of their entry yet, but Ericsson and Motorola have joined the preparatory group to promote overseas deployment of PHS. And another prominent foreign manufacturer has been carefully researching the market from the viewpoint of utilizing PHS as a tool for multimedia applications, including the possibility of combining PHS with a PDA (personal digital assistant).

For the PHS business to be successful, says the MPT's Inada, Japanese PHS operators need to change their business attitude drastically and face the challenges, no matter how tough they are. "It's a typical problem among Japanese telecommunications carriers. They are only concerned about the domestic market situation, and lack a global viewpoint for the businesses."

"This is mainly because they don't face real competition," he continues. "Therefore, we are trying to introduce competition in the telecommunications market in Japan to help improve the situation. Also, for PHS operators who say they cannot expand their business because of a shortage of staff, we suggest that they hire people from outside of the conventional telecommunications business cycle. Desirable candidates may come from trading companies, because they have much experiences in the competitive businesses worldwide."

Looking ahead

In the past, Japan's key industries (such as steel and semiconductors) were expanded through powerful guidance by the Japanese government. For the PHS business, however, whether the MPT's efforts can help it to expand as they anticipate will depend on how much PHS operators can do themselves to develop their business chances -- and how eager they are to do so.

Before joining the Computing Japan staff as associate editor in December 1995, Noriko Takezaki was an editor with the Tokyo-based Telecom Tribune.

Member list of the PHS Internet Access Forum

Chair: Prof. Shoichiro Asano,
National Center for Science
Information Systems

Deputy Chair: Association of Radio Industries and Businesses, Telecommunication Technology Committee

Key Members:

Apple Japan

Astel Tokyo

Canon

DDI Tokyo Pocket

Fujitsu

Hitachi

Japan Radio

KDD

Matsushita Communication

Mitsubishi Electric

NEC

NTT

NTT Chuo Personal

NTT Data Communications Systems

NTT Mobile Communications Network

Oki Electric Industry

Sharp

Sony

Toshiba

General Members:

Aiwa

Allied Telesis

Allied Telesyn International

Alps Electric

Anritsu

Asahi Kasei Microsystems

Casio Electronics Mfg.

Cirrus Logic

Compaq

Elmic Systems

Hewlett-Packard Japan

Hitachi Zosen

Hokkaido Telecommunication Network

IBM Japan

Intel Japan

Kanda Tsushin Kogyo

Kenwood

Kokusai Denki Engineering

Kokusai Electric

Kyocera

Kyushu Matsushita Electric

Maspro Denkoh

Matsushita Electric Industrial

Matsushita Electric Works

Meisei Electric

Melco

Microsoft

Mitsubishi Materials

Murata Mfg.

Nagano Japan Radio

Nakayo Telecommunications

NIFTY

Nippon Television Network

Nippondenso

Nitsuko

Nomura Research Institute

Omron

Ricoh

Rohm

Sanyo Electric

Seiko Epson

Seiko Instruments

Sumitomo Electric Industries

Sun Corp.

Taiko Electric Works

Tamura Electric Works

TDK

Teleway Japan

Tokyo Electric Power

Tokyo Gas

Tokyo Telemessage

Ueda Japan Radio

Victor Company of Japan

VLSI Technology

Yamaha