Global Economics

Japan's Cell Phones Playing Apple's Tune?


Internet mogul Masayoshi Son can never be accused of dawdling. When the chief executive of Tokyo-based Softbank (SFTBF) snapped up British wireless operator Vodafone's (VODPF) local business in March, there was little doubt that Japan's telecommunication industry was in for shock therapy. The biggest question facing the multimedia mogul and high-speed dealmaker was how his new acquisition would fit into Softbank's vast empire of high-speed broadband, Net-based phone and data services, and online content.

Son hasn't wasted any time in trying to develop a strategy to cross-leverage these assets. On May 13, the financial daily Nihon Keizai Shimbun reported that Son and Apple Computer's (AAPL) Steve Jobs had agreed to market iPod cell phones for Japan as early as this year. Softbank called the report "speculative," though it didn't deny that a music-playing cell phone was in its plans. Apple Japan officials declined to comment. A source close to Apple told BusinessWeek the two sides have been talking in recent months. Investors took the report seriously: Softbank's shares finished up 2.6% in Tokyo trading.

If the reports are correct, it's Softbank's first big attempt to assert itself in the mobile telecom sector since snaring Vodafone's Japan business in a $15 billion deal. Son is on something of a roll. On May 11, Softbank posted record net profit of $519 million for the fiscal year ended in March -- after five years of losses -- thanks to stronger profitability at the company's high-speed broadband service know in Japan as Yahoo! BB.

iTUNES EVERYWHERE. Softbank is a major investor in the U.S.-based mega-portal Yahoo! (YHOO), and two years ago Son paid $3.1 billion for Japan Telecom, the country's No. 3 fixed-line provider (see BW Online, 2/14/06, "Softbank: A Favorite Son Once More?").

For Apple, a tie-up with Softbank would be a deft way to make inroads into Japan's huge mobile phone music downloading market -- which currently dwarfs PC downloads 20-to-1. Eventually, the deal could help consumers download songs to cell phones whether from their PCs or Softbank's Wi-Fi and 3G networks. That way, "it's iTunes regardless of channel," says Philip Sugai, a mobile marketing expert at International University of Japan in Niigata.

What's in it for Softbank? A deal with Apple would give it music content to match its bigger telco rivals, NTT DoCoMo (DCM

) and KDDI (KDDIF) unit AU, which have 56% and 28% of Japan's mobile phone market, respectively. Vodafone is a distant third with 16% of the market, or about 15 million subscribers (see BW Online, 3/17/06, "Softbank-Vodafone Deal Rings True"). KDDI has already started letting users download full songs to their handsets over its high-speed 3G network, and DoCoMo is poised to launch its own service in June.

SMART BRANDING. It may outstrip PC downloading, but this method of downloading tunes is still in its early days in Japan. Sales of digital music for cell phones accounted for around 5% of Japan's $4 billion music market last year, according to the Recording Industry Association of Japan. "There's a lot more room for growth in digital music downloads for cell phones," says Ichiro Michikoshi of BCN, a tech market research firm in Japan.

It's also a smart branding decision. Teaming up with Apple lets Softbank piggyback on the iPod's hip image -- something that Vodafone never got right with its bulky, dull handsets and constantly changing brand. And if the companies can get the first of the iPod phones in stores by November, they will have a good chance to convert some iPod users to Softbank's cellular service when new rules let consumers in Japan switch carriers while keeping the same phone number. The key will be for Softbank to "banish memories of Vodafone's inferior brand image," NikkoCitigroup analyst Toru Hosoi wrote in a May 15 report.

Apple stands to benefit, too. Analysts have pointed to the rise of music player-cell phone hybrids as the biggest threat to the iPod's dominance in Japan, where it had a 51.9% market share as of April, according to BCN. Sony (SNE) and Panasonic trail with 15.2% and 7.1%, respectively. Broadening its reach might also help in winning over recording labels with top Japanese pop talent.

NOT YET DIRECT. So far, a limited range of local artists has hindered growth of the iTunes Web download service since its launch last August. "If Apple wants to make an impact here, they have to do it in the mobile space," says Gerhard Fasol, president of Eurotechnology Japan, a Tokyo-based consulting company (see BW Online, 3/17/06, "iPod Takes Japan by Storm").

Still, a Softbank-Apple phone would have to be easier to use than what's already being offered by others. According to the Nihon Keizai, the first iPod phones in Japan likely won't let users download music directly from Apple's iTunes Music Store. Songs would have to be downloaded to a PC first and then transferred to the handset. Later versions, expected sometime next year, would allow users to do everything from their cell phone.

That means the handset would initially resemble the Rokr phone, which Apple and Motorola (MOT) launched last autumn in the U.S. The phone got mixed reviews because of its time-consuming downloading process and limited song storage capacity. Former Apple executives say Jobs & Co. aren't likely to try anything they haven't already done in the U.S., which remains their main focus. They say Jobs wouldn't normally tie up with a small fry like Softbank, but he's probably content to do so as a test case for bigger projects in one of the world's most sophisticated wireless markets.

GOOD START. There's some catching up to do. Japanese consumers have been buying and storing songs on cell phones for nearly two years. KDDI's AU was the pioneer, starting its Chaku Uta Full service in November, 2004. As of mid-January, AU had sold 5.9 million music-playing phones to customers who have bought more than 300 million tunes over the carrier's wireless network. Its LISMO and DuoMusic services let subscribers mix their collection of songs downloaded to cell phones and PCs. One of its handsets, made by Toshiba, has a 4-GB hard disk drive that stores 2,000 songs.

Another competitor could be Sony-Ericsson's music phones, already on sale in Japan. The Walkman-like handsets phones have won plaudits from audiophiles for their sound quality and long-lasting batteries. They have the added advantage of being backed by the Sony Music Entertainment (Japan) recording label, which features many Japanese bands. Still, whatever the competitive challenges ahead for Apple and Softbank, it's a good start for Son's new venture.


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