A decade after the I-mode revolution that set Japan on a course to becoming the most successful mobile-content-services market in the world, regulators are looking to challenge operators'market dominance. A more Western-style, fractious model is being envisioned,with different players slugging it out for dominance.Will that spoil a good thing?

Changes are afoot in the Japanese mobile services market that could destabilize the longstanding status quo there. The elimination of handset subsidies and proposals from the mobile regulator to loosen Japanese carriers' tight grip on all areas of the ecosystem threaten to upset some of the market's fundamental dynamics. Changes in social norms have, at the same time, affected mobile-user behavior and had an impact on some content  ervices. On the face of it, nothing much has changed in Japan in the past six years: The outward appearance of phones has remained pretty much the same, and users still predominantly flock to operator portals to buy mobile content. Japan had its "eureka" moment 10 years ago with the invention of I-mode - spawning the world's most successful mobile-content-services market - so there hasn't been much call for change. Rather than the jolts and turns that have characterized the evolution of mobile content markets elsewhere, Japan has pretty much stuck to the same path for the past decade. The winning formula pioneered by I-mode and copied by all Japanese carriers - in which content providers are given a generous share of revenue (about 90%) and an easy way of publishing content on the mobile Web - has gotten much of the media industry behind the  operators. And the virtual monopoly that Japanese carriers have over the distribution of handsets means that local handset makers consistently churn out phones tailored to operators' specifications. So if all carriers want the same service on phones, that service soon becomes pretty much universal. For example, nearly 90% of mobile phones in use in Japan are 3G-enabled - the highest 3G penetration in the world. But there are elements in government circles - notably industry regulators within the Ministry of Internal Affairs and Communications (MIC) - that are unhappy with seeing so much power concentrated in operator hands, no matter how benignly it might be wielded.They want to see more competition and consumer choice. The MIC held discussions with industry leaders in February and March, proposing to open up the five mobile business "layers" controlled by operators - content and applications, platforms, communication services, infrastructure, and terminals - to facilitate the entry of new players and expand the market. The proposals are still very much open to debate, and some peoplethink that,despite their bold words,regulators might ultimately opt not to rock the boat too much.Fig. 1: Japan, mobile business layers that regulators are proposing opening upHandset moves

But action taken by the MIC already threatens to erode the operators' power in the all-important area of handsets. Changes to operator accounting rules introduced by MIC, due to come into effect in 2011, will mean that operators will no longer be able to file handset subsidies as operating expenses and will have to pay tax on those subsidies. In anticipation of the rule change, all operators phased out subsidies last year. The result has been a 20% drop in handset sales, even though operators have sought to neutralize higher handset prices by reducing their basic telephony subscription fees and spreading handset costs across monthly installments, roughly equaling the amounts discounted from voice and messaging - depending on the length of the contract.Having fewer handset sales weakens the business case for handset makers to churn out as many handset models as before. Japanese vendors design handset models destined for the domestic market to fit the specific requirements, and branding, of a particular operator. That means that models are unique to each operator's handset portfolio. At times, different operators might sell variations of the same model, but never exactly the same one. And most handset makers tend to work almost exclusively for one operator. Moreover, phones are SIMlocked to the network of the operator that sells them, so users cannot switch networks usingthe same phone. One of the reasons Japanese operators have been so successful at making new servicesavailable to the bulk of subscribers is the strong prescriptive relationship they have with handset makers.However, developing handsets for just one carrier is viable only if a certain volume of sales can be sustained - especially when manufacturers are expected to produce new models all the time featuring the latest technology. If sales don't recover, either the rate of handset development will have to slow down or manufacturers will have to start making crossnetwork handsets. The latter will become even more likely if the MIC presses ahead with plans to ban SIM locking. But that will depend on whether all carriers decide to roll out LTE networks or whether they continue on divergent paths in terms of network technology. No. 1 operator NTT DoCoMo and No. 3 SoftBank operate WCDMA networks and No. 2 KDDI operates a CDMA2000 network, making it impossible for phones to migrate across all three networks unless they are dual-chipped.Last year, MIC-led discussions into eliminating SIM locking were suspended until operators have completed their next-generation-network implementation plans, which are due to be announced in 2010. Content portability

Japanese operators' tight control over handsets extends to content as well. Most premium mobile content downloaded to phones comes with digital-rights-management software that stops it from being transferred to other phones or devices, even when users upgrade to a new phone. Content is also SIM-locked, so if the SIM on a phone is changed with someone else's SIM, the content files installed on the phone won't open. Needless to say, with all these controls, there is no content portability in Japan. So if a subscriber decides to switch networks, he can't take his content - such as games, ring tones and full tracks - with him. Operators say they have put these controls in place to protect content providers from piracy. And although hacking software is available to get around some DRM restrictions, piracy is not as big a problem in Japan as in most other markets, especially when it comes to mobile games, though that is less true for mobile music. Undoubtedly, though, DRM controls are also a way for operators to keep content in their walled gardens. These controls prevent users from, for example, setting a ring tone on their phone if they have downloaded it from an off-portal site - what in Japan are referred to as "unofficial" sites. And full tracks won't play unless encoded in the way specified by operators. Each operator develops its own encoding software, which it supplies only to content providers that it certifies to sell music on-portal. The barriers put on content from unofficial sites mean there is no off-portal market in Japan for premium ring tones, full tracks, games and other kinds of mobile content. There is plenty of file sharing and free pirated content off-portal - especially music - but unless users go to the effort of installing hacking software on their phone, they will be unable to makemuch use of that content. What doesn't help off-portal content providers either is that, until recently, operators allowed only content purchased on-portal to be billed through them. Their off-portal business model has been based only on data-traffic revenues.

Opening up to off-portal

The situation is changing, however - a reflection of how Japanese carriers are beginning to open up and explore new revenue streams beyond the original I-mode business model. In October, DoCoMo broke with tradition by introducing off-portal billing, and KDDI has since followed suit. SoftBank has yet to do so. But operators are being selective as to which unofficial sites they provide billing to. They don't want to be seen as enabling sites engaged in illicit or unsavory activities.As part of its plans to open up the mobile market, the MIC would like to see the status of off-portal sites raised to that of operator portals. It is also eager to see players from other industries enter the other layers of the market.Credit-card issuers and big retailers are reportedly interested in muscling in on the mobile platform layer to compete in the provision of DRM, billing and ID-management systems. The MIC has also encouraged the emergence of MVNOs. There are many, such as Disney Mobile, operating in the market, and most are focused on data services rather than on providing low voice prices.On the handsets front, the MIC would like to not only see local manufacturers act more independently from operators but also see more foreign manufacturers successfully penetrate the market - a market that even mighty Nokia has been unable to crack. The operators' dominance over handsets is reflected in the lack of diversity in handset design. Even though all handset models are made with a specific operator in mind, they are,overall, remarkably uniform. There isn't the plurality of design found in more-open markets, where handset makers are selling directly to end-users and competing for their attention. But Japanese handset makers are unlikely any time soon, if at all, to start behaving like Nokia and launching Ovi-type mobile content and application offerings to compete directly with those of operators. They would have to build up a much bigger global presence than they have now to gain the confidence and muscle necessary to start playing the operators at their own game, some market observers say. Besides, handset sales could start picking up and normalizing if the operators do a better job of explaining to consumers that, with the reduction in telephony tariffs, they don't necessarilyend up paying any more than they were before for their mobile service and handset. However, the longer the contract, the lower their monthly handset payments.

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