WW-07 -- How the US Helped Spark Japan's Wireless Net Revolution

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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. 7
Friday, May 11, 2001
Tokyo

INDEX
+++ Viewpoint: How the US Helped Spark Japan's Wireless Net Revolution
+++ Noteworthy News
- Japan's K Lab Unveils New Wireless Web Software
- DoCoMo Halts Sales of Latest Sony Cellphone
- Denso, Kenwood to Ally on 3G Cellphones
- Japan's KDDI says Firms Keen to Buy Wireless Unit
+++ Worth a read
+++ P.S.

+++ VIEWPOINT

How the US Helped Spark Japan's Wireless Net Revolution

Japan's wireless Web comprises NTT DoCoMo's i-mode, KDDI's EZWeb,
and J-Phone's J-Sky services, as well as several other mail-based
systems. But i-mode is the seminal precursor to the others, and
always the gorilla with respect to subscriber numbers. If i-mode
gave birth to Japan's wireless Web, then what gave birth to i-mode?

The service's antecedents actually go back to 1994, when voice
cellular services in Japan started to take off. Until then, the
cellular industry was highly regulated. Ownership was prohibited,
and only expense-account executives could afford the $1,500 per month
rental and service fees. Even at that, revenues were brisk, and
Motorola enjoyed the biggest market share for handsets, according to
Frank Sanda, then with Motorola, later head of Apple Japan, and now
president of Japan Communications. Nonetheless, by 1994 (15 years
after the first cellphones were introduced in Japan), there were only
2.1 million subscribers.

But that year, the government removed most of the restrictions, and
subscriber numbers started to climb skyward. In December 1996, there
were **18.2 million** mobile phone subscribers. With the phenomenal
growth came network overusage. Around 1997, frightening scenarios
were aired about the pending collapse of DoCoMo's PDC (Portable
Digital Cellular) digital network, writes long-time Japan wireless
industry insider Ray Tsuchiyama, adding, "Too many subscribers were
making calls simultaneously" (URL follows Viewpoint). To expand
capacity in the mid-1990s, he says, "NTT DoCoMo had to spend over
$6 billion on infrastructure." But even after that buildup, by the
late 1990s, DoCoMo had more consumer complaints about voice quality
and dropped calls than the competing carriers. Tsuchiyama says
contemporary advertisements by DDI and IDO for the new cdmaOne
handsets stressed better voice quality.

Something had to be done. DoCoMo was loosing market share, and it
faced the unsavory prospect of having to borrow even further to
expand an infrastructure based on decade-old PDC technology. "The
entire network would be obsolete before the debts were paid off,"
says Tsuchiyama. But the company noticed that Japanese cellphone
users were changing handsets at a phenomenal rate -- every eight
months on average, and adding handset features was one thing DoCoMo
could control. The solution was to entice subscribers to use more
data, rather than voice, on the existing network. "The objective was
to buy time, while postponing investment in a completely new
infrastructure," says Tsuchiyama. At the same time, Japanese couldn't
go online due to the usurious per-minute phone fees for dialup
access. Maybe that pent-up demand could be channeled into a mobile
Internet access system? The result was the creation of i-mode, and
the rest is history. (DoCoMo reported this week that i-mode has
23,220,000 subscribers, and as of April 30, EZWeb and J-Sky had
7,245,400 and 6,659,100, respectively, according to Japan's
Telecommunications Carriers Association.)

But what caused Japan's Ministry of Posts and Telecommunications to
remove cellphone restrictions back in 1994? At that time, the US
government was the champion of telecommunications deregulation, says
Tsuchiyama, and it intervened in Japan's moribund mobile market to
negotiate the 1994 Cellular Telephone Agreement. As a result, it was
gaiatsu (foreign pressure) from the Americans that led eventually to
the genesis of the wireless Web in Japan. Ironically, Japan is now
racing ahead of the US in wireless access.

In retrospect, perhaps the genesis of i-mode can be seen as a
salutary warning about DoCoMo's now-delayed plans to launch 3G. It
was the desire to extend the amortization of the 2G PDC network for
as long as possible by adding 2.5G data services that gave rise to
i-mode. Now, says Japan Communications' Sanda, the operator is having
a lot of trouble deciding what the 3G pricing plan should be and what
kind of 3G data services will be in demand. In the meantime, it looks
like 2.5G i-mode (a cash cow if there ever was one) will once again
allow the operator to buy time -- to figure out how to make 3G pay
for itself -- while "postponing investment in a completely new
infrastructure."

-- Daniel Scuka

Today's Viewpoint is based on "Deconstructing 'Phone Culture'"
(http://www.t9.com/Articles/journal_7-00.htm), Ray Tsuchiyama's
fascinating, first-hand account of the roots of Japan's wireless
revolution. Ray is Japan country manager for Tegic Communications.

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

--> Japan's K Lab Unveils New Wireless Web Software
http://www.iwon.com/home/technology/tech_article/0,2109,
125085|technology|05-10-2001::04:49|reuters,00.html
Source: Reuters on iwon.com, May 10

EXTRACT: K Laboratory, a unit of leading Japanese mobile content
provider Cybird, has unveiled what it calls the world's first instant
messaging system for mobile phones. Based on BREW, or Binary Runtime
Environment for Wireless, a mobile phone software platform developed
by Qualcomm, K Laboratory's messaging system allows mobile phone
users to exchange instant messages with the Yahoo messenger system.
BREW-enabled phones are due to reach the Japanese market later this
year through No. 2 carrier KDDI.

Wireless.NewsFactor.com (http://dailynews.yahoo.com/h/nf/20010510/
tc/9644_1.html) reported that while K Lab's system currently
lets mobile phone users exchange instant messages through Yahoo,
consumers using other messaging services -- such as ICQ and AOL --
also can communicate with mobile phones that support the new service.

COMMENTARY: K Lab also said that the new IM service will be expanded
to provide additional information on users' screens, including menus
and icons representing stock prices and graphic icons showing a
buddy's online or offline status. 130 million PC users throughout the
world have already deployed IM applications. Mail and instant
messaging are some of the mobile Net's killer apps (together with
entertainment, gaming, intranet access, and mobile e-com). The trick
will be to apply some sort of microbilling fee to cellphone IM
services, but this shouldn't be too difficult. Millions of mobile
surfers here already happily pay for email usage by the packet (sent
and received), so if a fee of, say, JPY0.01 can be tacked onto each
IM message sent, we think someone's going to make a ton of money. The
mobile Net is about services while on the go, not Web browsing.

--> DoCoMo Halts Sales of Latest Sony Cellphone
http://money.iwon.com/jsp/nw/nwdt_rt.jsp?cat=USMARKET&src=
201&feed=reuｧion=news&news_id=reu-t70719&date=20010511
&alias=/alias/money/cm/nw
Source: Reuters on iwon.com, May 11

EXTRACT: NTT DoCoMo announced that it has suspended sales of Sony's
latest i-mode handset due to a software glitch. DoCoMo said about
420,000 copies of the Sony SO503i have been sold since launch on
March 9, and would be replaced if customers wished. The company
declined to confirm the potential cost of the replacement or say when
sales of the model were likely to resume.

COMMENTARY: This decision was certainly a surprise. I was in the
DoCoMo shop in Roppongi on May 10, and the SO503i was still on sale.
I wonder what the sharp-looking corporate guy behind me who was
purchasing one of the Sony handsets is thinking today! There was no
word from Sony or DoCoMo on the specific cause of the glitch (or who
would be responsible for fixing it), but the errors occur when
downloading i-Appli Java applets onto the phone. In February, DoCoMo
announced a recall (for repair) of 230,000 Panasonic i-mode phones,
which came on top of another recall just the week previous. All the
recalls appear to have been related to the onboard Java environment.
I've mentioned before that the onboard software is becoming more
complex and that the makers are having problems with the onboard
systems integration -- even Sony and NEC. Tomihisa Kamada, CTO at
i-mode browser maker Access, said this week that several of the
makers have transferred software developers from other departments to
their mobile divisions to put more horsepower behind mobile
development and SI. Aside from getting the Java to work with the
browser, the middlware, and the logic (chipset) software, keitai
software engineers also have to contend with limited memory and
reduced processor power. "Balance is key," says Kamada. Perhaps
some Japanese handset makers, long established as hardware
powerhouses, need more balance between their hardware and software
efforts.

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--> Denso, Kenwood to Ally on 3G Cellphones
http://biz.yahoo.com/rf/010511/t101882_2.html
Source: Reuters on Yahoo, May 11

EXTRACT: Japan's largest car component maker, Denso, a Toyota
affiliate, said on Friday it would join forces with audio equipment
maker Kenwood to develop 3G cellphone handsets for No. 3 wireless
carrier J-Phone. Denso will also work with Kenwood to develop 2G
handsets for J-Phone and collaborate with Kyocera on 2G handsets for
No. 2 carrier KDDI. Denso said the decision to collaborate with
Kenwood and Kyocera on the development and production of wireless
phones was partly to free up resources so it could focus its
telecommunications business on the area of telematics.

COMMENTARY: Telematics is the convergence of wireless technology with
vehicles, and shows a lot of potential. Last year, Strategy Analytics
forecast a global in-car terminal market of US$16.3 billion by 2003,
when it expects to see 50% of cars produced in North America, Western
Europe, and Japan to have a built-in, telematics-capable terminal
(the ratio rises to 85-90% for high-margin large/luxury cars).
There's been growing activity in Japan. Cisco is driving around Tokyo
with a demo version of its mobile router, based on the approach that
the car isn't a single network node -- it's a collection of nodes.
The onboard router -- which can be linked externally through a
wireless interface -- provides connectivity for separate nodes such
as the engine (can report when it needs to be serviced),
entertainment system (can download music files from a Web drive),
navigation (linked through a GPS unit), and services, such as local
area information. And when the driver pulls off the highway for a
coffee break, why not log on to the rest station's
802.11(b)-compatible local wireless area network to obtain a coupon
for 10% off a tank of gas?

--> Japan's KDDI says Firms Keen to Buy Wireless Unit
http://biz.yahoo.com/rf/010511/t82821_2.html
Source: Reuters on Yahoo, May 11

EXTRACT: Debt-ridden KDDI said a number of companies have expressed
interest in buying its TuKa wireless unit. The Japan Industrial
Journal said Friday that eight companies, including Britain's Virgin
Group, had shown interest in buying TuKa. While the companies are all
major carriers, Britain's Vodafone Group and US telecom titan AT&T
Wireless are not among them. The journal quoted Jiro Ushio, KDDI
board chairman, as saying the company would begin negotiations soon
with six potential buyers. Andrew Craissati, chairman and CEO of
Virgin Asia Management, said Virgin was hoping to enter the Japanese
telecom market within a year. He added that Virgin was talking to
several telephone companies but declined to give details.

COMMENTARY: The TuKa group of three regional carriers (Tokyo, Tokai,
and Kansai) operates a PHS (Personal Handyphone) network and
presently claims some 4 million subscribers (a subscriber base that
was 23% bigger, as of December 2000, than VoiceStream in the US, for
example). KDDI owns 51.5 to 53.7% of each regional carrier, and the
TuKa network is, surprisingly, growing. In the March to December 2000
period, new subscribers joined at an annual growth rate of 20%. The
big problem, as mentioned last week (Wireless Watch No. 6), is that
KDDI's PHS services (under the TuKa as well as DDI Pocket and IDO
names) have never generated a pre-tax profit, since the PHS base
stations (whose ranges are typically 100-200 meters) connect to the
PSTN via NTT'S ISDN network, and NTT charges a lot for those
connections. One analyst's report states that DDI paid NTT JPY30
billion in PHS access charges for the first half of FY99/00 alone.
Yikes! How could a new owner boost TuKa's ARPU (average revenue per
owner) of JPY6,650? Look at data! PHS can deliver 32 or 64 Kbps (as
fast as DoCoMo's trial 3G system), and this should rise this year to
128 Kbps, giving those 4 million TuKa subscribers access to streaming
video and audio on their laptops, for example, when using the phone
as a wireless modem. Selling the system makes good sense, especially
if a reduction in access fees for the new owner can be negotiated
with NTT. A foreign buyer like Virgin should be able to get the
government to help twist NTT's arm, especially if it promises to put
some serious capital into the service.

+++ WORTH A READ

--> Are You Official? The Life of a Mobile Content Provider In Japan.
A great interview with Neeraj Jhanji, CEO of wireless startup
imahima.com. Jhanji discusses the challenges of becoming an official
content partner (it's tough), e-commerce on the wireless Web (there's
lots of potential), whether dealing with DoCoMo is difficult (it is),
and whether the government's moves to force DoCoMo to let an
independent third party serve as gatekeeper (deciding who gets on the
official menu) will have any effect (yes, but not soon).
(mformobile.com)
http://www.mformobile.com/print.asp?pk=15411

+++ P.S.

Want to sign up to participate in DoCoMo's 3G trial rollout? The two
handsets are the standard model (Forma N2001 -- made by NEC) and the
visual model (Forma P2101v -- made by Panasonic). Access
http://foma.nttdocomo.co.jp/normal/n-bana-top.html (Japanese only).

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Note: This week's Wireless Watch, due to be issued on Friday May 11,
was delayed until Saturday May 12. We regret any inconvenience this
may have caused.

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

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