It was a bold statement in small packages. On Aug. 5, Hewlett-Packard (HPQ) said it was planning to sell portable, Web-connected computers that can tap Japan's cellular networks without requiring users to be locked into a contract with a wireless operator. The computers—laptops, netbooks, and touchscreen tablets—will come with 100 minutes of free airtime and a built-in, pay-as-you-go wireless system when they go on sale next month.
HP's event, at a downtown Tokyo hotel, was a small affair, attracting just a few dozen journalists and one TV camera. But among industry executives and analysts, HP's latest move is attracting a lot of attention: It could end up rewriting the rules in Japan's wireless industry.
HP, in effect, will become a mobile operator—in industry jargon, a mobile virtual network operator (MVNO). That means the Palo Alto (Calif.) company will get to decide what type of gizmos to connect to the network—and will keep for itself most of the revenues from airtime use. Having a tech manufacturer double as an operator poses a threat to Japan's three largest wireless operators, NTT DoCoMo (DCM), KDDI (9433.T), and SoftBank (9984.T).
Undercutting the Operators' Control Operators traditionally have exerted tight control of the airwaves used to deliver telecommunication signals to consumers. They have the final say over which phones, PCs, and other gizmos can tap their network, and how much to charge subscribers for service. The iPhone, for which Apple (AAPL) is said to get up to 30% of the operators' revenues from iPhone subscribers' monthly payments, was the first to shift the balance of power away from operators. HP will take that a step further.
The Japanese government's decision last year to force operators to sell unused bandwidth to new entrants helped. HP will rent spectrum from Japan Communications (JCI), a tiny Tokyo operator. JCI doesn't own base stations or antennas; it buys bandwidth from DoCoMo. JCI officials say HP could hook up smartphones, Web-friendly digital cameras, and other gadgets in the future. Content and other online services might follow. "We have no specific plans yet," Shinya Hiramatsu, HP's marketing director for personal systems, said. "But of course, we're considering it."
Industry executives say HP could show the way for other tech outfits that want a piece of the world's most advanced wireless industry. There have been attempts to open up other markets. Last year, tech giants Google (GOOG), Microsoft (MSFT), Dell (DELL), and Philips Electronics North America (PHG) lobbied the Federal Communications Commission to set aside for free the unlicensed public wireless spectrum in the U.S. that would be available after TV stations switched to digital broadcasting. The FCC ended up auctioning the spectrum. That didn't silence critics who say operators are blocking innovative ideas that threaten the existing order. Operators say they invest billions in setting up and maintaining the network and know best how to recoup their investments.
For now, HP's arrangement is the exception. But it could spur imitators offering pay-as-you-go wireless services for all kinds of gadgets that use the Web in new ways. One example: car navigation systems. Most in-car systems give directions and allow map searches, but hardly act like Web-connected PCs. Auto industry executives say it's because they haven't found a low-cost solution to connect cars to the Net. "If we had [always-on Net] connection to the car, we'd be able to do more things than we can today," says Graham Smethurst, who heads BMW's Munich-based division that works on navigation and entertainment systems.
Low-Cost Come-On HP could be the test case. To lure consumers, HP plans to sell its computers for $50 to $100 more than the company's laptop models without the wireless broadband feature, which range in cost from around $500 to $900. Every machine will come with a removable SIM card that lets users buy more minutes. A radio antenna for Wi-Fi will give the computers access to Wi-Fi spots in restaurants, malls, and train stations nationwide. HP's starting small, to be sure: Hiramatsu hopes to sell tens of thousands of units—a rounding error in a market of more than 108 million mobile-phone subscribers but not bad for a brand with a small presence in Japan.
With the economy still in the doldrums, HP's netbook has the best shot at attracting buyers. Market researcher Gartner (IT) predicts that global shipments of netbooks will more than double this year to 28 million units, up from 11.8 million in 2008. By 2010, the tally could top 42 million. Already nearly 1 in 5 laptops sold worldwide is a netbook, says Gartner analyst Mikako Kitagawa, adding: "It could go higher." And yet, because netbooks sell for far less than standard laptops, the trend has slimmed margins for PC makers.
That's why adding services would be an important new business for hardware makers. Still, it's not clear whether Japanese consumers will embrace HP's 3G wireless service. One fact that could help HP: Wi-Fi hotspots are hard to find in Japan. If nothing else, HP could apply the lessons it learns in Japan to other countries that follow. "Our executives in the U.S. were very interested in this model," says Hiramatsu. "At this point, though, you won't find a similar arrangement in other countries."
Why would an operator like JCI want to empower tech companies? The answer lies in JCI CEO Frank Seiji Sanda's background. Sanda is a former engineer who worked for Motorola (MOT) and Apple. In recent years, he has prodded the government to intervene and remake Japan's wireless market so the three biggest cellular operators are less dominant. Last year, the government ordered DoCoMo to open up its wireless network, and JCI was the first to score a deal. Sanda says he wants to create "the platform for the next-generation Internet." "If we can start the next generation of the Internet from Japan, the economy will have a second act," he says.
But his position hasn't won him many friends among rival operators. Several electronics firms JCI initially spoke with worried that doing business with Sanda would damage their ties with the larger carriers. "This is a big risk [HP] took," he says. "They do have relationships with many carriers."