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Sunday, Feb. 3, 2002


Japan makes a profitable connection

THE MOBILE INTERNET: How Japan Dialed Up and the West Disconnected, by Jeffrey Lee Funk. ISI Publications, 2001, 200 pp. $32 (cloth)

In the 1970s and '80s, Japanese carmakers flooded world markets with products fresh from factories where workers wore uniforms, sorted parts into brightly colored bins, and followed instructions written on wall placards.

Detroit responded by spending billions of dollars to computerize older plants, only later realizing that the Japanese manufacturing secret was applying simple organization techniques to build steadily better cars, not making fancy gizmos.

Two decades later, American and European telecom firms are making the same mistake in the way they outfit their mobile phones to use the Internet. Japan's NTT DoCoMo, KDDI and J-Phone have built a potentially insurmountable lead over Western competitors by offering simple phones even as rivals wait for more advanced technology to take hold.

That's the contention of "The Mobile Internet: How Japan Dialed Up and The West Disconnected," a new book by Jeffrey Funk, a business professor at Kobe University.

The 200-page book describes the experiences of Japan's phone providers and dozens of firms that have sprung up to do business with cellular phone customers. It shows how simple electronic features of cell phones in Japan led to the development of firms to provide content and how demand for those companies' products led to more advanced offerings from phone makers. Together they form a cycle that's accelerating the pace of development, Funk writes, and currently accounts for 90 percent of worldwide revenue from the wireless Internet.

"Positive feedback is causing the mobile Internet to explode" in Japan, Funk writes.

The book's examples of how some Japanese businesses are succeeding seems brave at a time when bookshelves groan under tomes pessimistic about Japan's future. While many worry about a possible financial crisis, hollowing out of Japan's manufacturing base and flaws in Japanese management, this book highlights an industry in which Japan leads the world.

The view that Japan's cellular phone industry is doing something right got a boost last week when NTT DoCoMo announced plans to list its shares in New York and London, a step to boost its profile overseas where it holds stakes in other phone companies. This book shows what could lie ahead.

Enthusiasm about the mobile Internet isn't new, of course. Barely five years after accessing the Internet via regular telephone lines gained popularity, companies forecast that use of the Internet via mobile phones will boom too. In 2000, Amazon.com, a firm born of the fixed-line Internet, predicted that all its business would be done over mobile phones within a decade.

To meet that kind of demand, telephone companies spent more than $100 billion buying licenses to operate new third-generation (3-G) telephones, a technology promising 100 times more capability to transmit information than most current mobile phones.

The excitement of those first license bids has been toned down since, analysts say, by awareness that it will take longer to find a way to pay the bills. While everyone knows the mobile Internet will be big, no one's sure exactly what form it will take.

"The Mobile Internet" argues that cellular phones aren't simply a substitute for fixed telephone lines. In the same way that telephones, a century ago, opened up electronic communications to people who didn't know Morse code for telegraph machines, the wireless Internet offers a new computer-free frontier.

As with earlier technology such as radios and TVs, some analysts have derided cellular phones as hopelessly simple toys.

Japanese offerings are "being criticized because ringing tones, screen savers, and games are big applications," Funk says. "But just like personal computers and transistorized radios, the mobile Internet will improve and Japan's early start will give it a big advantage in this market."

Japanese companies have taken the lead by focusing on simple services. DoCoMo's i-mode and KDDI's EZ-net began by offering information through phones in packets, or bursts of downloaded data, avoiding the long wait required to display whole pages from the Internet.

The number of sites providing data for information packets gradually increased and eventually led to the creation of directory portals to help users navigate among the data. Funk points out that the simple initial packet system also led non-DoCoMo companies to develop portals, which make navigating the Internet straightforward enough to handle on a tiny telephone screen.

At J-Phone, a simple system to send short e-mail messages became popular with young people and led to a larger customer base as users became savvier with their phones.

Companies such as Bandai, Index and Giga Networks offered screen savers, ringing tones, horoscopes and other data to cell users. While e-mail makes up about 40 percent of DoCoMo's i-mode traffic consumers aren't just children. DLJDirect, an online brokerage, has found that users of its mobile and fixed-line offerings are about the same age, Funk writes.

The wireless businesses were on track to have about 60 million users in Japan by the end of 2001, and revenue for content providers was projected to double to about $200 million, Funk writes. For phone companies like DoCoMo, which collects the monthly charges for content and pockets a 9 percent commission, revenue would top $1 trillion.

This is a huge lead on the rest of the world, where there were only 8 million users at the end of 2000.

Unlike their Japanese counterparts, foreign firms have invested in technology that's not yet ready and haven't attracted users or businesses to help stoke demand. They focused on existing users and the market they can see now, Funk says.

In 1999 Nokia was first outside Japan to announce a phone that could access some of the Internet. British Telecom unveiled a phone in early 2000 and promoted it as providing an experience similar to surfing the Web on a personal computer. Consumer interest in both waned when the limitations of cellular technology became obvious.

Funk, who observed U.S. companies' troubles adapting to Japanese competition as a professor at Pennsylvania State University, writes that much of the problem now is misreading the potential need.

"The Mobile Internet" suffers at times from clunky writing, and could have been more colorful with more detailed explanations and illustrations of the services content providers offer. Also, the lack of an index makes it difficult to refer to the rich data on Japanese companies mentioned in the text.

Even so, the book effectively makes Funk's case that Japanese firms have a lead for now.

Today it's still too early to say how well new 3G services will be received. British and German cellular firms that paid huge sums for licenses have to roll out systems quickly to recoup some of their costs, even if technology isn't ready, Funk writes. Success will be difficult without an established customer base.

Japanese companies are making in-house data such as work schedules available by cellular phone and providers are phasing in offerings such as maps and restaurant reviews, a market that could be worth $3 billion in a few years.

Funk stops well short of seeing the wireless Internet as a solution to Japan's problems, and acknowledges that there are differences between Japan and other countries that help explain the popularity of the phones. NTT's high-priced monopoly over fixed-line phones, a relative lack of personal computers in Japan, and a Japanese fondness for gadgets has helped.

DoCoMo, KDDI and J-Phone may have limited themselves by developing redundant products instead of completely opening up their platforms. Yet the book makes clear how feedback between the cellular companies and content providers led to a boom in the technology, an example that foreign firms ignore at their peril.

Bradley Meacham has written about business and finance for several years, most recently for Bloomberg News in Tokyo.

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