Japan: Cheap Cell Phones at What Price?

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"In a market where it's common to find cell phones sold at low, subsidized prices, we think setting handset prices at several [hundreds of dollars] would severely limit sales," the company wrote in response to questions from the panel.

Operators Hooked on Subsidies

While experts concede that high-end handsets have helped Japan become a leader in mobile Internet use, they say subsidies only benefit a small percentage of consumers who feel they must have the newest phones. Consumers who don't give a hoot about gadgetry might be better off if they could choose a package consisting of lower connection charges and low-tech phones, says Jeffrey Funk, a professor at Hitotsubashi University's Institute of Innovation Research.

"Subsidies have become like a drug that the operators can't quit," adds Funk. And some executives worry that the operators' influence is already stifling the industry's organic growth. "Freer competition would lower the bar for new entrants," says Masaki Kinoshita, chief executive of Future Mobile, a Tokyo maker of wireless software and solutions.

That has regulators concerned that Japan Inc. won't be able to go global with its know-how in speedy third-generation (3G) wireless technology. In fact, Japan's lack of global penetration in cell phones, mobile content, and software has consumed the communications ministry's panel discussions since day one.

Japan already knows what it's like to be odd man out. Its decision to go with a unique second-generation wireless technology, rather than the CDMA and GSM standards used elsewhere, turned out to be disastrous for handset makers such as Matsushita Electric Industrial (MATSF), Sharp (SHCAF), and Toshiba (TOSBF). Those companies dominated at home but got creamed overseas by competitors Nokia (NOK), Motorola (MOT), and Samsung Electronics (SSNGY).

Key Problem: Opening the Market

The hope is that through the elimination or limiting of subsidies, consumers will have more options. Wakako Sakai, for one, would support anything that might lower her phone bill. A year ago, she got a sleek white Sanyo (SANYY) phone for just one cent when she signed up for KDDI's service. But for someone who only makes calls, sends e-mail, and occasionally goes online to check the weather, the phone's features are excessive—and she pays for it. Her monthly bill regularly tops $115. "I wish there were more alternatives," says Sakai, 31, who works at a Tokyo publisher of English-language textbooks. "I would switch if I could get a better deal."

There might have been options if the government had followed through on plans approved last year to force operators to open their networks and lease their excess bandwidth to newcomers, known as mobile virtual network operators (MVNOs). But regulators haven't decided how it could be done, and would-be MVNOs say talks with the operators have gone nowhere. Some say all the attention on subsidies distracts from other important issues.

"Getting rid of the subsidies will be treating the symptom," says Eric Gan, chief financial officer of eMobile, Japan's newest wireless service provider. "You're not dealing with the cause. You have to lower the entry barriers for newcomers to come in and utilize the (operators') facilities—maybe lower access charges, or tower-sharing, or MVNO, or roaming." With this many issues at stake, don't expect the government to make changes overnight.

Hall is BusinessWeek's technology correspondent in Tokyo
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