Whither Japan's Internet Market:
The Outlook for 1999
- by David Kellar -
|
"Stellar" may not
be the word to
describe the growth in Japan's Internet market over the last couple
of years. However,
compared to many
other sectors -
including the closely
related PC market - the simple fact that
Internet market is indeed growing strongly is sufficient to elevate it to bright light status in this otherwise gray and gloomy economy.
In 1997 and 1998 the number of internet users in Japan grew at rates of 73% and 57%, respectively, per annum, and by the end of 1999, AccessMedia projects the number of Internet users to grow an additional 44%, reaching 20 million individuals. This growth greatly outstrips 1998 growth rates in consumer PC shipments (barely positive) and corporate IT investment (negative). The questions now are: (1) will this momentum in the Internet market continue through the end of 1999 and beyond, and (2) what shape will the momentum take. Since I have somehow misplaced my crystal ball, I will attempt to answer these questions by looking at developments and trends in three interrelated segments of the market: Internet Users (indispensable for market viability), Internet Applications (the things Users use), and Internet Technology (the infrastructure underpinning and defining the feasibility of various Applications, as well as the User experience). Internet Users The number of Internet users in Japan is still growing at a double-digit rate, and AccessMedia expects nearly one-sixth of the population to be accessing the Internet by the end of the year. It is important at this point to examine the differences in market dynamics as defined by the location(s) from which users access the Internet. Broadly segmented, people will access the Internet from their home (for primarily personal objectives) or from their office or school (for both job/school and personal objectives). An increasing percentage - currently about 24% of Internet users - access from both office/school and home. Although it was originally expected that the number of Internet users would increase fastest in businesses, spreading through the web of networked PCs already in place, AccessMedia's periodic surveys show that growth in the number of users accessing from home is accelerating, while growth in the number of users accessing from the office or school is decelerating. In fact, year-to-year growth in the number of home access users increased from 75% in 1997 to 111% in 1998, while year-to-year growth in office/school access users fell from 69.8% to 46.5% over the same period. Reasons are many, but the primary factors are (1) that the lackluster economy has caused cautious Japanese corporations to cut back spending on new computer system deployments, including Internet-related spending, while (2) the average number of individuals in households accessing the Internet is increasing (from 1.16 to 1.44 users per household in the first six months of 1998 alone) as family members other than the primary PC user are getting into the game with their own email accounts. The outlook for 1999 is more of the same, as corporate IT spending budgets are still contracting and the popularity of personal email and personal "home pages" is still growing strongly. Internet applications This area is often referred to as "content," or the actual value-added text, images (still and moving) and interactive programs added to the basic IP, HTTP and HTML protocols and page description languages that make the Web work the way it does. "Application" is a better word as it refers to uses of the Internet, which is more appropriate when talking about Internet users and usage trends. Although plain and somewhat dull as a topic, email has been and still is the "killer application" of the Internet in Japan. The primary reason people first sign up for an Internet account, and the thing that people miss the most when they are away from their Internet connection, is - email. Fortunately, high connection speeds are not required for this application, and as such email is the primary application driving Internet growth. Following email are, in order of popularity, interest and entertainment, searching for information on products and services, downloading software, looking up company information, and reading current news and weather information. Applications requiring fast or constant connections, such as electronic conferencing, telephony, video streaming and "push" information services, are still not commonly used but are indicated by Internet users as applications they would like to use in the future. The outlook for 1999 is that we will not see significant shifts in the types of Internet applications used by Japanese users, as communications costs and speeds are expected to remain constant in the mid-term. Indeed, advances are being made in using current bandwidth more efficiently for video streaming, for example, or in accessing the Internet over wireless connections for new applications such as feeding real-time data to car navigation systems. However, these applications are still limited in the amount of information they can provide without irritating the user, so we will not experience any major Internet application paradigm shifts until the communications technology - wired and wireless broadband technology - catches up. Internet technology Internet applications, and perhaps even more importantly, the user experience, are defined and limited by the underlying protocols and communications technology. There are application functionality level technologies such as Java and XML which promise to give us - especially businesses - great flexibility in writing Web-based applications that truly do valuable things, such as interact intelligently with the user and allow flexible access to massive databases. Within the corporate LAN and WAN infrastructures, these technologies are already being put to use. For people accessing the public Internet, however, the technologies that will have the most impact are technologies that enable broadband communications. Currently most Internet users in Japan are restricted to narrowband access maxing out at 128 kilobits per second for a dual-channel ISDN connection. The majority of users are accessing at 28.8-56kbps. This is too slow to comfortably access applications such as Internet conferencing, telephony and video, and is even too slow to prevent frustration when attempting to view run-of-the-mill web sites with lots of graphics. What is necessary to enable new Internet applications, attract more users and take Internet usage to the next level is technology for bi-directional communications at speeds of several megabits per second. Happily, this technology - using cable or Digital Subscriber Line (DSL) modems - is here today, and is rapidly becoming commonly available to users in the US. Cable Internet services in the US such as AtHome already boast large user bases, and as I write this, MCI is rolling out nationwide DSL service while Compaq and Dell are starting to ship PCs with built-in DSL modems. Unfortunately, most Japanese users will not have access to these technologies anytime soon. Cable penetration (the number of cable-passed households) in Japan is still quite low, and most of the cable infrastructure in place needs to be upgraded to allow bi-directional digital communications. These upgrades are necessary not only at the cable companies' facilities, but also in most apartment buildings, where cable is generally daisy-chained from apartment to apartment. These cables need to be re-pulled and connected in a star configuration so that each apartment is connected independently to the building's cable hub: an expensive effort that will not happen overnight. DSL is a more viable alternative, as Japan's main telco, NTT, has the digital line infrastructure in place and all that would be required on the service provider (NTT) side is installation of DSL headend equipment. However, this is not likely to happen any time soon as NTT is still promoting ISDN - an early (and outdated) implementation of DSL that only allows communications speeds of up to 128kbps - and it is not technically feasible to offer narrowband ISDN and broadband DSL services over the same line. ISDN never took hold in the US or most other countries outside of Japan, so telcos and service providers in those countries are free to invest in DSL infrastructure. In Japan, however, the widespread use and continued promotion of ISDN will prevent users from having access to this Internet-friendly technology in the foreseeable future. The only other broadband alternative is satellite, which requires installation of a parabola antenna and related wiring at the user premises, and only allows broadband communications speeds in one direction (from the Internet to the user). The upstream link still has to go over standard telephone wires to the ISP. In 1999, use of satellite and cable connections to the Internet will increase in Japan, but only among a small minority. This will hinder the usage of new Internet applications. As such, we do not expect to see major advances in the way the Internet is used in 1999. The number of Internet users in Japan will indeed continue to grow, but the pace of that growth over the mid-term is likely to fall behind the US and other countries where broadband technologies will become increasingly common. More importantly, the way Japanese users use the Internet is in danger of stagnating while significant changes occur in other parts of the world. The future Despite the slow pace of advancement, Japan is still the largest Internet market in Asia Pacific, and has advantages over many countries in the region in terms of infrastructure and the government's relatively hands-off regulatory policy. It therefore has the capability of playing a leading role in Internet development in the region. In Internet time, however, tables can turn rather quickly, so it would behoove Japan's Internet industry and major influencers (government and corporate users) to keep their eyes open to the fast pace of global change, and be ready to act quickly. David Kellar, based in Tokyo for the past 12 years, is vice president of Access Media International, Inc., an IT market strategy consulting firm with management centers in Tokyo, Singapore and New York. AccessMedia provides consulting services and market intelligence related to interactive new media with an emphasis on network computing, Internet, communications, content, delivery channels, platforms, and the digital media marketplace and technologies. He can be reached at davek@ami.co.jp. |
