WW-06 -- DoCoMo 3G: Marketing Discretion the Better Part of Engineering Valor

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J@pan Inc Magazine Presents:
W I R E L E S S W A T C H
Commentary on the week's wireless news from Japan
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Issue No. 6
Friday, April 27, 2001
Tokyo

INDEX
+++ Viewpoint: DoCoMo 3G: Marketing Discretion the Better Part of Engineering Valor
+++ Noteworthy News
- Sharp, Sanyo post record profits, eye more growth
- Internet population to reach 100 million by FY2004
- Japan Telecom profit soars 310 percent
- Sony earmarks $500m for Ericsson
- KDDI, Japan Telecom charge NTT with unfair trade
+++ Worth a read
+++ P.S.

+++ VIEWPOINT

DoCoMo 3G: Marketing Discretion the Better Part of Engineering Valor

The week's big news was DoCoMo's announcement it would delay
commercial rollout of its 3G network until the fall, and start with
only a "test run" in May. At yesterday's press conference, president
Tachikawa said next month's trial launch would be limited to 4,000
people in the Tokyo and (limited) Yokohama areas, and that the
company had "merely found a wiser way to embark into untested
territory." The decision seems largely to have been motivated by
software problems with the network, handsets, and base stations, and
the change comes despite the company saying for months that its 3G
launch was on track for May (granted the firm never said "full
rollout," but it certainly didn't disabuse the industry from thinking
so).

While the market reacted predictably (DoCoMo shares took a dive on
Tuesday), the news wasn't totally unexpected. DoCoMo competitor
J-Phone had already announced that it would delay its 3G rollout for
six months, from December this year to summer 2002, so that it could
implement the latest version of the W-CDMA specs (due out in the
fall), and there have been a lot of rumors lately about engineering
problems with DoCoMo's network. It's also a widely known secret that
the handset makers are having trouble with handsets -- not with the
hardware (no problems with that in Japan), but with the onboard
software. Matsushita's current Java phones, for example, were
recalled in early February due to software glitches. Later, i-Appli
developers found that the P503i handset Java environment hangs if a
Java app tries to report its date as "Apr" (the customized-by-DoCoMo
Java environment on the phone expects "Apl" -- a rather embarrassing
phonetic typo). Sony's SO503i phone has also caused frustration
(related to ring tone problems and sudden disconnections), with some
900 complaints recorded in the Kyushu region alone.

But DoCoMo will no doubt solve any problems with the 3G network, and
we think the delay was a wise one, providing at least three benefits.
First, those 4,000 free beta testers will help the firm test the
network (and pay all packet and other fees for the privilege, mind
you). Second, it gives the handset makers more time to perfect the
phone software. Finally, eating a bit of crow now is far preferable
to the unmitigated PR disaster that any failure **after** a full
launch would generate.

But beyond any technical difficulties, the delay points to DoCoMo's
perhaps less-than-skilful business management of i-mode. In
particular, why did it plan the 3G launch precisely in mid-cycle of
the current Java phones? The premium-priced Java phones are proving
to be exceptionally popular, so why rush the 3G campaign while lots
of new subscribers are opting for 2.5G i-mode at least partly for the
Java handsets (more than 1.8 million have been sold to date)? Sure,
there's pressure to get subscribers off the creaking old PDC network
and onto 3G -- and some engineering pride is at stake -- but why not
milk the Java handsets for all they're worth? As recently as last
December, senior company staff were denying that there would be any
conflict between Java and 3G, but there is -- and it wasn't that
difficult to foresee.

This week's decision was DoCoMo's belated recognition that marketing
discretion is the better part of engineering valor. i-mode, whether
offered on 2.5G or 3G, is a business model and a service concept, and
as such, the most important considerations are marketing, timing, and
user take-up, not technology. Looks to us like DoCoMo needs fewer
engineers and more B-school grads.

-- Daniel Scuka

URLs reporting on DoCoMo's 3G delay are below

--> NTT DoCoMo limiting 3G use at start
http://sg.biz.yahoo.com/010426/15/nszp.html

--> DoCoMo 3G rollout delay explained
http://www.wirelessweek.com/index.asp?layout=newsat2direct&starting=4

--> DoCoMo delays full 3G rollout
http://www.wirelessweek.com/index.asp?layout=print_page&doc_id=24050

--> NTT DoCoMo: Software bugs behind limited 3G rollout
http://sg.biz.yahoo.com/010426/15/nszp.html

--> DoCoMo eats 3G humble pie
http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=
FT30MO1ZXLC&live=true&useoverridetemplate=ZZZ6MJPM90C&tagid=
ZZZR4COD20C&subheading=asia%20pacific%20equities

+++ Noteworthy News
(Long URLs may break across two lines.)

--> Sharp, Sanyo post record profits, eye more growth
http://biz.yahoo.com/rf/010426/t75939.html
Source: Reuters on Yahoo, April 26

EXTRACT: Demand for electronic gadgets with tiny liquid crystal
displays, such as cell phones and personal data assistants (PDAs),
gave Japan's Sharp Corp. and Sanyo Electric Co. record profits in the
past year.

COMMENTARY: While the guts of the keitai (battery, chipset, antenna,
et cetera) are important, color displays, the sound chip, and the
user interface are the three elements we think are most important for
consumer keitai success. With Japan's leading TFT display makers
raking in record profits, there will be a lot of resources to throw
into exporting the color displays overseas. Also, this proves the
demand for color, and should stimulate more investment in expanding
color display manufacturing. One long-time Japan hand at a European
cellphone peripheral maker in Tokyo said yesterday, "It's just
incredible what kind of technology lead the Japanese makers have over
the Europeans." We agree.

--> Internet population to reach 100 million by FY2004
http://www.nikkeibp.asiabiztech.com/wcs/leaf?CID=
onair/asabt/news/129140
Source: Nikkei AsiaBizTech, April 26

EXTRACT: InfoCom Research (part of the NTT Group) says the number of
PC- and mobile phone-based Internet users in Japan will top 100
million in fiscal 2004. For fiscal 2000, the number is estimated to
be around 45 million.

COMMENTARY: Options for accessing the Net here include: keitai,
wireless Palm (as of July), the highly popular Compact Flash PHS
wireless modems -- for almost any handheld device -- game console,
good 'ol dialup modem, ADSL, ISDN, cable, and fiber optic (the latter
four all flat rate). The most interesting part of this report is the
projection that the number of people accessing the Net by different
means depending on where they are (PC from home, keitai while mobile,
et cetera) will reach **72 percent** of all Net users in 2004 (it's
around 20 percent now). This seems to support the idea that Japanese
Net users are morphing into a more sophisticated population, using
different devices to access the Net at different times to make use of
different services. We think deploying any Net service requires a
comprehensive channel strategy. It's expensive and time consuming to
develop first for the big screen, deploy the service, then try to
reformat for the small. Our recomendation: develop for the keitai
first (programmers will cry, but in the end they'll appreciate the
discipline), then for the handheld (bigger display, fatter client),
and finally for the PC. Then, roll out the service on all channels
all at once with lots of bluster (this will please the marketing
folks to no end).

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--> Japan Telecom profit soars 310 percent
http://money.iwon.com/jsp/nw/nwdt_rt.jsp?cat=USMARKET&src=201&
section=news&news_id=reu-t71357&date=20010424&alias=/alias/money/
cm/nw
Source: Reuters on iwon.com, April 25

EXTRACT: Japan Telecom (No. 3 telco) will see its group operating
profit for the year ending March 31 jump 310 percent, to about 115
billion yen. Reuters quotes the Nikkei as attributing the rise to a
cut in interconnection fees charged by NTT to make use of its local
phone networks.

COMMENTARY: How do the profits of NTT competitors relate to NTT's
fees for accessing the local fixed-line PSTN network? Take, for
example, the wireless operators in each of the NTT competitor groups
(Japan Telecom and KDDI). All wireless carriers must pay access
charges to NTT, which maintains an effective monopoly on local
access. While the wireless portion of each carrier's network is
independent, J-Phone, KDDI/Au, and KDDI/Tu-Ka have to connect their
cellular base stations (whether cdmaOne, PDC, or PHS) to the PSTN at
some point, and that's where NTT tightens the screws. In FY00, access
fees paid by Japan Telecom to NTT equaled almost 16 percent of
revenue, according to one investment report. Also, KDDI operates an
extensive family of PHS networks throughout Japan, which have NEVER
generated a pre-tax profit, since the base stations connect to the
PSTN via NTT'S ISDN network, and NTT charges a lot for that
connection. In the first half of FY00, for example, one KDDI group
PHS operator paid NTT 30 billion yen (according to another investment
report). NTT has agreed to reduce access charges by at least 30
percent over the next two years (thanks to WTO and USTR pressure),
partly accounting for Japan Telecom's boosted profits cited above
(reduced access fees contributed 20 billion yen to the jump). This is
just one more example of how the former state-monopoly telco still
calls the shots.

--> Sony earmarks $500m for Ericsson
http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=
FT30Z0ZXXLC&live=true&useoverridetemplate=ZZZ6MJPM90C&tagid=
ZZZR4COD20C&subheading=asia%20pacific%20equities
Source: FT, April 24

EXTRACT: Sony said it expects to invest up to $500 million -- That's
half a billion dollars, folks! -- in its mobile phone JV with
Ericsson. The new venture aims to give both companies a leading
global position as the mobile phone converges with the Internet
around 3G technology. The JV, to be based in London, will include
design, branding, distribution, and marketing of handsets and employ
3,500 people, comprising 2,500 from Ericsson and 1,000 from Sony. It
will combine operations in the US, Japan, the UK, and Sweden.

COMMENTARY: After the DoCoMo 3G delay, this is the week's second
biggest event. As mentioned earlier, the Japanese keitai makers have
hardware technology second to none. What they need help with is
marketing and distribution, one of this JV's stated goals. Ericsson
owns about 10 percent of the global handset market; Sony, two. With
the balance of staff at the new JV being 2:1 in Ericsson's favor, it
looks like Sony will be receiving Ericsson's help rather than vice
versa. It strikes us as significant that even Sony, the Japanese
maker with arguably the best-known global brand (and best-developed
distribution channels), finds it necessary to tie up with a foreign
partner.

--> KDDI, Japan Telecom charge NTT with unfair trade
http://asia.biz.yahoo.com/news/asian_markets/article.html?s=
asiafinance/news/010427/asian_markets/dowjones/KDDI__Japan_Tele
com_Charge_NTT_With_Unfair_Trade_-Nikkei.html
Source: Down Jones on Yahoo, April 26

EXTRACT: Some NTT competitors (KDDI, Japan Telecom, and others) have
alleged that the former monopoly carrier, which still owns the last
mile to the majority of Japanese homes, has been pressuring consumers
to select NTT in all "Myline" categories, or else they may have
trouble getting telephone line repairs.

COMMENTARY: The government is pushing the Myline "choice to the
consumer" initiative, where home dialers are being allowed to select
which wireline carrier will provide them local, in-prefecture,
national, and international calling. NTT's alleged unfair practices,
if true, would be yet another example of how the former
state-monopoly telco calls the shots. Note there's a lot going on in
the telecom space right now. Consumers are being barraged with
campaign dross for a dizzying array of calling plans, rates,
technologies, and handset models from **five** Net-by-keitai wireless
operators. Also, a cabal of broadband access providers (including
NTT, Usen, and Tokyo Metallic, just to name a few) are in a pitched
price war for flat-rate ADSL, ISDN, fiber optic, and cable access.
Maybe consumers are just plain confused?

+++ WORTH A READ

--> Various ways of communication in ancient times
(AT&T Virtual Education Web site)
http://www.att.virtualclassroom.org/vc99/vc_14/japan/j3/j3.html
How about a little light reading before Japan's Golden Week holidays?
Covers communication by bell tones (a precursor to keitai ringing
tones, we think), carrier pigeon, and smoke signals from a
young-at-heart point of view. Smoke signal communication, at least,
is not unrelated to 3G; apparently in some early trials the 3G
handset processors warmed up at least enough to make the phone
untouchably hot, if not emit smoke outright. ;-)

--> Handsets in Europe strike a new chord as pop music replaces beeps
http://www.washtech.com/news/telecom/9179-1.html
For anyone doubting that Japan's consumer- and youth-market-focused,
ringing tone-download keitai craze can't happen in Europe or America,
read this twice!

+++ P.S.
Your cellphone can be a compass.
We heard this week about a Japanese electronic manufacturer that
produces a chip that senses magnetic lines of force much like a
compass does. The company, AP One Systems, reportedly provides the
chip to location-based SIs and solution providers with an eye on the
small device/keitai market. A cellphone enabled with such a chip
could sense the phone's orientation in space, and provide that
information to an onboard navigation application. The app's output
instructions could be tailored to say, for example, "Walk 50 meters,
then turn left" (not East or West, mind you, but "left"). The phone
(and the navi app) would know which way "left" was. Presumably, if
walking down the street from the opposite direction, the output
instructions would be "Walk 50 meters, then turn right." We wonder
what would happen if the owner was holding the phone upside down?
;-)

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NOTE: Wireless Watch will not be published during Golden Week (that's
next week). To those of you in Japan, HAPPY HOLIDAYS!

STAFF
Written by Daniel Scuka (daniel@japaninc.com)

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