Technological innovations and 3G mobile phone diffusion: Lessons learned from Japan

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  • Article history:Received 29 September 2009Received in revised form 4 February 2010Accepted 11 March 2010

    Keywords:3G mobile phone

    The adoption of mobile phones in Japan started in 1979, when only wealthy customers could access this technologicaladvancement. For the time being, different policy measures from government, innovation in services and technologicaldevelopment from individual operators and content providers made the market play into full swing. Though there is a greatdeal of research on mobile phones around the world, we have found only a few empirical studies focusing on the effect oftechnology and innovation on the diffusion of 3G mobile phones, particularly in Japan.

    0736-5853/$ - see front matter 2010 Elsevier Ltd. All rights reserved.

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    Telematics and Informatics 27 (2010) 418432

    Contents lists available at ScienceDirect

    Telematics and Informaticsdoi:10.1016/j.tele.2010.03.0011. Introduction

    The year 2001 was the rst to adopt the 3G network among the world by Japanese mobile phone operators. NTT DOCOMOcommercially launched its 3G FOMA (Freedom of Mobile Multimedia Access) services in October 2001 for the rst time. Fol-lowed by DOCOMO, au and SoftBank (previously J-Phone and then Vodafone) introduced the 3G services commercially inApril 2002 and in December 2002, respectively. Both DOCOMO and SoftBank use W-CDMA (Wideband Code Division Multi-ple Access) technology for 3G networks, while au uses cdma2000 1x technology. In addition, another mobile phone operatorentered into the market in June 2007 which is EMOBILE Ltd., offer only 3G services using W-CDMA technology.Technological innovationCompetition policyPanel data analysisValue-added servicesSmall gadgetTechnology and innovation become more important determinants of corporate competi-tiveness, and the telecommunications sector is no exception. A good example is found inthe development of the mobile phones. Technological development, embodied in innova-tive functions developed from the rst (1G) to third generation (3G) systems, has playedsignicantly important roles in the growth and upheavals of the Japanese mobile phonemarket. In addition, development in contents, value-added services which are suppliedby related rms formed in the vertical structure, charging systems, handset development;all these have made this small gadget an increasingly important part of daily life.This paper heuristically analyzes the effect of technological innovations and competition

    policies on the diffusion of 3G mobile phones in Japan. In particular, this paper attempts toidentify what are factors to promote the Japanese 3G mobile phone by using panel dataanalysis. In constructing an estimation model, the number of subscribers to 3G mobilephone services is taken as a dependent variable, while the following three groups of vari-ables (1) GDP and charges, (2) competition policies, and (3) technological innovations areselected as independent variables. The study examines not only the 3G market as a wholebut also the three major individual carriers, namely NTT DOCOMO, au (KDDI) and Softbank.In particular, the latter focuses on the different strategies of the three carriers toward inno-vations and competition. Monthly data related to 3G mobile phones from October 2001 toDecember 2008 is used for the analysis.

    2010 Elsevier Ltd. All rights reserved.Technological innovations and 3G mobile phone diffusion: Lessonslearned from Japan

    Sheikh Taher Abu *

    Graduate School of Applied Informatics, University of Hyogo, 1-3-3, Higashi-Kawasaki-cho, Chuo-ku, Kobe 650-0044, Japan

    a r t i c l e i n f o a b s t r a c t

    journal homepage: www.elsevier .com/locate / te le

  • In the case of the Japanese mobile phone market, Iimi (2005) focused on the demand for mobile phone services during

    tied technology, and social factors for the success of camera phone development.

    S.T. Abu / Telematics and Informatics 27 (2010) 418432 419Unlike the case with mobile phones, the diffusion of ADSL (Asynchronous Digital Subscriber Line) has been closely inves-tigated. Eisner and Waldon (2001), Kridel et al. (2001), and Crandall et al. (2002) utilized discrete choice methods to analyzecompetition of broadband market in the US. Tsuji and Tomizuka (2006) analyzed factors promoting Japanese ADSL by AHP(Analytical Hierarchical Process) analysis. They divided these factors into three types: deregulation, competition, and tech-nology, then calculated degrees of importance. Finally, they monetarily evaluated factors, in which competition mostly con-tributed the development of ADSL. Akematsu (2008) analyzed factors promoting ADSL based on the data of ADSL carriersusing the panel data analysis.

    From the discussion above, this paper attempts to present a view of the effect of technological innovations for the diffu-sion of 3G mobile phone in Japan using panel data analysis. The research is based on monthly data collected from differentsources. In addition, the paper analyzes not only the whole market but also the three major carriers. Technology develop-ment related to services which have been developing rigorously involving music, electronic payment, digital TV, high speedInternet service, pricing strategy, taking all these services into consideration, this paper has conducted an empirical analysisto produce authentic results for the diffusion of 3G mobile phones which may serve as a model to upgrade services to 4G(fourth generation) mobile phones in near future.

    2. Mobile telecommunication market

    The mobile phone market in Japan, which is characterized by rapid technological development in different phases ofchanging market demand, induces carriers to harmonize their businesses according to needs of subscribers. As the sectoris highly services-intensive, technological innovations and new business models can play an increasingly important role.Operators under these circumstances are confronted with erce competition due to short product life cycle and the pressureto differentiate their services.

    2.1. Overview of the market

    Three major carriers, DOCOMO, au, and SoftBank, have been dominating the market since the advent of the Internet inmobile phones in 1999. As of December 2008, the total number of subscribers amounted to 105.83 million, of whichDOCOMO alone holds 51.17% market share. In contrast, au and SoftBank holds 28.87 and 18.90% market share, respectively.

    Fig. 1 demonstrates briey to show the whole telecommunications market in Japan according to their subscriber achieve-ment and growth. While the number of xed phones has remained steady since 1996, mobile phone subscribers have beenincreasing rapidly. Therefore, the mobile phone market has been reaching to realistic near-saturation stage, and the growthrate of subscribers has been slowing down. The PHS (Personal Handyphone System) is an another portable telephone systemin Japan, which was introduced in July 1995 and was initially incompatible with the existing mobile phone network standardduring that time.

    In June 2007, EMOBILE Ltd., the fourth mobile phone operators, entered the market using the W-CDMA technology. Thecarrier offers only 3G services, having obtained DOCOMOs authorization to use its network on an access cost basis. Initially,it was started with 60,200 subscribers and consecutively 2 months the company had the same number of subscribers due to19961999. A nested logit model was used to examine the inuence of basic 2G services, including voice mail and specicdiscount packages offered by an individual carrier. He identied the effects of (a) price elasticity, (b) product differentiationof various carriers, and (c) network externalities increase the demand for mobile phones. Ida and Kuroda (2006) used amixed logit model to estimate demand for mobile phones services in Japan. They compared both 2G and 3G mobile phonesfor major carriers to nd whether 3G can be a substitute for 2G by using survey data carried by MIC (The Ministry of InternalAffairs and Communications) and concluded that DOCOMOs 2G services can be a substitute for its 3G. In case of au, 3G ser-vices were not substitute for DOCOMOs 3G. Nelson (2004) analyzed the development of camera phone in Japan. She iden-In respect to mobile phone diffusion in the world, Ahn and Lee (1999) were rst to undertake a cross-country modeling ofmobile services using ITU (International Telecommunication Union) data for 1 year. They found a complementary relation-ship between mobile and wireless services. Substitution effect between mobile and xed-telephone was estimated by Mad-den and Coble-Neal (2004) using ITU data 19942000 in a lagged dependent variable model. They found that mobile phonescan be a substitute for xed-telephones in many countries. Banerjee and Ros (2004) found that technological substitution insome countries and economic substitution in others can explain the differential patterns of development in global xed andmobile telephony. Many of the diffusion studies are based on econometric, relying on aggregate measures of mobile phonepenetration, compared across countries. Some researches explained penetration rates using geography, market competitionand the income level, such as Baliamoune-Lutz (2003), market competition by Rouvinen (2006), socio-cultural attributes andthe Internet, telecommunications use by Kamssu (2005) or national industry structure, pricing schemes and feature avail-ability by Kshetri and Cheung (2002) and Minges (1999). Kim (2005) estimated the preferences of mobile phones in Koreafor IMT-2000 (International Mobile Telecommunication-2000) services by using the conjoint analysis. He identied threemajor players in the Korean mobile market attracted subscribers by providing services like video calling, global roamingand upgrade services via the mobile multimedia Internet.

  • 40.00

    420 S.T. Abu / Telematics and Informatics 27 (2010) 4184320.00















    Fig. 1. Transition in total number of subscribers (in millions). Source: White paper, MIC.








    120.00Mobile phoneFixed phonemarket competition. In respect to compete among carriers, the company focuses on attractive services offering new pricingand marketing strategy to capture subscribers and reached to 1.12 million subscribers as of December 2008.

    Corresponding to Fig. 2, market share uctuation of each carrier can be seen in 3G services. Note that, while in 2003,DOCOMO had only 13.7% market share of 3G comparing to au (85.5%) and SoftBank (0.8%), but in 2008 it has been raisedto 50%. In response to aus largest market share at the beginning can be identied as they offered almost same technologyand bandwidth like 800 MHz for their 3G subscribers which was not actually 3G rather than 2.5G. Despite the trend,DOCOMO and SoftBank offered a number of innovative services to subscribers embodied with handsets and pricingstrategies.

    Another transition of mobile phones in Japan notably can be seen when i-mode service introduced by DOCOMO in Feb-ruary 1999. Voice only mobile phones entered into a new era of communication with high ambition to provide a bundle ofvalue added service related to IP (Internet Protocol) based functions. Like any other technology diffusion, at the beginning ofi-mode service, subscribers of Japan were not adapted with the new technology quickly while only 5000 out of 40.5 millionsubscribers registered for the service. For the time being, the other two carriers emphasized to develop the same IP functionsand EZweb by au in April 1999, and J-Sky by J-Phone (now SoftBank) in December 1999, were introduced. The ercecompetition occurred inside the mobile Internet market which lowered the data communication charges and increasedthe number of subscribers.

    2.2. Technology

    DOCOMO aggressively invested in R&D (Research and Development) for user-oriented 3G mobile phones, and it aimed tobe the leader in the global 3G markets. DOCOMO followed IMT-2000 by the ITU as the standard for 3G services. There were,however, some technical problems found in networks and 3G handsets in the early stage. Even loyal customers of DOCOMOwere not eager to change their handsets to 3G easily. Although more than 47.49 million subscribers signed up for 3G FOMAservice until December 2008, it is still less in terms of DOCOMOs total subscribers.

    33.1%13.7% 31.8%






    Fig. 2. 3G market share shift by carrier based on the number of subscribers. Source: TCA statistics (2009).

  • DOCOMO believes that better technology may bring competitive advantages and customer satisfaction. In fact, i-modeincreasingly helped to attract subscribers for better services than before by providing different competitive services suchas email, browsing Internet comparing with its rivals. Although SMS (Short Message Service) was introduced to the marketin 1986, it ended shortly and pushed base email service by DOCOMO helped to achieve its market power because of i-modeinvention. To cope with changing trends, DOCOMO often emphasize on high speed Internet service such as HSPA (High SpeedPacket Access) and an updated new technology of FOMA, leading beyond 3G as well as 4G before 2010.

    Table 1 illustrates the diversication of 3G technologies that have been frequently used by Japanese mobile phone oper-ators to provide the most sophisticated and user-oriented services among the world. au chose a US-developed 3G technol-ogy, cdma2000, which is different from the European technology, W-CDMA, which DOCOMO and SoftBank chose. au found

    imal share in this market.

    S.T. Abu / Telematics and Informatics 27 (2010) 418432 421The technological development from 2G to 3G such as W-CDMA and CDMA2000 was thus aimed at providing high speeddata communications. The maximum down load speeds of CDMA2000 and W-CDMA are 2.4 Mbps and 14.4 Mbps,respectively.

    2.2.1. BandwidthWhile limited bandwidth was the main issue regarding proper spectrum allocation until 2000, the MIC initially appropri-

    ated the 800 MHz and 1.5 GHz bands for second-generation mobile phones in 2000. As the number of mobile phone sub-scribers skyrocketed, however, the assigned frequencies became in such a heavy demand that it became impossible foradditional companies to enter the market without the allocation of new bandwidth. To correct this situation, and therebypromote the continuing development of ubiquitous connectivity in Japan, the ministry decided to allocate the 1.7 GHzand 2 GHz bands for new mobile carriers which are depicted in Table 2. For voice services, bandwidth shows little differencebetween 2G and 3G, but for data communications, 3G mobile requires more frequency because higher bandwidth was nec-essary. EMOBILE Ltd. entered into the market in 2007, resulted in intensifying competition.

    2.3. Innovations and services

    While DOCOMO has been successfully ahead of other carriers in the eld...


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