iBarbarian At The Gates

Hello Serkan:

You know I respect your work, but wanted to provide ACCJ members an additional layer of – hopefully thoughtful – insight to the comments made in this article. ++ See inline below++

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For years, Japan has been known as the world’s leader in mobile technology. The country’s cell phone makers still churn out over 100 super-advanced units per year, with almost every handset offering a wide array of flashy functions. Japan’s 95 million mobile subscribers were the first to use their keitai (cell phone) to access the web, make payments, play games on the go, read e-books, and shoot videos with HD quality. The nation’s multi-billion dollar mobile hardware market has always been almost exclusively in the hands of domestic players. Supported by strong ties to local carriers, Motorola, Nokia, Samsung and other foreign giants were fended off successfully for about a decade.

++ Handset makers from overseas, also including HTC, have all had various degrees success in the Japan market. However, as the model here is based on direct B2B relationships between the operator and device maker, this represents a unique challenge to their standard one design fits all approach. It needs to be understood that all handsets in Japan must conform the the operator specs and that they are the actual client for the purchase order, taking the P&L risk position. This tight integration is a key reason why Japan has near 100% adoption of 3G and continues to be far (far) ahead of other markets in segments ranging from data usage with imode (et all) to mobile payments via FeliCa.

Sharp, Toshiba, Panasonic, and other makers had a good run until around 2008, when Japan’s third-largest cell phone carrier, SoftBank, brought Apple’s iPhone to Japan. The American “smartphone” not only took the once impenetrable Japanese mobile market by storm, it disrupted the industry as a whole. According to estimates, Apple has managed to sell well over three million iPhones in Japan so far, now boasting an impressive 72 percent of the domestic smartphone market.

++ While we can all guess about numbers since, unlike with AT&T, SoftBank still refuses to reveal actual results. For the sake of discussion; “if” they have moved about three million units, that’s well under 3% of total active market share and it should be clearly noted that both Nokia and Mitsubishi actually ceased operations here at that level or even better. One has to wonder what the total market share “to-date” is for iPhone vs. say HTC or Blackberry?

The iPhone is now the nation’s must-have personal companion, thanks to SoftBank’s marketing acumen, the quality of the device itself, and (most importantly) the year-long complacency shown by domestic carriers and phone manufacturers in a continuously expanding, high-margin market.

++ Good points. As a fashion accessory, certainly, but how many people do you know with an iPhone as their ‘only’ handset? Clearly SBM has put all of their marketing effort behind this, a fact noted by it’s total domination on the show floor during my recent visit to the Omote Sando shop. It’s interesting to me that no one has pointed out the Antenna ‘quality’ issues are something we have never seen on Japanese phones? At any rate, indeed it takes about 1-year from design to delivery and we will begin to see a wide range of PDA styled voice enabled units, like the new Kyocera ‘droid, made for global markets going forward.

But growth, which began in the late 1990s and continued through the mid 2000s, has come to an end. Hit by the recession and a rapidly graying user base, domestic shipments of handsets fell 12.3 percent year on year to a 12-year low of 31 million units in fiscal 2009. Exports have been historically weak. Worldwide, only London-based Sony Ericsson (a joint venture between Sony and Sweden’s biggest telecommunications firm), commands a noteworthy market share of 5.1 percent.

++ I would humbly suggest the dip in 2009 handset numbers had much more to do with the Ministry mandated change in subsidies than anything else. Otherwise, obviously the fully branded handsets produced by NEC, Sharp or Fujitsu have been rare to find overseas, attributed largely to the noted above B2B business model working in reverse against them. That being said, it should be noted that the component market, according to JEITA, shows a significant majority of handsets coming from all makers actually are powered by parts made by Japanese OEMs.

The mobile sector in Japan is often referred to as the “Galapagos Islands” for its unique, practically closed mobile phone infrastructure. The most prominent explanation for the Galapagos syndrome is i-mode, a mobile web service tailor-made for handsets, which NTT DoCoMo launched in 1998. Japan’s top telecommunications firm practically kick-started the mobile Internet as a whole, but failed to export it to the U.S. and other markets. SoftBank and KDDI, Japan’s second-largest telco, never even tried to take their proprietary web technologies abroad.

++ I’m not a big fan of the G-word, perhaps useful if trying to explain to non-industry cab-driver types but not very accurate. All major players in the global telecom space have long been very active here, think Ericsson, IBM and HP, you just don’t see them so much as a consumer facing brand. Perhaps one of the best examples would be KDDI who has been running their entire network on Qualcomm or e-mobile built their network with Huewai. As for taking the model overseas, well books have been done on that, however I will say that execution by the partners in most cases was clear cause for failure. Whether it was lack of handsets, insane revenue share to content providers, plus widly over-priced data billing, combined with tight lock on official content partners, you could ‘call’ it imode.. but it was clearly nothing like the original model.

Another example is 1Seg, an industry-wide mobile TV standard that’s supported by most of Japan’s cell phones but has so far been adopted by just a handful countries in South America. As a result, many Japanese phones had (and still have) a number of unique features that miss the mark in other countries.

++ I’m glad you brought this up as it’s a standard case in point I like to use when trying to explain the Japan mobile market to international clients. If we look at the adoption of cameraphones – originally commercialized in Japan – for a baseline, the value proposition and path to deploy from any operator or handset maker perspective it was a low barrier for adoption. However, getting everything in order to run terrestrial digital tv is another matter all together. Yet, Japan has managed to bring the home tv market to your phone, using the same ad-supported business model, without a noticeable handset cost and – importantly – no monthly channel subscription fee. I would kindly suggest that, like the cameraphone, which back then was attributed to something like “those Japanese – just love taking photos”, this offering will come to global markets once they can get all relevant parties at the table to agree on whatever technology platform. Certainly, it’s a far better approach than trying to stream content over already increasingly bloated 3G networks everywhere.

And it’s not just the hardware. The success of the iPhone has shown the Japanese mobile industry that it has to quickly catch up in terms of software and usability, too. iPhone users can download about 200,000 apps, or small software programs (games, productivity tools, e-books, etc.), many of which are Apple-exclusive. As a gaming device, the iPhone has become so popular that video game behemoth Nintendo recently said it now regards Apple as its main future rival.

++ Indeed.. I always say that that Apple did a super job to copy the DoCoMo imode platform model, controlling the handset and content platform with billing. Other than a 70/30 rev. share, instead of 90/10 here, it’s a mirror image of the so-accused walled garden. Now, if only it had Flash and removable memory card..

The American company also has an edge in terms of user-friendliness, an area in which Japan’s handset makers haven’t been innovating for years. Whereas the iPhone is designed to be extra-easy to use and comes with just a handful of functions out of the box, most of today’s Japanese cell phones feature a plethora of gratuitous features and clunky user interfaces that have remained practically unchanged in over a decade.

++ Hmmm.. while no doubt the iPhone UI is slick, the extra features – such as TV and Payments – along with full Flash capabilities are clearly valuable and targeted too the domestic market..?!?

Beaten at their own game, Japan’s once proud, but now dethroned cell phone makers are ready to strike back with new software, massive consolidation and aggressive internationalization. Japan’s carriers are slowly starting to embrace Android, an operating system for cell phones which was developed by Google and has two distinct advantages: It is open source (license-free) software, and it’s already being used in millions of handsets worldwide.

++ I’m not sure how the ‘maybe’ 3% market share in Japan equates to “beaten at their own game”.. it should not be so difficult to imagine that the consolidated strength of Japan handset makers could – and indeed will – make significant strides into world markets once they focus their priorities on that adventure!

DoCoMo recently announced that it intends to develop (and export) its own mobile operating system. The goal of the software, which is backed by four of Japan’s top handset makers, is to reduce development costs and boost international competitiveness. Last year, NEC, Casio and Hitachi decided to merge their cell phone operations to become the nation’s second-biggest manufacturer (following Sharp). The new company, dubbed NEC Casio Mobile, has already set its sights outside Japan. Four of the twelve million cell phones it plans to ship in 2012 are expected to go to the U.S. and other foreign markets. Overall, it now seems clear the iPhone sounded a loud wake-up call for Japan’s mobile players to finally leave the coziness of their Galapagos ecosystem.

++ There’s that G-Word again, a definite pattern developing here.. Lets face it, there is a clear dis-connect between marketing and merit, on both sides. I’d be willing to wager that Sharp has sold as many handsets in Japan alone over the last couple of years than than Apple can claim for iphone in the entire APAC region! Yet, we do not hear much about the silent steady and humble approach of domestic players in the international media. Perhaps, like Toyota with their Lexus brand, someday we will.

I will close with this thought: Why is it that when something like this comes from U.S. – powered by the 5th Ave. marketing machine – people call it ‘innovation’ even though the entire model is clearly based on the well-established Japanese approach.. which sadly somehow falls under a far less endearing term, quarantine comes to mind, like Galapagos?

Kindest regards,

Lars