Japan’s mobile telecommunications sector continues to grow
The global mobile internet and smartphone revolution started in Japan in 1999, and Japan’s mobile telecommunications market is the world’s most advanced and most vibrant. Much mobile innovation and inventions, such as camera phones, color screens for mobile phones, mobile apps (i-Appli in Japan), and mobile payments were invented and first to market in Japan.
Globally the first mobile internet started in Japan in February 1999 when NTT-Docomo brought i-Mode to market. NTT-Docomo did not succeed to develop global business based on i-Mode, however, SoftBank took the lead, and is now building a global business built on Japan’s telecommunications sector’s strengths.
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Japan mobile operators grow revenues to over US$ 170 billion in FY2014
While former monopoly operator NTT-Docomo’s business continues to shrink since its peak in 2002, KDDI is growing its predominantly domestic Japanese business slowly but steadily.
SoftBank on the other hand drives rapid growth with domestic Japanese acquisitions (Vodafone-Japan, Japan Telecom, eMobile and Willcom) and overseas acquisitions, which include US operator SPRINT, US mobile phone retailer BrightStar, Finnish game company SuperCell and many others – not to mention SoftBank’s investment in Alibaba.
Operating profits rise to approx. US$ 25 billion in FY2014
Operating profits and net profits are steadily increasing for Japan’s three mobile operators combined.
Former monopoly operator NTT-Docomo’s operating profits peaked in 2002, and have been steadily decreasing since this peak.
Both challengers KDDI and SoftBank on the other hand are growing operating profits steadily: KDDI mainly domestically in Japan, with relatively small global business, while SoftBank has dramatically increased business outside Japan with a series of acquisitions and investments, including US operator Sprint, US mobile phone distributor BrightStar and Finnish game developer SuperCell.
i-Mode’s popularity soon exceeded any expectation: Docomo for some periods had to limit new subscriptions.
With Steve Jobs’ love for Japan, and Apple’s intense supplier relationships with Japan, its not farfetched to see connections between i-Mode and iPhone, in particular the i-Mode ecosystem and Java-based i-Appli’s are forerunners of today’s apps and apps-ecosystems.
At that time there was no Wikipedia, and Docomo had no English-language website at all, so our company Eurotechnology Japan KK’s information was more or less the only English language information openly available about i-Mode. We were bombarded by requests from many major semiconductor firms, telecom operators, investment banks, students and world-famous business schools for our i-Mode report and related business development and strategic work.
Today 5 of the global top-10 top-grossing Apps are Japanese
While Docomo never managed to capture global value from inventing and first introducing the mobile internet, the No. 1 top-grossing company globally, and five of the top-10 globally top-grossing Apps for iOS and Google-Play combined are Japanese (source: App-Annie).
Japan’s app market is the world’s largest in terms of cash revenues
Its also no coincidence that in terms of cash value, Japan’s is the world’s largest app-market for iOS and Google-Play combined, bigger than the US market and the Chinese market in terms of cash value. (source: App-Annie).
App-Annie’s data to our knowledge only cover the iOS and Google-Play app-stores, not the i-Mode and other mobile internet businesses, so Japan’s actual mobile app economy is even larger than App-Annie data show.
i-Mode is still alive and kicking – and a big business for Docomo
i-Mode is still today the mobile internet system for Docomo’s traditional flip-phones which are still an important part of the market, and recently made headlines since sales for traditional flip-phones were rising, while smartphone sales were (temporarly?) dropping.
i-Mode (and EZweb for KDDI, and Yahoo-mobile for SoftBank) will still be important business for some time to come in Japan.
In business the first-comer does not always win the game
Japan’s NTT-Docomo tested two types of wallet phones, manufactured by Panasonic and SONY with 5000 customers between December 2003 and June 2004, and introduced mobile payments and wallet phones on July 10, 2004 – over 10 years ago.
ApplePay therefore could be developed based on over 10 years of experience with mobile payments in Japan. ApplePay is expected to be introduced for the USA market in October 2014, and we can expect Apple to introduce ApplePay to other markets including Japan in due course.
It will be particularly interesting to see how ApplePay and the already established mobile payment and NFC payment ecosystems in Japan will integrate.
SoftBank overtakes Docomo and KDDI in all major KPIs
SoftBank presents annual results for the Financial Year which ended March 31, 2014 today, NTT-Docomo and KDDI presented their results a few days ago. Using projections published by SoftBank and using data found in the Japanese business press over the recent days, we have compared SoftBank, Docomo and KDDI financial results:
SoftBank overtook both Docomo and KDDI in all major KPIs: SoftBank’s annual revenues, operating profits and net after-tax profits are higher than NTT-Docomo’s and KDDIs.
The reason for SoftBank overtaking NTT-Docomo and KDDI are both excellent performance of SoftBank’s core businesses, mobile communications and media in Japan, and also a series of recent investments: SuperCell, GungHo, SPRINT, BrightStar, eMobile/eAccess, Willcom and more which all have been very successful investments sofa, not counting Alibaba, which of course is an amazing success story.
Going forward, of course the key questions now are the turn-round of SPRINT, and whether SoftBank can succeed with the much rumored acquisition of T-Mobile in the USA, and possibly also a major European acquisition.
We have today updated our Report on Japan’s telecommunications landscape, to include latest financial and subscriber data, and latest M&A activities: Japan’s telecommunications market is one of the world’s most active also regarding M&A and restructuring.
SoftBank overtakes Docomo and KDDI in Market cap (data for May 7, 2014):
ensuring that Docomo will remain a leading edge mobile operator for the foreseeable future.
Docomo financial report – announces failure in India:
Still, there are some shadows on Docomo’s amazing success story:
Docomo announced withdrawal from the joint-venture with TATA-Teleservices in India, thus another of Docomo’s ventures to create growth outside Japan has failed. This is the last in a very long string of failures of NTT-Docomo outside Japan, after having lost about US$ 10 billion on investments in KPN-mobile, AT&T-Wireless, and Hutchinson, and the attempt to develop i-Mode mobile internet services in many countries.
NTT-Docomo has now been overtaken by SoftBank on most key performance indicators (KPIs). SoftBank has achieved higher overall subscriber numbers, higher revenues, higher operating income and higher net income than NTT-Docomo.
SoftBank recently acquired eMobile/eAccess, and has been the court-appointed reconstruction partner of Willcom, after Willcom’s financial failure. Therefore eMobile/eAccess and Willcom are also part of the SoftBank group, and SoftBank plans to merge both. In addition, Wireless City Planning (WCP) are also part of the SoftBank group. You will find these transactions, the logic and reasoning behind them explained in great detail in our reports on SoftBank and on eAccess/eMobile.
List of mobile operators on Japan’s market today:
We have the following mobile operators currently in Japan – subscription market shares are shown in brackets (subscriber numbers for Docomo, KDDI and Softbank are as of February 28, 2014, while for other operators the latest officially reported numbers are used):
eMobile/eAccess (note: eMobile, eAccess and Willcom are now combined into Ymobile)
Willcom (now merged into Ymobile)
Wireless City Planning (WCP)
fixed line and other businesses
several virtual mobile operators, e.g. Japan Communications Inc. who lease communications capacity e.g. from Docomo and retail this leased capacity to their own subscribers
The SoftBank group including eAccess/eMobile, Willcom and Wireless City Planning has actually more than 30% of Japan’s mobile subscriber market – not 25% as some articles write.
For detailed market data, statistics and analysis of Japan’s highly competitive mobile communications market, read our market report on Japan’s telecom markets, which includes analysis and data for Japan’s wireless, fixed, ADSL and FTTH markets, and detailed financial data, analysis, and comparison of the financial performance of NTT, NTT Docomo, SoftBank and KDDI.
We are also preparing reports on Japan’s cloud and data center markets – contact us for details.
Learn more about SoftBank, Masayoshi Son, and his 30/300 year vision for SoftBank
On Thursday January 16th, 2014, NTT Docomo announced the postponement of mobile phone handsets based on the TIZEN operating system. This is actually the second time that NTT Docomo has postponed the planned introduction of TIZEN handsets, so it might become doubtful whether NTT Docomo will ever introduce TIZEN handsets.
In the announcement NTT Docomo essentially said that with the current market situation in Japan, it makes no commercial sense for Docomo to introduce a third smartphone operating system to the market.
The French journal Les Echos interviewed me about Docomo’s repeated postponement of TIZEN OS handsets. Here some notes I wrote up to prepare for the interview:
Both for handset makers like HTC or Samsung and it would be a dream to become independent of OS owners/controllers like Microsoft or Google, and for mobile operators like Orange or Docomo, it would be a dream to have an OS they can control, and where they can introduce their own services like Docomo’s “iconcier” personal digital assistant, which is to some extent competing with Apple’s SIRI and with various Google services. Its a dream but realization is a different story. Its not enough to make and further develop and maintain the full OS stack including UI, create a development environment and SDKs as easy to use and competitive with Apple’s and Google’s, app stores, build a developer community who create lots of apps. Its also necessary to make a critical mass of attractive devices, gain a critical mass of market share, create global scale, and most importantly win over all the most important Apps like Facebook, LINE, etc.
With the dramatically increasing complexity and sheer size of software, it becomes harder to bring mobile services to market without global scaleability, or at least a major part of the world, which usually will need to include China. Docomo does not have this global scale, so it will become harder and harder for Docomo to introduce own software services, such as iMode or iConcier.
Docomo has continuously lost market share and recently even net subscribers, and in December for the first time in recent memory succeeded to gain top position in subscriber gains, surely because of the iPhone. In addition, rumors are that Apple demands very high minimum sales shares of operator partners. So Docomo is under double pressure:
to satisfy contract conditions with Apple
to maintain subscriber gains
in addition, Docomo still has a substantial part of “iMode-keitai”, also called “galake” (= “Galapagos keitai”). So Docomo already has a large variety of OS and handset styles, and has recently reduced the number of different handset it supports, so going to Tizen would go against this trend.
Its not the end of Tizen. Tizen can in addition to smartphones also go into embedded applications such as cars, elevators, washing mashines etc.
Ericsson held the Mobile Business Innovation Forum in the Roppongi Hills Tower in Tokyo on October 31 and November 1, 2013 delivering a great overview of the push and pull of the mobile communications industry: technology push, M2M and user pull, as well as how the mobile operators between technology and users can best make customers happy and at the same time monetize their investments, while “Over The Top” (OTT) new comers (Google, YouTube, Amazon.com, Facebook, Twitter and others) seek to disrupt the good old telecommunications world.
Here some key take-aways, read more below:
About 50% of global smartphone, mobile phone and mobile broadband subscriptions are in Asia-Pacific, making Asia-Pacific the most important region in the world, and Japan one of the most important LTE markets.
Switch from voice to data is a differentiator: forerunner telcos see rapid growth (10-12% CAGR) for both revenues and EBITDA over the period 2008-2013, while average telcos see stagnation. The key for telcos is to be a forerunner, rather than an average stagnating telco.
Many products such as XBOX or Apple’s SIRI are linked via networks to a data center. Networks and data centers are disruptive innovation for games and many other sectors. Maybe cars as well.
Open source is coming to software defined networks (SDN), the OpenDayLight community develops software for software defined networks.
Software defined networks create virtualized networks, SDN support “network slices” for different applications. API’s open SDNs to users.
Manufacturers and other industries have rationalized a long time ago, telcos have not yet rationalized, creating big opportunities.
LTE Markets – 5 out of 10 top LTE markets globally are in Asia-Pacific, and the top 3 are in Asia-Pacific (however this table shows the percentage penetration, does not reflect market size. In terms of market size, Japan is doubtlessly No.1:
Mobile communications will dwarf the PC-world. By 2018 we will expect to have:
PCS and tablets: 260 million in APAC (31%) vs 850 million globally
smartphone subscriptions: 2.2 billion in APAC (49%) vs 4.5 billion globally
mobile broadband subscriptions: 3.5 billion in APAC (50%) vs 7 billion globally
mobile phone subscriptions: 4.5 billion in APAC (50%) vs 9 billion globally
Katsuya Watanabe (Charley K Watanabe): ICT Growth Strategy for Japan
Deputy Director-General, Information & Communications Bureau, Ministry of Internal Affairs and Communications (MIC), Japan
Government of Japan – IT Strategic Headquarters:
The new internet world had a relatively slow start in Japan. In January 2001 the e-Japan Strategy was formed with the target for Japan to become the world’s most advanced IT nation by 2005, and the IT Strategic Headquarters where formed. In January 2006 the New IT Reform Strategy followed, and in July 2009, the i-Japan Strategy 2015.
The Ministry of Internal Affairs and Communications (MIC) formulated the u-Japan Policy in December 2004, followed by the x-ICT Vision in July 2008.
With the change of Government in September 2009, the New Strategy in Information and Communications Technology formulated.
With the advent of Prime Minister Abe’s Government in December 2012, in June 2013, the new IT Strategy was formulated: “The world’s most advanced IT nation creation”, by the Council on ICT Strategy and Policy for Growth, which was set up in February 2013.
The Ministry focuses on the following trends: Big Data, Sensor Networks, Cloud Computing, and smart phones.
Mission: to be the most active country in the world.
Creating new value-added industries
Solving social problems
Improving and strengthening common ICT infrastructure
Issues: economic growth, employment, information transmission capacity, development of cities, super-aging society, resource problems, open innovation, cybersecurity, utilization of personal data
Prioritized projects are:
Creating new value-added industries:
broadcast and contents
Solving social problems:
Medical, nursing, health care
Mr Watanabe introduced several industry-academia-government collaboration projects addressing these priority issues. The economic effects by 2020 of creating new industries stimulated by these government programs are estimated as follows:
super-aging society sector: 23 trillion yen (US$ 230 billion)
Managing Director of Smart-Life Business Division, NTT-DOCOMO
NTT-DOCOMO aims to be the customer’s partner for smart-life.
In the transition from traditional feature phones to smartphones including tablets, NTT-DOCOMO sees a new potential market emerging: video, shopping, books, services and contents are booming.
The center of the mobile eco-system (and value creation) is shifting to higher layers.
NTT-DOCOMO seeks effective utilization of its business assets:
Postpaid subscriptions (99.7% postpaid)
VAS sales at mobile shops: DOCOMO has 2,400 carrier DOCOMO branded shops
Handset control: DOCOMO sells handsets with value added services (VAS)
DOCOMO seeks to create new markets in 8 business areas:
The basic concept is to bring smart life into reality, and to become a smart life partner. To improve customer satisfaction and to improve corporate value.
DOCOMO is in the process to transition from the traditional i-Mode and i-Menu services on feature phones, to d-market and d-menu for the multi-OS environment (with Google/Android, Tizen, iOS and other OS).
Revenues from new business of DOCOMO increased from US$ 4 billion (FY2011), to US$ 6 billion (FY2012) and is expected to increase to US$ 11 billion by FY2015.
Masashi Satomura: “ITS, Cooperative system”
Chief Engineer Dept 3, Honda R&D
About 300 parties participate in Japan’s ITS programs, lead by the ITS Promotion in the Cabinet office of Japan.
Major cooperative projects are:
ASV-5 (V2V, V2P) by the Ministry for Land and Infrastructure and Transport MLIT
Joint research (V21) by MLIT and NILIM
DSSS/Green wave (V21) by the Nation Police Agency
Key issues are:
sustainable business model
Key targets are to achieve fatality rates below 2500 by 2018, and to reduce traffic congestions to one-half by 2020 compared to 2010.
Honda develops autonomous driving with the aim to realize “the joy of mobility” with safety and freedom.
The vision: As Japan aiming for the safest transportation in the world, we hope to deploy cooperation system in collaboration with government and car OEMs, in four phases.
Phase 1: basic services
Phase 2: advanced services
Phase 3: integrated services
Phase 4: autonomous services
A perfect storm:
Network coverage and quality is good enough
Business models make data affordable
App-centric services become mainstream
Smartphone penetration is reaching critical mass
however, for mobile operators there is a HUGE difference between the frontrunner’s revenue and EBITDA growth compared with stagnant revenue/EBITDA for average operators. Key for mobile operators is to be strongly growing frontrunner – not a stagnating average operator.
To move from an average no-growth operator to a fast-growing frontrunner, a mindshift is needed from:
problem focus to opportunity focus
maximizing old revenues to innovating new revenues
connectivity as a commodity (“dumb pipe”) to connectivity as differentiator
from tech silos to tech synergies
Ericsson uses six growth codes:
“Streetwise metrics”, experience centric KPIs
“Show casing”: quality led marketing
Redefine subscription: “unboxing”
Open-ended innovation: “ecosystematic
Visionary collaboration: “co-partnering”
Visionary investing: “gap minding”
Yung-Ha Ji: How to migrate to future ICT network
Head of Network Strategy Department, KT Corporation
In the IDI/ICT Global Development index ranking, S-Korea ranks 1st globally for broadband, while the Scandinavian countries rank 2nd, 3rd, 4th and 5th, and Japan ranks 8th, followed by UK on place 9.
kt will cover 99% of S-Korea’s population with LTE network based on 20MHz Bandwidth in the 1.8GHz band. With the BenchBee speed test, download speeds of 44 Mbps are achieved with a Category 4 LTE-A phone.
kt saw explosive growth of data traffic: 350 times increase over the 4 years from January 2009 to September 2013.
Monthly data usage is 2.2Gb for LTE and 1.2Gb for 3G phones. Total data traffic is about 20,000 TeraBit/Month in September 2013.
kt has the world-first LTE network using virtualization cloud technology.
kt introduced a series of services including Web-enabled IPTV, Giga-Internet FTTH premium services, olleh TV mobile, LTE broadcast, “Total Advertising Open Community” (TAOC) – using targeting of advertisements to differentiate from OTT operators.
Example of an innovative service: if you click an advertisement and watch an ad, you are rewarded with increased transmission speed.
Akira Yamaguchi: Mobile payment systems in Japan
Exec Officer Retail finance and credit cards, Orient Corporation
Jacob Navok: Games over the network
Director of Business Development, Square-Enix
Games are the ultimate application! Worldwide game industry revenues are US$77.4 billion in 2013, adding all segments from retail hardware to software and services.
Hardware used to be the driver in the past, but today the network drives everything, and networks bring disruption to game design, business models (“free-to-play” is a marketing model – not a business model). Business models include: micro transactions, subscriptions, advertisements and digital pricing.
Marketing disruption include: “free-to-play”, cross-promotional networks, and app-stores.
Video had a dramatic impact on networks, but games have not.
Interactive media bring the next revolution: SONY acquired Gaikai (US$ 400 million), and Microsoft announced Xbox Cloud services (US$ 700 million).
Server side rendering and developer innovation will create game demand on many devices.
Speed is key!
Reporter and Producer, CLICK, BBC
Dan Simmons showed how smart phones are a second screen accompanying movies, PCs and TV. 60-80% of Americans use a second screen, and 46% use a smart phone.
Eyeballs move to iPads… the question is: who owns the second screen!
CBS made US$ 10 million off advertising, but advertising ads during superball on the internet – not on TV!
TV is about raising emotions, and feedback at the moment, immediate feedback is incredibly valuable. A 2nd screen can give a 360 degrees view.
Dan mentioned the APP-movie, where visitors to the movie theatre downloaded an App to their smartphone and received message to their App during the movie. The messages need to be frame-accurate, and today’s networks are not good enough to ensure frame-accuracy. People with smartphones and using the App knew who the murderer was at 65 minutes into the movie, while visitors without smartphone and App had to wait until 80 minutes into the movie before they know who the murderer was. Initially it was thought that this could be a problem, but it turned out to be a positive part of the enjoyment for the audience. A further attraction was, that visitors could keep the App on their smartphone, and the movie owner could reach viewers long after the performance was over, and they had long left the movie theatre, keep the contact, and potentially create follow-on business.
Internet traffic is shifting to mobile: 13% of global internet traffic is on mobile.
Innovation and technology evolution
Ulf Ewaldsson: “Transforming networks
We see cities as organisms.
simplicity and automation
continued traffic growth
from nodes to systems
blurring of IT and telecom
Concept of “Network slices”:
Network performance needs depend on industry, beyond just smartphones.
A matrix of industry needs covering the following industries: cars, processing, utilities, transport, media, and NSPS, healthcare etc.
Which have different needs for: throughput, latency, QoS, volumes, coverage, capacity, security and location.
A common network platform includes dynamic and secure “network slices” with different specifications for different industries and applications.
Three new products:
Ericsson Radio Dot System
SDN on a chip: SNP 4000
Cloud on a blade: Ericsson Cloud System
Technology in-depth sessions
Network Slices: Service Provider (SP) Software Defined Networks (SDN), Network Functions Virtualization (NFV) and Cloud
Head of Technology Strategies, Ericsson
Service Provider based Software Defined Networks (SP SDN) are on the way to deployment. The path to deployment includes: technology, business model development and operations. Currently we are still midway in the technology development phase, business model development is in the early phase, and we are just before operations and deployment.
Network functions are virtualized in the DC/cloud infrastructure. Functional layers of the network are virtualized, and networks become open to developers.
Networks are elastic and we have “network slices” for different applications.
Ericsson is leading participant/founder in the open source “OpenDaylight” LINUX community, the first release of the Hydrogen Code was on September 13, 2013. OpenDayLight is an open source community developing software-defined networking (SDN).
Connecting the dots in the Networked Society
Head of Strategy & Portfolio, BU Networks, Ericsson
Business cases and clear rationale why technology is introduced is necessary.
We need to redefine how network performance is defined: “app coverage” defines network performance not in terms of technical data alone, but in terms of usability of each app. App coverage for video will be different than for voice, or low intensity data applications.
70% of usage is indoors, therefore we need indoor coverage, and Ericsson does not believe in Femto-technology, and introduces the Radio Dot System. Launch will be in 2H 2014 for 3G and 4G and for WiFi later. Up to 4 channels per unit.
Component based architecture:
AIR = antenna integrated unit
SSR = Edge router
Monetizing the network assets
Head of Strategy and Business Intelligence, BU Support Solutions, Ericsson
Business Transformation – Ericsson Consulting and System Integration (SI)
Head of SI Core, IP & Media, Ericsson
Manufacturing and other industries have rationalized decades ago. Telcos are not yet rationalized.
OSS/BSS need to be good and fast to make money.
A revolution will happen in the broadcast space when processes are being rationalized.
In Australia, Telstra spent US$ 1.1 billion for a billing system.
As another example, a Tier-1 European telco operator had 62 different billing systems.
time to market,
from network centric to customer centric,
Next generation networks, mobile broadband and cloud computing
Roles in new business models and eco-systems
Ericsson Global Services division grew from SEK 29 billion and 8000 people in 2003 to SEK 97 billion and 60,000 people in 2012.
Mobile subscription data released last week show, that the SoftBank group continues to gain market share while incumbent NTT-docomo continues to lose market share – an upward trend for SoftBank, and a downward trend for NTT-docomo essentially unbroken since SoftBank acquired Vodafone-Japan and succeeded with the turn-round.
SoftBank’s market cap has also steadily increased recently and is now close to NTT-docomo’s, exceeding it on some days:
Bringing eMobile and PHS operator Willcom under its group umbrella, and by creating the new operator Wireless City Planning (WCP), Softbank group subscription numbers now exceed 40 million, and have overtaken KDDI
PHS operator Willcom joins the SoftBank group
PHS operator Willcom registered for bankruptcy administration essentially because of the high investments in upgrading the legacy PHS network infrastructure, and is currently in corporate reconstruction with SoftBank as the reconstruction sponsor.
Wireless City Planning (WCP) is a wireless operator owned partially by Advantage Partners and SoftBank and other investors, and representing the next generation network Willcom hoped – but could not afford – to develop.
While negotiating the SPRINT acquisition, SoftBank tricks out KDDI to take control of eMobile
While Masayoshi Son was secretly negotiating his offer for SPRINT, he discovered that KDDI was in negotiations to acquire new entrant eMobile. While continuing the SPRINT negotiations, he was a faster decision maker than KDDI, and could win the eMobile acquisition right under the eyes of KDDI.
Since a few weeks ago, iPhones on SoftBank‘s network automatically log into both SoftBank’s and eMobile‘s LTE radio networks, greatly enhancing data transmission rates and coverage.
SoftBank seeks to win, where Docomo failed – taking Japan’s telecoms know-how global
Japan telecom sector financial results: very very healthy
With SoftBank and DISH battling for US mobile operator SPRINT, the eyes are on Japan’s very healthy mobile phone sector, which a few days ago announced financial results for FY 2012. Japan’s mobile operators combined achieve about US$ 120 billion in revenues and income margins are among the highest globally.
The size, success and extremely advanced state of Japan’s mobile phone sector, SoftBank’s excellence, and Masayoshi Son’s midas touch give SoftBank the strength to go for an acquisition of SPRINT – and to aim for the large scale globalization which DoCoMo tried, but could not achieve about 10 years ago.
Japan’s mobile phone operators are protected by government licenses, but within this scope, there is passionate competition and there are many M&A actions. With high investments in infrastructure, Japan’s mobile phone sector is among the most advanced in the world. Japan initiated the global mobile internet revolution.
Combined, Japan’s mobile operators achieve about US$ 120 billion in sales annually
Combined, Japan’s mobile operators achieve about US$ 120 billion in sales annually, and the size of Japan’s mobile industry has been growing steadily ever since mobile phones started in Japan.
The Figure above clearly shows the growth of SoftBank from a small venture to one of the world’s largest telecom operators, and the acquisition and turn-round of Vodafone-Japan.
SoftBank is on track to achieve the target of YEN 1 Trillion operating income/year by FY 2016
FY2012 financial results announced a few days ago show that SoftBank has overtaken KDDI in terms of operating profits, is on track to overtake DoCoMo and to achieve its target of YEN 1 Trillion (US$ 10 Billion) in operating profits by 2016 – this while investing heavily in infrastructure in Japan, and paying down debt remaining from the acquisition of Vodafone-Japan.
Japan Galapagos effect: “Why do Japanese companies make so beautiful mobile phones with fantastic functions, and have almost no global market share?”
I asked this question back in 2003 to NTT-DoCoMo’s CEO Dr. Tachikawa (see my article “Leadership questions of the week” in Wallstreet Journal of June 12, 2006, page 31), and offered several proposals to Dr. Tachikawa, of which he accepted one.
A related question is: “why can Samsung, LG and Apple beat Japan’s initially far more advanced mobile phone makers, and why have Japan’s phone makers taken no effective action to build global business in order to avoid extinction?”
Now six years after my initial presentation to DoCoMo’s CEO, I have been invited as the only non-Japanese to work on Japan’s “Post-Galapagos Committee”. For most of this year our small group of industry CEOs, academics, government officials and other leaders have been working on understanding the reasons for Japan’s “Galapagos effect” and how to overcome it.
The “Galapagos effect” has not been created by a single factor. Instead a collection of choices by the management teams of Japan’s electrical conglomerates have prevented leverage of their domestic success stories into global success stories. These choices can be overcome. In our “Post-Galapagos committee” we have worked all-year on how to overcome these choices.
Unfortunately the “Galapagos effect” is only one symptom of the crisis of Japan’s electrical giants: most have shown little or no growth in sales over the last 10 years, while at the same time margins tend to be small or negative. Over the same period, General Electric has increased sales by a factor of about three, while at the same time earning healthy margins.
Overcoming this crisis will create many opportunities. If at least some of the conclusions of our “Post Galapagos Committee” can be realized, then our committee’s hard and totally voluntary work during most of this year and many late nights will not be wasted.
Japan introduced the mobile internet with i-Mode in 1999, while i-Phone and friends are now getting the rest of the world hooked onto the mobile internet.
Games used to be played in game parlors, and some of Japan’s game giants were originally and still are game parlor machine makers – a round of Dance-Dance-Revolution anyone? Next came consoles, cassettes and handhelds, taking the growth momentum out of game parlors, and establishing a pattern of growth by generations (today we are in the 7th Generation). Nintendo broke the cozy generation pattern where pixels and MHz increased in predictable ways from Generation to Generation without much other fundamental change. Nintendo took games sideways into the blue oceans of motion sensors and to the silver generation, women and other previously non-gaming majorities, while Xbox and SONY kept slugging out the generation game.
We have been analyzing the Tokyo Game Show for many years – at the 2004 Tokyo Game Show, when SONY gave previews of the PSP – actually, I was personally much more interested in DoCoMo’s huge exhibition village setting a stage for about 15 mobile phone gaming partners.
Since i-Mode started mobile phone games in 1999, online and mobile phone games combined have essentially outgrown the video game software sector in 2009, and are certain to grow much more in coming years – the iPhone is not slowing mobile phone based gaming down…. Those who only count video game cassettes and consoles, certainly don’t see the rapid mobile and online growth – and complain about shrinking markets.
Is Nintendo now being blind-sided by mobile phones and app-stores?
I don’t think so: not blind-sided – but strongly affected. Actually, Nintendo’s CEO and games developer Shigeru Miyamoto tell us they want to make their DSi’s central to everybody’s lives – with built in cameras, payments, app-stores, navigation. Essentially everyone on planet earth has a mobile phone, or will soon have one, or two. Many of todays phones in people’s hands can’t yet play games nicely – but DoCoMo’s phones do – and iPhones do also. Thats why we already see a lot of mobile gaming in Japan. Imagine the day when most mobile phones on planet earth can play games nicely? Will that day come?
Will people upgrade to a DSi? or to a PSP? or to a better mobile phone? Apple and DoCoMo are both proof that people do pay for downloading games from i-Mode or i-Tunes app-stores – and that’s exactly the growth we see in the Figure – you don’t see that growth if you count only the number of game cassettes and consoles sold. In any case we may not see an 8th generation console – people might upgrade their phones instead – or use Skype on their PSP.
(2) for mobile operators DoCoMo, KDDI and SoftBank margins are 10%-20% and increasing despite the crisis! Could mobile phone usage be crisis resistant?
(3) TV media groups had healthy margins in the 10%-20% range back around 2001- however these margins have been slowly melting away, and TV group margins are heading to cross the zero line into the red zone by 2010-2011. Watch out for a TV media crisis. Read more below.
Consumer electronics sector operating margins:
Nintendo bucks the trend: while Japan’s electronics firms’ margins are dropping into the red, and have never been much higher than 5% during the last 10 years, Nintendo‘s operating margins are above 30% and rising despite the crisis.
Mobile phone sector margins are 10% – 20% and rising despite the crisis.
Mobile phones seem to be resistant to the current crisis. DoCoMo‘s, KDDI‘s and Softbank‘s margins are healthy and improving despite the crisis.
(Find full data, fully labeled graphics and analysis in our JCOMM Report)
Margins of TV media groups have been melting away since their peak in 2001.
Back in 2001 Japan’s TV media groups used to enjoy healthy margins of up to 20%. Over the last 8 years these healthy margins have molten away, and Japan’s large TV media groups are likely to all simultaneously go into the red from 2010 onwards, unless dramatic action is taken. Media groups will need to grow profitable new business, e.g. mobile-TV, and other cross-media growth areas.
Could it be that recent anti-takeover measures have made the large TV media groups complacent?
(Find full data, fully labeled graphics and analysis in our J-MEDIA Report)
A few days ago the New Context Conference was held here in Tokyo, mainly about social network systems (SNS), top executives including CEO of LinkedIn, Facebook, and some exciting new photo, video conference and e-learning companies discussed market entry to Japan.
Japan’s two markets
Takeshi Natsuno, one of the three key DoCoMo managers who together started i-Mode and arguably started the world’s mobile internet revolution launching i-Mode back in February 1999 gave the keynote discussion. Natsuno shared his very interesting observation, that Japan consists of two markets:
new Japan = people below 50 years age and
old Japan = above 50 years age
…and having managed i-Mode (today: 48 million paying subscribers) for almost 10 years Natsuno-san is certainly one of the best to know. (Natsuno-san’s main job today is to make Japan’s very cute equivalent of YouTube profitable – read more about this in a future issue of our newsletters).
New Japan vs Old Japan in my talk at Stanford University
Actually, you’ll find a similar observation about “old Japan and new Japan” in my presentation entitled “New opportunities versus old mistakes: foreign companies in Japan’s high-tech markets” which I gave some years ago at Stanford University to faculty, students, alumni and silicon valley managers.- (You can view and download the slides of the presentation below.)
Natsuno-san talking at the New Context conference in Tokyo about old Japan, new Japan, the future of the mobile internet, and the mobile industry. Natsuno-san is one of the three inventors of i-Mode.
Download Gerhard Fasol’s lecture slides presentation at Stanford University
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Second generation (2G) phones silently bowed out of Japan’s market 8 months ago: the last 2G phones in Japan were shipped in December 2007. KDDI/AU switched off their 2G radio network in March this year, and both DoCoMo and SoftBank announced that they will switch off their slow and expensive 2G networks in the very near future (about 2009). Almost all other countries in the world either depend on legacy 2G networks only, or keep legacy 2G going while building out third generation in parallel. (Today’s 3G HSDPA phones transmit data up to 250 times faster than 2G phones did on a good day).
The last 2nd generation (2G) phones shipped in Japan in December 2007. Almost all other countries keep legacy 2G networks running – Japan just switches them off. More in our JCOMM report.