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Switch from subsidy business model to installment contract model causes Japan's mobile phone handset market to collapse (temporarily)

Japan’s mobile phone disaster

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g_fasol
in

Japan’s mobile phone sector is admired the world over, and Japanese mobile phones are years ahead the rest of the world regarding functionality. However, Japan’s mobile phone industry may be heading for a disaster, similar to the European 3G spectrum license fee disaster which almost bankrupted Europe’s mobile phone operators – unless changes are made quickly. Statistics released today show that mobile phone deliveries in October dropped down to 1/4 of steady sales maintained over the last 8 years as the figure below shows.

Switch from subsidy business model to installment contract model causes Japan's mobile phone handset market to collapse (temporarily)
Switch from subsidy business model to installment contract model causes Japan’s mobile phone handset market to collapse (temporarily)

What is the reason for the disastrous drop in mobile phone deliveries?

Until recently Japan’s mobile phone operators subsidized mobile phone handsets. Consumers would typically pay YEN 10,000 (about US$ 100) for handsets with built-in digital TV, GPS, movie camera with auto-focus, electronic money and tickets, QR-code reader, and much more, which cost the operators up to YEN 100,000 (US$ 1000) per handset.

Encouraged by Japan’s Government, mobile operators recently switched from the subsidy model to an installment plan, while discounting the monthly usage fees.

While previously consumers put YEN 10,000 (US$ 100) or in some cases YEN 1 (1 cent) on the counter to receive one of the world’s most advanced handsets, since a few weeks ago consumers are faced with a 2 year installment purchase contract where they pay the full YEN 60,000 (US$ 600) or YEN 80,000 (US$ 800) for a handset in installments of around YEN 3000 (US$ 30) each month for two years. Not surprisingly handset sales dropped into the cellar as shown above (the figure above actually shows the deliveries from manufacturers to mobile operators, not the actual retail sales).

What are the likely consequences?

  1. continuing consolidation of Japan’s mobile phone handset makers
  2. surviving handset makers will push into international markets
  3. operators will push harder for cheaper handsets
  4. operators might return to a modified subsidy model
  5. NOKIA might get another chance in Japan

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Comments

3 responses to “Japan’s mobile phone disaster”

  1. Nik Frengle Avatar
    Nik Frengle

    Not such a disaster for mobile phone companies. We wanted this to happen some years ago, as the rate of handset renewal was unsustainable: The cost of subsidising handsets was our biggest cost, though before MNP it seemed sort of worth it, because most of our customers weren’t going anywhere. This is why Apple’s i-phone is so attractive in Europe and the U.S.: It doesn’t need subsidising because it is so good that people will pay full price for it.
    Actually, there is another lesson there: The technology contained in Japanese phones is, as you say, way ahead of that in European or American handsets. However, most of the interfaces are poor, the technology hard to get to, the software that makes use of the technology not ready for prime time, and in general are not great phones. That is why they have not sold in Europe and the U.S. The fact that most of the advanced technologies, like One-seg, mobile Felica, QR Code, and so on depend on an infrastructure that is not present except for Japan hasn’t helped. Nokia phones, which I have been using for the last 3 years since I left Japan, also aren’t great as far as use of technology, but absent all the technology that Japanese phones enjoy in Japan, are overall better phones, and sell many more outside of Japan.
    The lesson for phone makers is to make something that people are willing to pay full price for. If it is good enough, people will buy it. If it isn’t, and most aren’t, they will fail. That is a good thing. It is the dicipline of markets. As U.S. automakers are soon to find. This is the very good contribution of Apple to this market.

    Reply
  2. Anonymous Avatar
    Anonymous

    “…make something that people are willing to pay full price for.”

    What’s very interesting here is that the Apple iPhone has been such a big hit despite lagging in some areas…the first one not having 3G, and each only have a 2MP camera, etc. Also the initial vs. current pricing and resulting backlash being a factor. Yet the Apple fan club has created a cult following for this phone. And of course the innovative UI, and the familiar app store interface in the form of iTunes have made it a hit and a good econonmic model.

    But tell me, do you think it’s a good phone? Can you make phone calls with it easily?

    In summary, what’s interesting is that you only have to get a few things right and then have great marketing & pricing in order to create a hit product.

    Reply
  3. Anonymous Avatar
    Anonymous

    The most important aspect of the iPhone is that it has been developed by taking a tiny computer incorporating a video iPOD and then adding phone functionality.

    Nearly all other handset manufacturers took a phone and tried to add functionality such as video, browsing the real internet, which they found almost impossible to do properly (WAP, mobile interent etc.) or only managed with an awful User Interface.

    This is why people will queue up and pay full price.

    Reply

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