The shift from the pager to keitai in the mid-'90s The mid-1990s was a pivotal period in Japanese mobile communications. When the keitai was introduced in 1990, business use dominated. It was a luxury item, an executive tool supplied by the corporation to a select few. Subscribers in 1992, the year NTT Docomo was established, numbered approximately 1 million. By this time, the pager was already a widely used communications device. At first, the pager's only function was to signal the receipt of a transmission with a ringing bell. Like the keitai, it was initially used almost exclusively for business purposes. The introduction of the "display pager" in 1990 changed this. This type of pager was designed to enable the caller's number to be displayed. It was quickly adopted as an essential means of communication among high school students, who relayed messages in pager code. This youth-driven creation of a new communication culture was a rare occurrence, even when viewed internationally, and has left a lasting legacy in the history of communication. The number of pager subscribers in 1992 was approximately 7 million. Subsequently, the Personal Handyphone System (PHS) was introduced as a product that extended the range of a cordless phone to be used outdoors. Competition between these three products was intense from 1994 to 1996. At the time, pager developers were considering new functionality for pagers, such as the ability to display the Roman alphabet in addition to numbers or to send as well as receive messages. The spread of pagers seemed unstoppable. They were becoming such a force among teens that some girls high schools prohibited students from bringing them on campus.
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"We are still in the early days of the keitai camera services. Judging by adoption rates, it appears that cameras will become a standard keitai function. We are on our way to becoming a country where half the population carries a camera at all times." |
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In the meantime, keitai providers were working to become more competitive by reducing costs. Initially, keitai handsets were leased from NTT and required a deposit as well as an activation fee. In 1996, they eliminated the deposit requirement and reduced the activation fee and in April 1994 they eliminated the lease system so that new users could buy and own their handsets.Combined with the reduction in subscription costs, this last change was particularly effective in boosting adoption. For the month of June 1994, two months after these changes, new subscribers to keitai surpassed the number of new subscribers for fixed-line telephones. The path was clearing for keitai's ascendancy. The PHS was its only obstacle. In fact, the keitai industry plotted its business strategy by watching the PHS market. The intense advance publicity of the PHS was what pushed keitai operators to take price reduction measures. The number of PHS subscribers passed the 1 million mark within a year after the start of service in October 1994. During the intensifying competition between the PHS and keitai, the pager steadily lost ground. Many of the youth that had driven pager usage switched over to the PHS. The PHS was an instant youth hit, particularly among high school girls, and was given the nickname pittchi.
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"The PHS was victim of its own success as the keitai came to emulate its appeal." |
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Despite its small service area, low cost and long battery life made the PHS a huge success. Its adoption curve within the first year of its introduction was significantly steeper than the keitai. In 1995, the PHS and keitai held practically identical market shares. However, after this point, the PHS suddenly lost momentum. In 1996, the keitai emerged as the mobile communications industry leader and has since maintained its lead.The context of the PHS and the reasons for its defeat The forerunner to all these personal communications systems was London's Telepoint system. Telepoint is a system for setting up small antennae on the streets to connect to "cordless public telephones" for receiving calls only. This project inspired Japan to first begin considering personal wireless communications systems. At that time, the cordless telephone was a strong market with annual sales of 3 million units. Since they were analog, however, they were easily tapped into by outsiders and this was considered a social problem. This problem hastened development of the digital cordless phone. The PHS has several unique features: 1) It is a digital cordless phone that makes it possible to make a call from the house, office and outdoors from one phone.
2) Connection costs are from one-half to one-third those of the standard keitai.
3) The handset is small (100 cubic centimeters) and light (100 grams) with a long battery life (8 hours per charge).
4) Audio quality is high enough to send music.
5) Communication can be maintained up to walking speed.
6) It can receive incoming calls and make outgoing calls. There are a number of reasons why the PHS, so successful at the time of its launch, lost out to the keitai. One reason was that DDI Pocket, the provider with the largest share of the PHS market, experienced a major technical breakdown due to a failure at its base station. The limited service area was also a persistent problem. The PHS had weak connections and could not be used inside a house. Further, price wars had reduced the cost of PHS handsets to such an extent that they were perceived as "cheap" goods. Handsets had been virtually given away in order to gain new subscribers.
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"The Docomo brand image has also been enhanced because they do not discount their handsets." |
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The effects of these price wars were more detrimental to PHS than for keitai. The PHS relied on the NTT fixed-line network and operators had to pay NTT for network charges. It is difficult to say whether these network fees were set too high, but the reality is that it was not possible to reduce these fees to offset the price-cutting of the handsets. Another major factor was that keitai were nearing the size, weight and battery life of PHS. Ironically enough, the PHS was victim of its own success as the keitai came to emulate its appeal. Youth made a transition from pager to keitai via PHS.The principle difference between the keitai and the PHS was the cost of communication. For the PHS, since it is essentially a cordless phone, it did not cost anything to use the extension -- in theory. The system was based on the 3 million unit-per-year cordless phone market. However, the unexpected success of the PHS immediately after its launch created an operator-driven environment. As a result, the focus turned to competing against the keitai rather than capitalizing on the unique features of the PHS. As mentioned earlier, terminals were given away at no charge and consequently, cordless phone manufacturers turned their back on the PHS business. Even now, the market share of cordless phones combined with a PHS handset is extremely low. This is in part because the small size of a PHS terminal is considered inconvenient for home use. The PHS is able to support a wireless private branch exchange (PBX) telephone system where users can create local phone systems that do not incur telephone charges. The development of this PBX capability into a business possibility is only recently being realized. There are various factors behind the defeat of the PHS, but the major reason is the diversion from its fundamental concept and strengths. NTT Docomo's success The Japanese keitai market consists of three companies: NTT Docomo, AU and J-Phone (Vodaphone). Their shares are roughly 60 percent, 20 percent and 20 percent, respectively. The difference in the financial conditions of NTT Docomo and the other two companies is even larger than the difference in their market shares due to how the companies deal with sales and distribution of handsets/keitai terminals in Japan.
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"In the past 10 years, the Japanese communication industry ... has transformed itself from a monopoly to a competitive industry and has seen the establishment of a new wireless industry dominated by NTT Docomo." |
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AU and J-Phone work through independent retailers and pay incentives on top of the retail price for the sales of the terminals. The free-of-charge PHS terminals described earlier were also an outcome of this system as retailers could make money off incentives even with a free handset. A business strategy that prioritized gaining market share over profit weakened the two companies' financial conditions.In contrast, NTT Docomo established their own Docomo Shops, a retailing operation managed jointly with trading houses and other companies that exclusively sold Docomo terminals. Although I do not have access to the exact numbers, it appears that the incentives for these stores are significantly lower than those of their competitors. The Docomo brand image has also been enhanced because they do not discount their handsets. This situation is clearly reflected in the bottom line. In the midterm accounting of 2002, all three companies turned a profit, but those of AU and J-Phone were less than one-tenth of Docomo's. Even Docomo, however, has faced business difficulties. In 1996, Docomo's share of the keitai market dropped below 50 percent. Although this is not widely known, one of the factors that salvaged the situation for them was the streamlining of operations. During this period, Docomo made a number of changes to its business operations. One was the elimination of the leasing system in favor of outright sale of their handsets. The other was the development of operations software that enabled the company to quickly process new subscribers, a major innovation at the time. As a result, it delivered better customer service, quick turn-around between application and start of service, efficient retail operations, better control of the complex distribution process, real-time management, and synchronization of the flow of goods and money.
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