Keitai: The Industry and its Players

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Keitai: The Industry and its Players
by Keaton Nguyen

Introduction

In the first part of the discussion of the keitai, I discussed the sociological impact of the keitai on the Japanese people.  To say the Japanese people have integrated the keitai into their lives is an understatement; more accurately, the cell phone is used as an instrument empowering them to connect to intimates, create communities, participate in commerce, and to express their individuality.

In this second part, the other side of the equation is examined – the keitai, the manufacturers, and the service providers.  To begin, this paper will discuss how the cell phone originated and evolved and how NTT DoCoMo became not only the most powerful cell phone provider but also the most powerful company in all of Japan.

History of the Keitai

To better understand the keitai of today, it’s best to understand how it came to be in Japan.  Cellular telephones were first invented in 1973 but it wouldn’t be until 1979 when it would reach Japanese shores.  In this time, cellular phones took the form of fixed wireless phones and car phones.  In 1987, handheld mobile phones are invented.  Due to the pricing and rental structure, “it was a luxury item, an executive tool supplied by the corporation to a select few” (Kohiyama 2004).  The pager was introduced in 1990 and was quickly adopted by high school students.  In two short years, there were 1-million keitai users and 7-million pager users.  1994 would be a watershed year for the keitai industry as regulatory reforms allowed the keitai to be purchased rather than leased.  This would allow keitai penetration to begin its exponential growth.  In October of the same year, a competing system, the Personal Handyphone System (PHS) was introduced and became the portable phone leader [1].  These changes in 1996 when keitai carriers eliminated deposit requirements and either reduced or waived activation fees.  With a more mature the keitai industry, the carriers and manufacturers focus their R&D departments on enhancing the keitai’s capabilities.  In 1998, mobile mail, the ability to send and receive text messages, is introduced.  In 1999, NTT DoCoMo introduces i-mode enabling users to view web pages and send e-mails.  A year later, of the 55.5-million keitai users, only 4.2 million had adopted i-mode.  In 2003, the keitai user population grows to 80-million with 75% having access to the Internet via their phones (Trends 2003).  Though adoption has been slow and handsets have been plagued with defects forcing recalls, DoCoMo released the 3G FOMA (Freedom of Mobile Multimedia Access) phones with higher data transfer rates enabling videophones and video mails (Meyer 2002).

The Growth of the Keitai

Chart 1: Growth of the Mobile Phone v. other services
Source: Telecommunication Carriers Association

Chart 2: Market share of the Mobile Phone v. other services   
Source: Telecommunications Carriers Association

Chart 3: Per Minute Utilization of the Mobile Phone
Source: Telecommunications Carriers Association

The Keitairetsu

At the forefront of the keitairetsu [2] are the three major network operators, NTT DoCoMo, KDDI Au , Vodafone (J-Phone), and owning roughly 55%, 20%, and 15% of the keitai market, respectively, leaving slivers for smaller operators like Tu-Ka (Kohiyama 2004).  DoCoMo’s ownership of the market is overshadowed only by it’s financial strength and clout in the keitairetsu to the extent that an executive at Nippon Ericsson said, “DoCoMo sets the direction.  And the manufacturers work together” (Meyer 2002).

Along with the network operators, the rest of the keitairetsu is made up of the content brokers, content producers, advertising agencies, and the handset manufacturers.  According to Fumitaka Okumura of Jupiter Media Metrix, a high-tech consultancy, calling the interrelationships that make up the keitai industry a keiretsu is inaccurate due to the lack of financial stake one company will have in another, though they do meet to collaborate on industry strategy, standards, and specifications (Meyer 2002).  Instead of owning financial stakes to tie a company’s future to its keiretsu partners, members of a keitairetsu are “bound together by patents, joint research agreements, and standards bodies” (Meyer 2002).

The manufacturers in the keitairetsu are separated into two tiers, which greatly determine how they do business and the degree of their success.  Meyer’s article on the keitairetsu explains how the manufacturers are grouped.  The top tier manufacturers are the “Mova” players like NEC, Matsushita, Fujitsu, Mitsubishi Electric, and, more recently, Sony (Meyer 2002).    They are involved in the development of DoCoMo phones and will know what is needed to make the phones before the specifications are formally published.  Being a Mova player was to be the writers of the text, not the readers.  The readers of the text are the “by” players.  These companies make the phones that, if bought by DoCoMo, are later co-branded.  Another major disadvantage for the by players are that they get the specifications for the new phones after the Mova players and thus arriving later to market.

The keitairetsu has been a successful partnership because of the collaborative efforts of all its members.  Meyer’s article further describes the inter-member dynamics and its precarious relationship with the Japan Fair Trade Commission (JFTC).  Partnerships are made between members but they are narrowly defined, e.g. Sony and DoCoMo worked together on music downloading.  Further, members will meet to talk about standards and compatibility issues but keep product specifics, strategy, research, and new developments close to their chest.  Because of their collaboration, the JFTC closely monitors the keitairetsu, even creating a special unit dedicated to halting anti-trust infractions.  In practice, the government reviews infraction on a case-by-case basis weighing the damages against the benefits with the customers’ best interest in mind.  If the harm from an anti-competitive arrangement is outweighed by the benefits, then the JFTC will not intervene.  In the end, the keitairetsu succeeds because it is able to balance relationship between collaboration and competition.

The Dominance of NTT DoCoMo

NTT DoCoMo’s dominance was almost pre-destined when its history and its corporate parentage is closely examined.  To date, it is the largest market capitalized company on the Japanese stock exchange, grew to ¥686 billion in nine years, and with the exception of one year, had a market share of over 50% in a rapidly expanding market (See Chart 4) (Kushida 2002).

Chart 4: Market Share of Major Providers
Source: Telecommunications Carriers Association

In 1985, Japan’s national telecommunication monopoly privatized to create Nippon Telephone & Telegraph (NTT) with certain monopoly rights like owning the last mile for telephone networks.  This privatization also created a number of “NTT Laws” enacted by the Ministry of Posts and Telecommunication.  Two years later, NTT created analog wireless service using the PDC format first developed by NTT.  PDC is a proprietary format used only in Japan before any global standards were adopted.  In 1991, NTT introduced the first of the “Mova” series of phones with reduced prices and smaller size.  However, the only users to benefit from the keitai and the Mova phones were business users.  In 1992, NTT spun off its cellular division creating NTT DoCoMo as it was lagging behind other countries’ cellular companies.  This was in part due to the high prices, 4-5 times, while the user population was not much larger than 1 percent of the Japanese population.

1994 was a watershed year for the entire industry.  As noted before, regulatory reforms allowed phones to be purchased.  But more importantly, DoCoMo aggressively reduced sign-up fees, service plans costs, and eliminating the deposit fees.  DoCoMo also re-organized its sales network to address their changing customer demographic from primarily business users to retail users.  DoCoMo also divided itself into nine district companies to micro-manage the sales and management of those regions allowing them to address each district’s unique market.  This resulted in a doubling of subscribers to 4 million from 1993 to 1994.

From this point on, any increases in subscriptions would have to come from technological and functional advancements.  In 1996, non-voice applications like SMS (text messaging) was introduced and quickly gained popularity.  In 1999, DoCoMo introduced i-mode and a national network using CDMAOne.  In recent years, DoComo and other providers have been placing large bets on their 3G phones.  3G’s greatest offering is increased bandwidth, which will allow a greater number of applications of larger size.  Such advancements have helped DoCoMo subscriptions surpass its competitors (See Chart 5).

Chart 5: Growth of Keitai Service Providers
Source: Telecommunications Carriers Association

NTT DoCoMo’s offering using the 3G platform involves FOMA – Freedom of Mobile Multimedia Access.  FOMA subscription has increased from 155,000 in January 2003 to 2.4 million subscribers by end of March 2004 (See Chart 6).

Chart 6: NTT DoCoMo’s FOMA Subscriber Growth
Source: NTT DoCoMo FY2003 Third Quarter Report

The 900i phones were introduce enabling larger content applications (See Chart 7).  Previously, application and storage sizes were limited to 30k and 200k, respectively (See Chart 8).  With FOMA, application size limits grew to 100kb and storage size grew to 400kb (See Chart 8).  Some additional features are (See Chart 7):

  • Deco-mail – enabling messages to be decorated with photos, animation, etc.

  • Chaku-motion – incoming call notification to include ringtones, video, and music

  • Macromedia’s Flash – the new size limit grew to 5 times larger than on the PDC format

Chart 7: NTT DoCoMo’s new phone: the 900i Series
Source: NTT DoCoMo FY2003 Third Quarter Report

Chart 8: The 900i’s Capabilities
Source: NTT DoCoMo FY2003 Third Quarter Report

NTT DoCoMo, today, still stands as the largest and strongest of all carriers by many measures.   One of the most important measurements is ARPU – Average Revenue Per User.  Of the top three providers, NTT leads with over ¥10,000, KDDI at ¥7,500, and Vodafone at ¥6,500 (See Chart 9).

Chart 9: Make-up of the Provider’s ARPU (Average Revenue per User)
Source: Telecommunications Carriers Association

DoCoMo’s financials show a steady growth year over year.  In the most recent financial report, March 2004, DoCoMo’s operating revenue grew 4.7% over 2003 (See Chart 10).  Its EBITDA [3] grew a tiny 1.5% but it’s cash flow grew to a whopping ¥850 billion which gives it abundant resources for marketing and R&D.

Chart 10: NTT DoCoMo’s Financial Highlights, March 2004
Source: NTT DoCoMo FY2003 Third Quarter Report

Marketing and Advertising

As with any product, manufacturers spend millions and billions of dollars, yen, and Deutsche marks trying to appeal to the fickle tastes of the consumer market.  Reviewing the Japanese carriers’ and manufacturers’ advertising, we find they don’t seem to differ much from advertising worldwide as exhibited by their many billboards and magazine ads.  The keitai service providers’ and manufacturers’ advertisements continue to use celebrities like J-Pop stars like Ayumi Hamazaki [4].  Furthermore, the advertisements make the promise of not a new keitai but an exciting lifestyle.


"Go Natural" - NTT DoCoMo/Mitsubishi advertisement
Tokyo Subway, Oedo line, November 2001

According to their 2004 filings, NTT DoCoMo spent US$560.90 million on advertising to earn US$48.455 billion in annual sales, only 1.2% for 2004 (Hoovers.com).  It’s difficult to say if it is a small or a large amount compared to its domestic competitors as no advertising expense information was provided for KDDI-AU and Vodafone’s Japanese subsidiary.

As a comparison, ratios for US service providers Cingular and Verizon were provided.

Advertising Exp

Annual Sales

Adv/Sales (%)

NTT DoCoMo

US$560.9

US$48,455

1.2%

KDDI-AU / Tu-Ka [5]

US$18,289

Vodafone (J-Phone) [6]

US$1,824.56

US$61,849

0.3%

Cingular

US$643

US$15,483

4.15%

Verizon

US$1,428

US$67,752

2.1%

Source: Hoovers Online (hoovers.com)


Japan Railways
Shibuya Station, Hachiko Exit, November 2001


Actress/Singer Ayumi Hamazaki in a Tu-Ka advertisent
Japan Railways, Shibuya Station, November 2001

Examining only the sociological aspect of the ketai as we did in the first installment of this paper only provides us with an equally incomplete picture if we were to only analyze the keitairetsu, the collaboration and networking between the movas, the bys, and the service providers.  We are also able to understand the partnerships bound by contracts and patents between manufacturers but in the larger scope of both articles, we see a much more meaningful partnership between the industry and the keitai users.

Without one, the other would not exist.  The two share a symbiotic relationship where one partner reaps financial gains and the other acquires something much more valuable – agency [7].

Bibliography

Kohiyama, Kenji.  2004.  A Decade in the Development of Mobile Communications in Japan.  Accessed November 22, 2003:
http://www.ojr.org/japan/wireless/1059673699.php.

Kushida, Kenji Erik.  2002.  The Japanese Wireless Telecommunications Industry: Innovation, Organizational Structures, and Government Policy.  Stanford Journal of East Asian Affairs.  Spring 2002, Volume 2.

Meyer, Richard.  2002.  Kei(tai)retsu.

Accessed November 28, 2003:
http://www.japaninc.net/article.php?articleID=665.

Trends in Japan.  2003.  An Emerging “Thumb Culture”: Multimedia Mobile Phones Usher in New Lifestyles.  Accessed November 22, 2003: http://www.jinjapan.org/trends01/article/030110fea_r.html.

Endnotes

[1] The Personal Handyphone system success is largely attributed to the same high schoolers that made pagers a success.  Despite the PHS’ small service area, its low cost and long battery life made it a success.  It was so successful among high school girls; it was even given a nickname, the pittchi. (Kohiyama 2004)

[2] A foreign journalist coined the term keitairetsu, a combination of the Japanese word for mobile phone and the last character for keiretsu.

A keiretsu is complex corporate structure where one company owned large shares of many other companies, and vice versa.  This phenomenon originated in post WWII as a way for Japanese corporations to prevent foreign companies from acquiring controlling interest of weakened Japanese companies.

[3] EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

[4] For those not familiar with the J-pop (Japanese pop music) scene, Ayumi Hamazaki is Japan’s Britney Spears.

[5] Advertising expense for KDDI-AU / Tu-Ka was not provided.

[6] These numbers are for Vodafone worldwide.

[7] For the non-sociologists, the term “agency” can be difficult to understand as it already is for sociologists.  For lack of a better term, “agency” can best be defined as “empowerment.”  For a more comprehensive discussion on agency, I recommend Arjun Appadurai’s “Modernity at Large.”