LESSONS FROM JAPAN

U.S. operators can take a page from the NTT DoCoMo book Mobile phone service, network operators and content and service suppliers are trying to anticipate which business models and services will generate the revenues and customers needed to drive profits. For network operators in Europe and the U.S., the answers will be critical. As they invest significant sums of money in license fees and new networks, they must determine how to make those investments pay off.

A precursor to 3G already has taken Japan by storm. In less than two years, some 15 million customers have signed up for i-mode, NTT DoCoMo's service that delivers traditional voice service and Internet access over specially configured mobile devices. NTT DoCoMo, which announced late last month that it would invest $9.8 billion to buy a 16% interest in AT&T Wireless, now is gearing up to bring expanded mobile services to Europe, the U.S. and Asia.

The company previously had negotiated partnerships with, among others, KPN Mobile and America Online. Financial analysts estimated last summer that up to one-third of NTT DoCoMo's market capitalization of about $250 billion was based on the i-mode business. While the overall market value has since declined with the recent market downturn, many industry players are nonetheless wondering whether the i-mode phenomenon can be repeated outside Japan.

I-mode's meteoric rise in Japan has been propelled by several factors. First, even though today's i-mode service runs on a 2G network, the handsets are more versatile and functional than typical mobile handsets. In particular, they have more readable screens and longer-lasting batteries than other phones, and they are small, lightweight and considered to be attractively priced.

Second, the base price for i-mode service - 300 yen per month (less than $3) - is low compared with what the average Japanese user pays for mobile phone service, which is about 11,000 yen per month (about $95).

Third, the number and variety of services and applications are growing all the time, feeding the curiosity of both current users and prospective users.

And fourth, i-mode is always on - that is, users do not need to dial into it.

Lessons learned While European and North American markets are different from Japan's, (for example, Japan's PC market penetration and fixed-line Internet usage are much lower than those of many countries), NTT DoCoMo's experience with mobile services has generated much insight. Indeed, as mobile network operators develop next generation services in their own markets, they should consider these lessons from Japan.

E-mail is the "killer app." The feature that initially attracted users to i-mode was the ability to send and receive e-mail from mobile handsets. Other popular services have been developed since, but e-mail remains critical to i-mode's appeal.

For many Japanese consumers, i-mode is the first practical application for electronic messaging. Moreover, the interest in mobile communication is consistent with the experiences in both Europe and the U.S., where short message services and pagers, respectively, have been popular. The average i-mode user sends or receives more than 100 messages per month. And the cost of this service is relatively low: In Japan, it is cheaper to send an e-mail using i-mode than it is using the fixed-line Internet. A short message can cost between one and three yen, or up to 3.

Entertainment is the "killer content." NTT DoCoMo anticipated that business- and productivity-oriented applications such as stock quotations, online banking, personal contacts and calendars would generate considerable interest. However, initially, at least, such functions have been much less popular than entertainment. In fact, surveys show that visits to entertainment sites offering games, screen savers and phone-ringing tones that can be downloaded, make up more than 50% of all user activity. Even businesspeople spend more time on those types of sites than they do on sites that offer banking and brokerage services.

Customers use i-mode in niche time. I-mode users have dramatically different usage patterns than people who go online through PCs. The typical Japanese PC user goes online for 30 minutes or more per session. The typical i-mode subscriber's sessions average less than two minutes. Users tap into the service three to four times per day, often while commuting by train or during "niche times" throughout the day.

However, a majority of subscribers say they also use i-mode from home. The fact that the service is always on lends it a convenience and spontaneity that other wireless technologies lack. Recognizing that subscribers have a usage pattern that's distinct from what people do on the fixed-line Internet, content providers are developing new services that play to that pattern.

Some of these services, such as 30-second games and music clips, are entertainment oriented. But others will build on the unique capabilities of mobile to provide services that are tailored to the needs of individuals and that can be adapted to different locations. Because users carry their mobile devices with them in a wide range of settings, the devices are ideally suited to act as tools for identifying and authenticating users to service providers.

The youth market is bigger than the business market. Industry experts in Japan originally expected that the earliest and most enthusiastic adopters of i-mode would be business and professional users in their 30s and 40s who would want to tap into office e-mail, news and data sources.

Instead, more than 50% of the users are people in their 20s or younger. NTT DoCoMo struck an early chord with young mobile-phone users who were drawn to the attractive handsets and weren't intimidated by the new technology.

While the youth market developed first, the user demographics are now broadening. As new sites, such as those allowing subscribers to book airline reservations, come on stream, increasing numbers of mobile professionals and field sales representatives are signing up. For them, the service can provide a quick and easy way to tap into information relating to their financial and work lives.

If you make the economics attractive, content developers will come. NTT DoCoMo realized early that to attract subscribers, i-mode needed content. To encourage developers to create appealing material, it offered benefits. NTT DoCoMo does not buy content; instead, it allows designated third parties to provide fee-based content and services, and it assists them by handling their billing and collection through the monthly phone bill. For this service, NTT DoCoMo charges content and service providers a 9% commission on the revenues they generate over its network.

By September 2000, i-mode offered more than 2000 official sites, and more than 20,000 independent sites were available. As content and services have grown, so have the number of i-mode subscribers and the average amount they spend. Text messaging drives voice traffic. Even though i-mode subscribers in Japan use their handsets extensively for e-mail, their mobile voice usage has not declined. In fact, recent data show that voice traffic has increased by an average of 10% per subscriber.

I-mode lets users link addresses from e-mail to the senders' phone numbers, making it possible to respond to text messages by voice. This capability has big implications for marketers because it allows them to approach i-mode customers with text messages while customer service people stand by for voice replies. In Japan, where subscribers pay per-minute charges for voice calls, additional voice usage can increase network operators' revenues substantially.

Clicks drive bricks The links between mobile commerce and traditional commerce have not yet been fully explored, but early evidence suggests that i-mode can provide opportunities for retailers to steer customers to their fixed locations. For example, Tsutaya, Japan's largest video-rental chain, sends i-mode users electronic coupons, which they can redeem in video stores. During video rental promotions, the company has seen its rental fees jump by up to 60% and its sales of nondiscounted products rise as well.

Other retailers and restaurants are beginning to use i-mode in similar ways, and banner ads on i-mode experience click-through rates that are much higher than the typical response rates with fixed-line Internet banners. Before long, retailers may be able to beam real-time offers to i-mode subscribers on the basis of their current location.

Yet it also is possible that the links between mobile commerce and traditional commerce will be used in other, more complex ways. For example, content developers are beginning to roll out services that allow shoppers to examine merchandise in a store, then purchase the goods electronically at lower prices from a competitor. With this type of application, shoppers get to touch and feel the items they are interested in, talk to salespeople and, with a few clicks on their mobile handsets, order the merchandise.

But network operators and service providers must work together. As eager as content and service developers may be to move into mobile services, network operators can't sit back and expect them to seize the opportunities on their own. Operators must be ready to help.

In many cases, this will require getting their hands dirty. NTT DoCoMo, for example, works closely with developers to define offerings and to create services that take into account i-mode's unique features and the experiences of other service providers. While content providers clearly stand to benefit from access to a broader market, mobile operators will have opportunities to add attractive new services to their existing menu of offerings.

Applying the lessons The Japanese experience offers some ideas about how operators might think about next generation services in their own markets. The reality, however, is that circumstances will vary from country to country. Culture, demographics, the maturity of a mobile market, the availability of alternative technologies and the ambitions of operators are just some of the factors that will cause markets to differ from one another. Therefore, every operator must look at NTT DoCoMo's experience through its own lens and ask some fundamental questions:

- What services and capabilities will the target customers want, and which ones will be most popular with which customer segments?

- Will developing services in 2.5G help or hinder the transition to 3G? If 2.5G service is too appealing, consumers may be less eager to trade up to 3G when it arrives.

- How can operators motivate content and service providers to create compelling applications and services that will attract new subscribers and keep existing subscribers engaged?

- To what extent should mobile data services be coordinated with services on the fixed-line Internet?

- What will the introduction of new mobile services mean for the pricing of traditional mobile services such as voice?

As companies invest in the next generation of mobile communications technology, they will face many important decisions. They need to begin addressing them now, and they should take whatever lessons they can from those that have gone before them.