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DECEMBER 24, 1999 VOL. 25 NO. 51
The Next Net Revolution
Sparked by Japan's DoCoMo, mobile-phone Internet access is set to sweep the world. This time, Asia should lead the way
By JIM ERICKSON and MURAKAMI MUTSUKO Tokyo
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Japan was once considered backwards because of its failure to embrace the Internet. Now, thanks to emerging new wireless communications technologies, the country is leading the way into the "post-PC" era when Internet services become available on all sorts of smart devices. While much of the U.S. remains hardwired securely to a desktop computing paradigm, cellular phone operators in Japan and Europe are converting mobile networks into data-centric communications hubs for a stunningly diverse array of information and e-commerce services. Cellphone-crazy Asia is becoming a center for development of the wireless Web.
Much of the region's momentum emanates from one company: NTT Mobile Communications Network Inc., better known as NTT DoCoMo. Japan's largest wireless carrier trumped most of the world in February when it rolled out a new Net-linked mobile communications service called i-mode. With a special handset, customers such as Otsuka can enjoy much of the convenience and access to information normally available only from a desktop or laptop Internet connection - while constantly on the move. "We are the only cellular phone operator in the world that is making a real business [of mobile Internet access] for profit," says Enoki Keiichi, managing director for DoCoMo's gateway business unit.
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It is not surprising that DoCoMo (it is derived from Do Communications Over The Mobile Network and means "anywhere" in Japanese) is at the forefront of wireless Web technology. With a 60% market share in Japan and more than 28 million subscribers, DoCoMo spends roughly $50 million a year on research and development - a princely sum by industry standards. DoCoMo's president, Tachikawa Keiji, is a tireless advocate of widespread digital data dissemination - he insists that vending machines and even household pets will one day be linked to cellular networks.
What is surprising, however, is that so many Japanese have responded so enthusiastically to the company's most revolutionary product. In its first six months, i-mode captured 1 million subscribers; another million joined in the next three months; and up to 18,000 new subscribers are now signing up every day. The company expects to have almost 4.8 million i-mode customers by March. Yet the service is no loss-leader meant to entice traditional voice customers. Users pay a standard monthly charge of $2.60 (phones cost between $100 and $350), plus transmission charges based on the amount of information sent and received. DoCoMo also receives a 9% commission charged to content providers for e-commerce transactions. It isn't big money yet, but the company expects it will be eventually.
The i-mode also represents a bold initiative by DoCoMo to grab leadership in a new market. While the cellular phone industry in general dallied on creating a standard through which Internet data could be transmitted to tiny cellular handset screens, DoCoMo forged ahead to introduce its own system. Months later, the industry finally came up with a transfer protocol. Could this be a repeat of Sony's losing Betamax bet, in which the company wasted time and money by pursuing one format for video cassette recorders while the rest of the world built another?
Not likely. The wireless application protocol (WAP) standard agreed on by most of the rest of the industry, but not DoCoMo, may be overtaken by technological advances as soon as 2001 when a new generation of fast, wireless data-transfer systems arrive - third-generation (3G) systems. In other words, the eventual winner in the current standards battle is likely to be neither WAP nor the proprietary system established by DoCoMo. (Other standards battles remain to be fought, however. Japan and Europe are promoting one 3G standard for the future transmission of data called W-CDMA; North American is pushing a different one called cdma2000. The solution to this battle may come in the form of phones that can accommodate both formats.)
In going its own way earlier this year with i-mode, DoCoMo stole a march on the rest of the industry and created a wireless platform upon which third parties could build and offer services cheaply. The company was trying to reach an entirely new market - mobile phone users who don't have Internet access. That's a lot of potential customers in Japan, where one out of every three people have mobile phones but fewer than one in eight can tap into the Internet.
The number of content and service providers that have partnered directly with DoCoMo to offer tailored i-mode products now exceeds 240. In addition, i-mode users can access more than 2,200 sites on the Web - some highly-specialized, others uniquely Japanese. For example, surfers (the wet kind) can get real-time information on which beaches have the best waves. Students can check English spelling or get the correct Chinese characters for compositions and reports. About 300,000 users have coughed up a few cents to put an animated character from toymaker Bandai on their cellphone screens. DoCoMo is adding an auto navigation service that uses global-positioning-system satellites. Content has multiplied so rapidly that no fewer than 10 search engines have sprung up just to help i-mode customers find what they like. "The Internet link is the key for the cellular phone business now and in the future," says Enoki, the DoCoMo director.
For the year ending March l999, the company posted $1.75 billion in profits, a tenfold improvement over results three years ago. Since i-mode was launched, the company's stock price is up more than 250%; DoCoMo's market capitalization often exceeds that of its parent, global telecommunications giant Nippon Telegraph and Telephone.
Cellular operators in other countries can't duplicate DoCoMo's technically advanced network, its research spending or its enviable market share. But they can at least join the game since the WAP standard has been agreed upon. For now, WAP-enabled appliances are few. But a spate of new phones, pocket computers and other devices should hit the market next year.
"The driver for the development of technology is going to be wireless and it's going to be data," says Ian Stone, CEO of SmarTone Telecommunications Holdings Ltd. in Hong Kong. SmarTone, which is 20% owned by British Telecom, introduced a WAP service in September offering real-time stock quotes, news, weather reports and e-mail. Hong Kong's other top cellular players - including Cable & Wireless HKT, New World Mobility and Hutchison Telecom - are launching their own WAP initiatives. DoCoMo is purchasing a 20% stake in Hutchison, the largest cellular network operator in Hong Kong with about 1.3 million subscribers.
Pyramid Research, a communications market research firm, says Asia is a proving ground for the merging of mobile telephony and the Internet. According to a recent report, Asia will have 125 million cellular users by the end of this year and more than 310 million by 2004. Already there are more cellphones in Korea than fixed lines, and the same will be true in the Philippines and Hong Kong next year. Mobile phones and other mobile devices "will likely become the Internet access device of choice," says Ross O'Brien, Asia research director for Pyramid. "Asian consumers will be engaging in mobile transactional e-commerce in ever-increasing numbers. We believe that nearly half of all cellular subscribers in the region should have mobile data capabilities in the next ten years." Meanwhile, "vendors are looking to use operational experience to test next-generation applications, marking such cutting-edge markets as Hong Kong and Japan as important learning laboratories," says O'Brien.
The education will be expensive. SmarTone plans to spend up to $90 million to upgrade its network and build a "fixed wireless" system to deliver broadband communications to homes and offices. But expansion into new business lines is essential for cellular carriers operating in relatively deregulated markets, says telecommunications analyst Rohit Sobti, recently named head of regional telecommunications for Salomon Smith Barney in Hong Kong. Hong Kong, for example, has one of the highest cellular phone densities in the world, with phones in the hands of more than 50% of the population. Price competition for voice customers among six carriers is brutal. Companies are hoping that offering Internet access can provide new opportunities for profitable growth.
That could be a boon to dominant carriers such as DoCoMo, but smaller operators and latecomers may find no profit-margin-relief in the new data business. As more companies begin offering Net access, "you've got exactly the same market dynamics as you've got in voice, which will lead to a very quick erosion of profits," says Andy Perkins, telecommunication analyst for Paribas Asia. For some, the solution will be to stay out of the current standards battle and wait for the new systems to emerge. DoCoMo is pushing ahead on all fronts. It is one of the most vocal supporters of the third-generation transfer technology, which will allow for data transmission to mobile devices at a blazing 2 megabytes per second. That's fast enough to enable bandwidth-needy applications like video phones and even mobile movies-on-demand.
"It's going to be a gradual move towards the third generation," says Sobti. "And if an operator wants to have a piece of that pie, they must start investing slowly to keep up with the services the consumers are expecting." In China, where there are about 35 million mobile phones compared with 20 million PCs, the leading cellphone operator, China Telecom, is considering leap-frogging directly to 3G, according to a report by Credit Suisse First Boston. DoCoMo plans to become the first in the world with a 3G service in March, 2001 - but it sees other business opportunities as well as it morphs from a cellphone company into an Internet information services provider. Joint venture partners include Microsoft and NTT Data Corp. The latter has teamed with DoCoMo to launch a satellite-based digital broadcasting effort.
More unusual services are also on tap. DoCoMo in November unveiled a simple, pocket-sized gadget called the P-Doko. It does just one thing: identifies the location of the user and transmits it to a receiver. P-Doko is aimed at parents who want to keep track of children or wayward seniors. DoCoMo President Tachikawa wants to see it used to monitor the comings and goings of everything from pets to parcels. Indeed, as Japan pioneers the wireless Web and other data applications, DoCoMo increasingly sees its customers as anything that moves. The arithmetic is simple: Japan's mobile phone market is estimated at 80 million. Add in pets, vehicles, and other inanimate objects, and the potential market reaches into the billions. "We're interested in expanding the pie," says Tachikawa. For this pie, the sky may be the limit.
- With reporting by Yasmin Ghahremani, Matt Driskill / Hong Kong and Suvendrini Kakuchi / Tokyo
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