Peering round the corner

WILLIAM GIBSON, a science-fiction writer, once observed: “The future is already here–it is just unevenly distributed.” If so, then the future of the mobile Internet is particularly highly concentrated on the 29th floor of the gleaming Sanno Park Tower Building in Tokyo. This is where executives from the world's mobile-phone companies go to see the latest gadgets from NTT DoCoMo, Japan's dominant mobile operator, and the unquestioned global leader in the fusion of mobile phones with the Internet.

The firm's claim to fame is the runaway success of its i-mode service, which pipes cut-down web pages on to mobile phones with small colour screens. DoCoMo, whose name is a play on the Japanese word for “anywhere”, has 60% of the Japanese mobile-telephony market. Over two-thirds of its 37m mobile subscribers have also signed up for i-mode, which was launched in February 1999. This allows them to use special i-mode phones to send and receive e-mail, read the news, access weather forecasts and horoscopes, and download ringing tones and cartoon graphics from nearly 50,000 i-mode-compatible websites. The most advanced i-mode phones double up as music players and can download and run small pieces of software, including games. Other popular uses for i-mode include mobile banking, stock trading and reserving airline tickets (see chart 3).

This is impressive from a technological point of view, but what is even more remarkable is that i-mode's 27m users are prepared to spend money on these services. On top of a monthly charge of ¥300 ($2.50) to access the i-mode service, they pay ¥2.4 (2 cents) for every kilobyte (thousand bytes) they download. In addition, around 500 DoCoMo-approved i-mode sites are subscription-only, requiring users to pay monthly fees of up to ¥300 each; DoCoMo collects these fees as part of the monthly phone bill, takes 9% commission, and passes the rest to the sites' publishers. About 50% of i-mode users subscribe to one or more of these sites. And despite claims that i-mode appeals only to teenage girls, half of all i-mode users are 30 or over, and a quarter are over 39 (see chart 3).

All these data whizzing around produce extra revenue for DoCoMo, and have other benefits too. The company has found that i-mode users are more lucrative than other subscribers. On average, they spend 15% more on voice calls than non i-mode subscribers, and generate 25-30% more revenue overall. They are also far less likely to switch to other operators.

Most important, as competition forces down revenue from voice calls—from an average of $100 per subscriber per month in March 1997 to $65 in March 2001—data revenue amounting to an average of $17 per user per month helps to make up the difference. Operators and content providers the world over are keen to find out how they can emulate i-mode's example.

Those who have made the pilgrimage to DoCoMo's 29th-floor demonstration room over the past few months have been rewarded with what is, to most people in the industry, a wondrous sight: 3G phones that actually work. DoCoMo originally intended to launch its 3G service, called FOMA (for “freedom of multimedia access”) in May, but teething problems with the new technology forced the company to impose a five-month trial period, and delay a full launch until the beginning of this month. FOMA now offers i-mode access at far higher speeds than existing phones, as well as snazzy new features such as videotelephony and the ability to use data and voice services at the same time.

DoCoMo's 3G phones look and feel much like its standard i-mode phones, though the higher data rates mean they are hotter in operation, and their batteries run down much faster; they need to be recharged every day. But look more closely at one of the Panasonic models, and you will notice that it has two green “call” buttons, and a small rotating aperture in the hinge between the phone's two halves. The aperture is a camera, and the second “call” button is for making video calls. The phone is held at arm's length, and the camera can either point at the user, or be rotated 180 degrees to transmit what the user is seeing. The quality of video calls is impressive, at least to anyone used to the grainy moving postage stamps that pass for video on the Internet.

However, there is more to the mobile Internet in Japan than DoCoMo and i-mode. Japan's other two mobile operators, KDDI and J-Phone, have their own i-mode-like services. J-Phone (in which Britain's Vodafone, the world's largest mobile operator, has a big stake) is every bit as innovative as DoCoMo. Although it has yet to launch its 3G network, this summer J-Phone was the first Japanese operator to launch a phone with a built-in still camera, which allows users to send photos. J-Phone has also pioneered “location-based” services, which allow users to call up information relevant to their location.

Why has the mobile Internet been such a success in Japan, and can that success be duplicated elsewhere? Certainly Japan is a special case in many ways. For a start, PC penetration is low for cultural reasons. It used to be regarded as demeaning for managers to have PCs on their desks; typing was for secretaries. In addition, NTT, the incumbent fixed-line telephone company, charged high rates for dial-up Internet access. And the Japanese have traditionally been enthusiastic about small technological gadgets.

Why Japan has it made

There are other factors at work, too. The three Japanese mobile operators each operate incompatible proprietary systems. DoCoMo users, for example, cannot send short text messages to KDDI users. J-Phone's location-based services are available only to J-Phone subscribers. And if you want to switch from one operator to another, you have to buy a new phone, since Japanese handsets are operator-specific. This absence of open standards may seem old-fashioned to foreigners, but it has been a key factor in getting the mobile Internet off the ground in Japan. When a Japanese operator wants to launch a new service, such as picture messaging or videotelephony, it can specify in detail how that service will work, ask manufacturers to build the appropriate handsets, and ensure that these are available when the service is launched.

Operators in other parts of the world are too numerous to be able to boss the handset makers around in this way. Instead, they face a chicken-and-egg situation. There is no point in their launching an innovative service unless handsets to support it are available; but until such a service has been launched, manufacturers have no reason to produce handsets that support it. This explains why, for example, handsets with colour screens are still a rarity in Europe, though they are commonplace in Japan. Colour screens make phones more expensive, and consumers will not pay more for them unless there are compelling services that use colour. No such services exist, so nobody buys colourhandsets, so there is no reason to develop colour services.

Even so, it should be possible to make the Japanese model work in other countries. DoCoMo has great hopes for establishing i-mode as a global standard, and has formed a number of alliances with companies including AT&T and AOL in America; it also owns minority stakes in mobile operators in Europe and Asia. But its attention is currently concentrated on getting 3G off to a good start in its home market, so its plans to launch i-mode elsewhere have not got very far yet.

Besides, the real reason for i-mode's success is not so much the technology as the business model. By giving content-producers a means to charge users, i-mode ensures that there is plenty of content available; indeed there is a growing waiting list of content-providers awaiting DoCoMo's approval for their sites. That wealth of content attracts users who, in turn, attract more content. The result is a virtuous circle. Another important factor is the management of expectations: users understand that i-mode is different from logging on from a PC.

Textbook success

I-mode or no i-mode, the use of phones to send short text messages has grown explosively. The Japanese call them oyayubizoku (the thumb tribe), but the sight of people walking down the street frantically clicking at their handsets has also become a familiar sight in many other countries, notably in Europe and some parts of Asia. Some schoolchildren, forbidden to use the phones in class, have taught themselves to input text by touch alone, so that they can send messages while keeping their phones hidden. In the Philippines, the country where text messaging is most popular, the use of the technology by protesters is credited with helping to overthrow the country's former president, Joseph Estrada.

Text messaging is a booming and hugely profitable industry; globally, over 30 billion messages are now sent each month, bringing in over $30 billion a year in revenue for operators, according to figures compiled by Simon Buckingham of Mobile Streams, a consultancy based in Newbury, England. In some parts of the world, text messaging accounts for 10% of operator revenues.

Normal text messages are limited to 160 characters, costing an average of 10 cents each to send, but text messaging can be used to do more than just send quasi-telegrams to other people. Premium-rate text messages can also be used to request new ringing tones and logos. In Finland, it is possible to buy soft drinks and chocolate bars from some vending machines using text messages. In some Scandinavian countries text messages can be used to pay parking or car-wash charges. Increasingly, text messaging is being integrated with the Internet to allow messages to be sent to and from websites or desktop PCs. Hence the claim by Peter Vesterbacka of Hewlett-Packard in Espoo, Helsinki's high-tech suburb, that Scandinavian countries, along with Japan, provide “a partial crystal ball” for the future of the mobile Internet.

By contrast, Wireless Access Protocol (WAP), the nearest thing to i-mode outside Japan, has dismally failed to catch on. It is used by fewer than 10% of mobile subscribers in Europe, and accounts for less than 0.5% of operator revenue. WAP's failure has a number of causes, not least an excess of hype. An infamous advertising campaign launched in Britain by BT Cellnet used fancy computer graphics of a digitised figure whooshing around on a surfboard. The reality of accessing the Internet from a mobile phone, users soon discovered, was far less glamorous.

WAP, which displays cut-down web content on phones, is painfully slow: just establishing a connection takes up to half a minute, and downloading anything requires the patience of a saint. There are numerous WAP versions that are not fully compatible. But worst of all, there is very little content, because there is no way for content-providers to charge for it. Operators collect a per-minute fee for WAP usage, and some of them pay content providers to produce material to encourage traffic, but there is no virtuous circle of the i-mode sort. WAP is crap, goes the industry refrain. But in essence the problem is the business model, not the technology, particularly now that 2.5G networks are speeding up the service.

When it comes to the adoption of mobile data, the odd country out is not Japan but America. The United States and Canada are the only countries in the world where PCs are more numerous than mobile phones; everywhere else the reverse is true (see chart 4).

The American exception

America's enthusiasm for PCs, and lack of enthusiasm for mobile phones, is due to a combination of factors, but mainly to the relative prices of fixed and mobile calls. In Japan, expensive access to the fixed Internet drove users to mobiles; in America it was mobiles that priced themselves out of the market. Local calls are free, and PCs are cheap. Mobile phones, on the other hand, suffer the huge drawback that users are charged to receive calls, so Americans tend to leave their mobile phones switched off to avoid having to pay for unwanted incoming calls. Mobile network coverage is patchy and rates until recently were high. So teenagers who want to keep in touch with their friends are given their own phone line, a PC and a dial-up account with AOL, the world's largest Internet-access provider. Soon they are happily sending and receiving instant messages through their PCs.

Their counterparts elsewhere in the world, in contrast, are brandishing mobile phones and sending text messages. Mobile phones have become even more appealing to teenagers in Europe since the advent of “pre-paid” phones, which can be replenished with vouchers on sale at newsagents and corner shops. Pre-payment, which originated in Italy to exploit a tax loophole, means that even people without bank accounts (such as children) can have mobile phones. It also enables users to control their spending.

Sending text messages is cheaper than making voice calls, which helps to explain their success. According to figures from Gartner, 47% of Swedes and 39% of Italians use text messaging, compared with 2% of Americans. But even in America, lower prices and better co-operation between operators are now helping text messaging to take off.

Another oddity is that handheld computers, which are essentially cut-down PCs, are also far more popular in America than elsewhere. These devices—notably Compaq's iPaq, and the handhelds made by Palm and Handspring—are far more expensive than mobile phones and lack wireless connectivity as standard, though they have bigger screens and more processing power. Americans widely perceive wireless-enabled versions of such devices, rather than Internet-capable mobile phones, as the logical means of accessing the Internet while on the move.

The split between America and the rest of the world is apparent in other ways, too. Because PCs are so popular in America, people there like to think of the mobile Internet as simply a mobile version of the PC-based Internet. This has fired their enthusiasm for a wireless networking standard called 802.11b, or Wi-Fi, which allows suitably equipped laptops within a few hundred feet of a base station to access the Internet. Wi-Fi coverage is spreading fast in many American offices, universities, hospitals, schools and airports, and its advocates claim that it could even do away with the need for 3G networks (see article).

Joe Manget, an analyst at Boston Consulting Group, thinks American enthusiasm for Wi-Fi can be explained partly by another cultural difference with the rest of the world. In Europe and Asia, he notes, many people commute to work on public transport, and like to peck at their mobile phones while they are on the move. In America, on the other hand, people commute in cars, which rules out the use of wireless handheld devices. Instead, they want wireless access for their laptops when waiting around in places such as hotel lobbies and airport lounges.

Martin Dunsby of Deloitte Consulting points to yet another difference. Thanks to general enthusiasm for information technology, American firms are far more likely to have adopted customer-relationship management and enterprise-resource-planning systems (which keep track of customers and inventory, respectively) than companies in other countries, and now want to extend those systems to wireless devices. So in America it is the corporate market that leads the mobile Internet, says Mr Dunsby, whereas elsewhere it is the consumer market.

But whatever the differences, the fact remains that the mobile Internet, in one form or another, generates enthusiasm across the developed world. As with the Internet in 1995, it is clear that both consumers and businesses would like to adopt this new technology over the next few years. Last time round many of the firms that rushed to exploit the demand for everything to do with the Internet got things seriously wrong, as the demise of the dotcoms shows. The builders of the mobile Internet evidently believe they can avoid making the same mistakes. So what makes wireless different?