Mobile Kaizen management is good for Japanese consumers
Next to South Korea which enjoys the highest fixed and mobile broadband penetration – counting relative DSL connections and 3G-enabled mobile phones – Japan continues to be the leading mobile data market in the world. Having analysed the Japanese mobile market since 2000 I do believe that Japan is still far ahead when it comes to managing the mobile economy and maximizing value for consumers. I like to call the Japanese management approach “Mobile Kaizen”, i.e. the art of continuously improving the mobile economy.

In Japan, there are 3 mobile network operators that all launched their first mobile Internet services back in 1999 and, since then, have competed heavily among each other for the mobile communications budget of Japanese consumers and businesses. The Japanese market is driven by consumer demand and managed in a carrier-centric way. The carriers control the market and specify all the functionality of the mobile handsets that are built to their orders mainly by Japanese handset makers (only now Vodafone tries to sell devices made by Nokia and Motorola in Japan).

Japanese carriers don’t loose time to wait for global standards such as MMS (Mobile Multimedia Messaging) or OMA DRM (Digital Rights Management Standard set by the Open Mobile Alliance). They order the technologies that they believe will drive the ARPU (Average Revenue Per User) or the sales of new handsets. Japanese carriers know very well how to continuously improve their offerings with the aim of delivering more value for money to their customer base.

In my view, the carrier-centric model for managing the mobile economy is better suited to deliver mobile data services that consumers pay for than the device-centric model – favoured by Nokia – which is still dominant in Europe. This is a key reason why Japan leads the pack.

While the Japanese market is getting more saturated, the level of competition increases. All three carriers have introduced mobile data flat rates now after KDDI started their flat rate attack in November 2003. NTTDoCoMo publicly declared that they had no choice but to follow the first mover – they would have rather done it at a later point of time. Fortunately, the result of this fierce competition is lower mobile data prices which Japanese keitai users (keitai = Japanese word for mobile phone) definitely enjoy.

Carrier statistics and 3G migration status
At the end of each month, the Japanese Telecommunications Carriers Association announces the latest mobile subscriber statistics: As of 31 October 2004, there were 84.6 million mobile subscribers in Japan resulting in a mobile penetration of 67 % – 127 million inhabitants make Japan a rather crowded island.

The market leader is NTTDoCoMo with 47.5 million customers and a market share of 56,1 %. Having launched i-mode in February 1999, NTTDoCoMo now serves 42.5 million i-mode users in Japan who have access to over 4,400 official i-mode content sites and over 70,000 unofficial content sites which are neither listed on the operator’s portal nor able to use the operator's billing system. In fact, the unofficial content market is very important since it accounts for 50 % of the mobile data traffic in Japan.

From the beginning, NTTDoCoMo was motivated to create a mobile ecosystem enabling mobile content providers to make healthy money by passing on a very fair share of the premium content revenues (no data transmission revenues are shared in Japan): NTTDoCoMo only keeps 9 % and passes on 91 %. This 9 % is modelled to compete with other payment systems rather than maximise revenues on a short-term basis by overemphasizing the marketing power of the official portal. At the same time, NTTDoCoMo does not invest in content development and would never license music rights as in the case of Vodafone in Europe.

NTTDoCoMo's 3G service called FOMA (Freedom of Multimedia Access) is based on W-CDMA (Wideband-Code Division Multiple Access; 384 kbps downlink peak data rate) and the current number of 3G FOMA customers is 7.1 million. This means that DoCoMo have already migrated 14.86 % of their customers to 3G. The monthly 2G ARPU of DoCoMo is YEN 7,700 (€ 52.32) with 24.75 % data revenues. The monthly 3G FOMA ARPU is YEN 10,030 (€ 74.22) with 34.20 % data revenues. These numbers prove that 3G handsets and networks are well qualified to make customers spend more on mobile voice and data. However, 3G ARPU will eventually go down by the time the mass market will have adopted 3G – this is the typical effect when more low value customers come on the network. In Japan, early 3G adopters are heavy data users who want to reduce their packet fees.

Number 2 in the market is KDDI with 21.9 million subscribers and a market share of 25.91 %. KDDI has 17.1 million customers subscribing to their mobile portal called EZweb. Surprisingly, KDDI is number 1 in the 3G market as they have been very smart in migrating to 3G by using CDMA2000 1x from Qualcomm offering a 144 kbps downlink peak data rate. Now, KDDI already has got a total of 16.1 million 3G subscribers which means they have successfully migrated 73.66 % of their customer base to 3G. KDDI also keeps only 9 % of mobile premium content revenues and has the same approach to enabling the mobile content ecosystem.

Recently, KDDI launched the new service called WIN (We Innovate the Next) which is the highspeed 3G service based on CDMA2000 1x EV-DO (Enhanced Version-Data Optimised) with a 2.4 Mbps downlink peak data rate. KDDI's ARPU is YEN 7,300 (€ 54,02) and the WIN ARPU is YEN 11,190 (€ 82,81).

Only the increased bandwidth of WIN enabled KDDI to introduce a 2-tiered flat rate called "Double Teigaku" which costs YEN 2,000 (limited packets) or 4,200 (unlimited packets). KDDI now counts a total of 1.19 million WIN subscribers of whom 81 % are flat rate subscribers. KDDI targets 3 million WIN subscribers in March 2005. NTTDoCoMo responded to the flat rate challenge from KDDI by introducing "Pake-Houdai" ("all you can eat") priced at YEN 3,900 for their heavy users who spend at least YEN 6,700 for their voice plan (a voice tariff including free voice minutes per day). The number of flat rate FOMA subscribers is not available though.

Vodafone Japan has fallen behind to the third position and when it comes to 3G they are even more behind. Vodafone Japan also uses W-CDMA for 3G and waited for a later release of the standard to enable global roaming. Now, Vodafone Japan serves 15.2 million subscribers which results in a market share of 17.95 %. 13 million customers use the Vodafone live! portal but only 274,400 of Vodafone's subscribers are 3G-enabled – a mere 1.81 % of their customer base. This is especially disappointing for Vodafone as the Japanese market still contributes the most revenues of all Vodafone companies due to the high ARPU in Japan. Vodafone Japan's ARPU is around YEN 6,500 (€ 48.10) while separate 3G ARPU figures are not yet disclosed. Vodafone keeps 12 % of mobile premium content fees and passes on 88 %.

As pointed out above, Vodafone hopes that in the long run their global strategy will enable them to fight back on the Japanese market. But NTTDoCoMo and KDDI don't have to wait for go decisions from Europe and thus are extremely fast with launching new services. Just take a look at the contactless IC smartcard technology called FeliCa that NTTDoCoMo now incorporates into most new phones. NTTDoCoMo has got already over 600,000 FeliCa-enabled handsets in the market which offer mobile payments and membership card applications that are extremely convenient for users. While KDDI announced the adoption of FeliCa in the second half of 2005, Vodafone is still struggling to define their FeliCa strategy.

Chaku-uta drive 3G
Mobile music is still the hottest segment in mobile Japan. In 2004, the Japanese ringtone market (polyphonic ringtones called Chaku-melo) will be YEN 100 billion (€ 750 million) and the ringtune market (CD-quality 30 second music clips called Chaku-uta) will be at least YEN 20 billion (€ 150 million). Ringback tones – "waiting music" played to the caller while waiting for the phone to be picked up – are still small in Japan but will be successful, too.

In 2003, a total amount of YEN 180 billion was spent for mobile premium content and 50 % was music-related business. This is really massive if you compare it to a still declining CD industry in Japan with a mere value of YEN 400 billion (€ 3 billion).

During the "Mobile Intelligence Tour" to Tokyo, which I co-organised in April and October 2004, we enjoyed meetings with Masakatsu Ueda, president of Label Mobile. Label Mobile was established by 5 record companies in 2001 and now it has 11 labels as shareholders. While Chaku-uta were introduced by KDDI in 2002 they are now offered by all 3 carriers. For their new FOMA handset series NTTDoCoMo just increased the file size for Chaku-uta to 500KB. Chaku-uta uses the file format AAC+ (Advanced Audio Coding). In fact, Chaku-uta is now the most important 3G service in Japan.

Most Chaku-uta tunes sell at YEN 100 (€ 0.75) but prices vary from YEN 50-200 (€ 0.34-1.50). A standard ringtone sells between YEN 10-20 (€0.08-0.15). About 150 million Chaku-uta downloads are expected from the various Label Mobile sites in 2004, out of a total market forecasted to reach 200 million Chaku-uta downloads. These figures are very promising, given that only 15 million phones in the market were enabled for Chaku-uta in August 2004.

The most important factor for the record companies about Chaku-uta is the following: Anybody in Japan can provide ringtones as long as they pay YEN 5 (€ 0.03) royalty fee per ringtone download to JASRAC, the Japanese equivalent of GEMA (the German "Gesellschaft für musikalische Aufführungs- und mechanische Vervielfältigungsrechte" or society for musical performing and mechanical reproduction rights). For the normal ringtones no rights have to be negotiated. So ringtones have become an absolute commodity while the main business bypassed the labels.

However, permission is needed in the case of Chaku-uta from the master right holders which in Japan are the record labels. By co-founding Label Mobile the major labels in Japan have decided to disintermediate ringtone providers and do the business on their own. This trend will happen in other markets, too, and classic ringtone providers will have to adapt early enough to record labels and publishers doing direct business again with the music fans. Moreover, production costs for Chaku-uta are quite low as encoding music into AAC+ can be done automatically while ringtones have to be composed and optimised manually.

The copy protection of Chaku-uta is very high: Only the official files can be set as ringtunes and they cannot be taken out of the phone. This is a direct result of the carrier-centric model where each of the 3 operators defines the functionality of handsets including the rules for what can and cannot be done with paid content.

I assume that most Japanese consumers accept the fact that they cannot move content they paid for because they have had no other choice so far. But I am quite sure that over time this might change.

KDDI's Chaku-uta Full will rock 3G to the next level
KDDI announced their ultimate mobile music service called "Chaku-uta Full" (full track downloads) in October and just launched it on 19 November 2004. Now the labels don't have to dream anymore about the keitai becoming the new walkman. It is already a reality, though only for some early adopters at this stage. You can only buy Chaku-uta Full if you are a KDDI WIN highspeed customer with a flat rate. This makes perfectly sense as avoiding extra packet fees is a prerequisite for launching full track download services – even with AAC+ the file size averages 1-2 MB.

At the launch of Chaku-uta Full only four handset models support the service: W21CA (manufactured by Casio), W21T (Toshiba), W22SA (Sanyo Electric) and W22H (Hitachi). One Chaku-uta Full song will cost between YEN 200-300 (€ 1,50-2,25) and users can choose from a catalogue of 10,000 songs in the beginning. But KDDI wants to grow the size of the catalogue and invites other labels to produce and sell full tracks.

Of course, users can set a Chaku-uta Full as ringer, too, usually at three positions in the full song. And given the increased convenience of shopping for mobile music anytime and anywhere I am very confident that this service will make a lot of money. At least, it is the core mobile data strategy of KDDI for 2005.

Mobile DRM is suboptimal in Japan, too
As pointed out above in the case of KDDI, the DRM situation in Japan is the following: Due to the fact that the Japanese market is carrier-centric each carrier has so far defined its own content protection system. Today, users are not able to forward or save to the removable memory card any content they purchased for their mobile phone. As far as I know, the new 3G handsets of Vodafone will support OMA 1.0 which does not enable superdistribution (OMA 2.0 will support superdistribution; see Buhse 2004). It remains to be seen which operator pushes superdistribution first as a competitive weapon in the future.

Thus mobile DRM is suboptimal for the users in Japan, too: It is impossible to continue using your paid content on your next phone for the time being. The more you have spent for buying mobile premium content such as ringtones, games etc. the more it will hurt you. While Japanese operators are starting to implement device management tricks for easy back-up of personal information data such as contact and calendar information, they still have to improve on their server-based know-how about their customers’ access rights to content they paid for in the past. Especially, in the age of mobile data flat rates there is a marginal cost of zero associated with redistributing premium content again.

Given these limitations, mobile consumers still love mobile music. On a global level, mobile music already generates 10 % additional revenues to a global music market of € 30 billion. And the mobile music market is forecasted to double until 2008 to € 6 billion.

Bottom line
To sum up, I am very sure that Japanese keitai users get more value for their money and that's why I like the mobile ecosystem in Japan very much. I do strongly recommend visiting Japan to study the Japanese market. Learning from Japan makes sense as there are basically no differences between end user cultures in Japan and other countries, but many differences between management cultures.

The mobile music market segment drives 3G and generates around 50 % of the mobile premium content revenues. The current mobile music highlight in Japan is the recent launch of Chaku-uta Full, the full track download service of KDDI. It will be exciting to watch how quickly European operators will manage to make their mobile music shops successful, too.


About the author: Holding a business degree from the University of Mannheim, Germany, Jan Michael Hess worked from 1996 to 1999 in the Internet Marketing industry in various positions at Cyperfection, Pixelpark, Icon Medialab and In 2000, he founded the mobile intelligence and consulting firm Mobile Economy GmbH in Berlin with a strong interest in mobile Japan from the beginning. In 2003, he co-produced the "Mobile Kaizen in Japan" seminar tour through Germany; in 2004, he co-organized 2 Mobile Intelligence Tours to Tokyo in April and October together with Daniel Scuka of Wireless Watch Japan. He is also chief editor of, a webzine covering key mobile issues. Contact: Jan Michael Hess,

Status: first posted 30/11/04; included in INDICARE Monitor Vol. 1, No 6/7, 17 December 2004; licensed under Creative Commons