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New balance of power in Japan as users convert to smartphones

Japanese users are finally being converted to smartphones, and with the change are coming new power players, among operators and device makers.

Consumers in the country have long shunned open software platforms because their carriers’ closed web environments offered handsets with such advanced functionality. Now they are starting to favor phones with huge app stores, and that is driving growth for the carriers most focused on the mobile web, such as Softbank. It also spells further problems for the homegrown vendors such as Sharp and Toshiba.

Admittedly, smartphones remain a small piece of the total pie, selling about 2.35m units in the year to March 31. This was about 6% of the complete handset space. The majority of sales are of phones with very high end specifications, by western standards, but with operator controlled software environments. These often support sophisticated content and apps, but strictly within the walled garden.

But smartphones were the only category showing growth last year in the hugely pressurized Japanese market, where a sharp cut in subsidies in 2007, plus the credit crunch of 2009, have pushed sales steadily downwards and lengthened renewal cycles. This provides an opportunity for firms that have found it hard to compete in Japan, whose operators have highly specific requirements and are used to dictating to their mainly local vendors. Nokia pulled out of the country (except for its luxury Vertu brand) and others have hardly tried at all. But with even the mighty DoCoMo embracing smartphones and non-Japanese vendors with off-the-shelf designs, the game could change.

Apple has been the main vendor to take advantage of the slow shift towards the smartphone, and Sony Ericsson and HTC are also establishing footholds. According to a report in The Wall Street Journal, the iPhone - which is exclusively sold by Softbank, the country’s third cellco - accounted for 72% of smartphone shipments in the year to March 31 (figures from MM Research of Tokyo). In the first quarter of 2010, iPhone sales were up threefold year-on-year, while the handset market as a whole stagnated.

The other main smartphone to have caught the Japanese imagination is the Sony Ericsson Premier3, running Symbian, which is offered by KDDI. And DoCoMo’s entry to the open smartphone game will also be headlined by a Sony Ericsson handset, though an Android one, the Xperia X10. Of course, the Sony side of that vendor gives it an advantage in Japan, though the venture has not generally been keen on creating operator specific phones like Sharp, Toshiba, NEC or Panasonic. And a flood of big name devices is set to follow through the year, many from non-Japanese suppliers - for instance, Softbank is also launching the HTC Desire, along with the iPad, from this month.

Apple has certainly grasped the nettle first. The progress of the iPhone epitomizes the recent shift in Japan. When it first launched at Softbank in 2008, sales were slow and consumers complained that it was quite basic compared to homegrown offerings, which usually feature very high end cameras and media functionality, and often come with digital TV and mobile payments too. But the joys of the unwalled web experience and app store, and the Apple user experience, are converting the Japanese (even though, of course, the iPhone comes with its own walled gardens), and now even DoCoMo wants similar devices (and was reportedly angry at Apple’s decision to make both the iPhone 3GS and iPad exclusive to Softbank).

“The iPhone is not as advanced in terms of hardware,” Takeshi Natsuno, a former top executive at DoCoMo, told the WSJ. “But the user interface is something to behold.” At the launch of the Xperia X10, the cellco’s president Ryuji Yamada said: “I feel that the era of the smartphone has finally come to Japan. Other carriers will be releasing smartphones as well.”

While Android and iPhone are hitting the headlines, Symbian probably has the biggest opportunity, should supporters like Sony Ericsson and several Japanese vendors seize it (Nokia could even re-enter, if the smartphone market continues its surge). Symbian is actually the dominant operating system in Japanese handsets, but these do not count as smartphones because the OS is walled in by the carrier frameworks, and so the Symbian platform is not open to third party developers. With cellcos embracing apps platforms - and the new, open source Symbian^3 on the horizon - vendors could take advantage of its major installed base to set it free and grasp significant market share.

DoCoMo, in particular, has worked closely with Symbian and its own user interface system for the OS, MOAP, has been put into the open source process for the new releases. About two-thirds of DoCoMo handsets runs Symbian. Not that the huge operator will let go willingly of its control of the user experience. In April, it announced it was working on an advanced multimedia overlay for Symbian and Linux, which it hopes will gain global adoption by many vendors - although its partners in the project are its old friends Fujitsu, NEC, Panasonic Mobile and Sharp, plus chipmaker Renesas. The main aim is to improve speed and functionality for high quality video and 3D graphics.

Such projects will keep the Japanese handset makers alive, but they have already been through a wave of consolidation and their plight will worsen if their home market, already suffering limited growth, is assaulted by outsiders. In ‘real’ smartphones, they have little competitive advantage, though several, such as Sharp, are embracing Android in order to create devices that are more appealing to the wider world. Some are also leveraging their long experience in advanced media handsets, as Toshiba did when it launched the first gigahertz smartphone, the video optimized TG01 running Windows Mobile. But such devices have not created the impact that their specifications merit because of the small brand awareness and market share the Japanese suppliers have beyond their homeland. Sharp is the most successful internationally, though largely by trading on its experience in submerging its own brand under that of a partner - it makes the new Microsoft Kin phones, for instance.

It is not just the vendor landscape that will change along with Japanese consumer habits. The operators’ balance of power is shifting too. The new focus on open mobile data as a revenue generator was seen in the rapid growth of the newest mobile challenger, eMobile, which started as an MVNO but is also planning its own network, and focuses almost entirely on data plans, initially based on dongles and netbooks. Then came UQ Communications, a joint venture between KDDI, Intel and others with a WiMAX network. This has pioneered the fully open model also seen at Clearwire, leveraging a high capacity IP infrastructure to support generous mobile data tariffs, new devices from media players to PCs, and a wide range of MVNOs.

The big three cellcos - DoCoMo, KDDI and Softbank - will also be early adopters of 4G technologies to support these new data-driven revenue streams. DoCoMo will start to roll out LTE late this year; KDDI has UQ and will also expand coverage and capacity with an EV-DO Rev B upgrade and an LTE overlay; Softbank recently acquired control of the national 2.5GHz spectrum held by bankrupt Willcom and could run WiMAX, TD-LTE or XGP technology in that, to add to its own LTE strategy.

Of the big three, Softbank has been the most successful in adapting its existing 3G network to the new norms, because of its iPhone deal and now its launch of Desire, which is proving a major seller in other markets, and whose hardware specs come closer to those expected by a Japanese user. This week, Softbank made a bit of mobile history by becoming the first major conventional cellco to report higher revenues from mobile data than voice. In its first quarter, 55% of revenue came from data, and a new study by Chetan Sharma Consulting forecasts that DoCoMo will also break the 50:50 barrier this year.

This shows the huge appetite of Japanese users for mobile data, whether it lives within a walled garden or not. The tier one US carriers, by contrast, are not expected to see data overtake voice until the turn of 2013, says Chetan Sharma. Japanese consumers, especially younger ones, are abandoning mobile voice in favor of other methods of communication, like social networking, more rapidly than their counterparts elsewhere. This creates its own problem - the decline of voice ARPU and revenues, even though voice is cheaper to support and so carriers higher margin than unfettered data. Softbank is addressing this dilemma - which its equivalents round the world share - more successfully than DoCoMo, so far at least, by leveraging the increased data usage the iPhone can drive. It added 1.24m net subscribers in Q1, and accounted for more than three-quarters of true smartphone shipments in that period. This helped it increase overall ARPU despite the erosion of voice, and it became regained profitability in Q1 after a year of losses associated with older operations. By contrast, DoCoMo lost its long standing top spot as the leading cellco in terms of mobile data revenues. It was pushed into a narrow second in Q1 by Verizon Wireless (in a comparison of one-country operators). AT&T and China Mobile could also overtake this year, and of course, multinationals like Vodafone also report huge data totals.

Another sign that open smartphones are the new wave for Japan was seen in the Chetan Sharma survey, which predicts that revenue from off-deck apps will overtake that from on-deck carrier apps this year - a tipping point that the US will not reach until 2011.

Источник: 4G Trends

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