BuddeBlog

In November 2006 I spent a week in Japan. I was invited by Ericsson to attend their annual Analysts Conference. I also conducted several Roundtables with customers and met with our sales partner organisation, GII. Of course, mobile developments feature prominently in this report, since Japan is a world leader in that area, and the Ericsson conference focused heavily on the new developments in mobile. I also very much appreciated the company’s facility for customer visits and specialist interviews.

The amazing Japanese mobile market
Mobile phone use in Japan is very different from what I have seen elsewhere. I had been aware that this was so, but experiencing it first-hand was very interesting.

Not only do people not talk on their phones in trains, basically they don’t make mobile calls in any public area – those intrusive calls in other countries, which everyone within 25 metres is forced to listen to. More often than not people go outside or to a private area if they have to make a call. As far as I know most phones are on silent mode; the Japanese don’t like loud noises, and they find us westerners rude because we speak loudly and our phones have such penetrating ringtones.

Japanese people are certainly the most polite people I have ever encountered.

I have been told that this was not only politeness, but also shyness, and I think that this certainly is a cultural factor.

As usual, I did one of my quick and dirty surveys in Japan. On board a train I could easily count between 50 and 100 people within my radius and, on average at any given moment, one in ten was using their mobile phone for data purposes. At stations this number was double that.

When you encounter kids coming home from school, at least half of them are on the phone. As far as I could see 95% or more were using it for email. SMS is not very popular in Japan, because of the lack of SMS interconnect between the operators. Mobile email is very cheap, prices are capped and, in the case of Softbank, emails are free.

Occasionally you see some of the younger men playing a game. I did not see anybody using video or photo applications. So, despite the fact that mobile data use in Japan is 45% (against a global average of 15% if I include SMS) the reality is that it is mainly used for email – the reason for that is largely due to the lack of SMS.

I found this very interesting indeed.

The user-friendliness of email in Japan is also remarkable. Predictive typing has been finetuned in such a way that it allows people to be very fast with what must be a difficult script for mobile phone typing.

During my trip I have gathered lots of interesting data on the Japanese market. I have analysed why the Japanese market is so successful and what other countries can learn, and should take into account, if they look at the Japanese success story. The reality is that a great deal of its success is by default and not because of superior planning, and is a result of the unique social context within the Japanese culture.

More on that in my special report.

The mobile data success is also stimulating the market for content, services and advertising. In my report I discuss interesting developments in relation to QR codes, a type of Japanese bar-coding system, but more pictorial, which can be used in combination with the mobile phone camera.

Mobile social networks is another success story, emulating the fixed networks of MySpace and YouTube.

Some five million Japanese are now also using e-cash through their mobile phones.

And, last but not least, I have been able to gather information regarding the unbundling of FttH. Thanks to good government telecoms policies, in Japan there are ten fibre wholesale operators using the NTT FttH network.

For our special report on Japan at the discounted price of $20 see http://www.budde.com.au/Reports/Contents/Japan-Travelogue-Japan-Trip-November-2006-4136.html

The Japanese train system
We have all seen those pictures with Japanese rail staff in white gloves pushing people onto the trains, but actually experiencing it is a different matter entirely.

Despite the fact that there is not just one underground railway system in Tokyo, and you sometimes need to buy new tickets halfway, the system works like clockwork. You never have to wait more than a few minutes and the speed is fast, the trains are clean and the passengers surprisingly quiet.

These trains carry millions of travellers every day, but it’s only when you see the size of the infrastructure and the number of people involved that you appreciate the scale of this system. The mass of people at the stations made me think of the demonstrations you sometimes see on television – of course without the banners and the shouting. It certainly is huge.

Tokyo station is easily one of the largest train stations I have ever seen. It is beyond comprehension, and I was told that even seasoned local Tokyo people sometimes get lost there. Shinjuku is apparently even bigger, and Shibuya, the station that I called ‘home’ for most of the week, was equally impressive.

They have built a whole system of fly-over pedestrian footways to cope with the passengers. The Shibuya shopping-level pedestrian crossing a bit further up is a tourist attraction in itself.

At the same time the rituals around train travelling are highly-finetuned – by the people themselves. There is no pushing, people line up and when no more people can be pushed into the train the rest remain in the queue waiting for the next train to arrive.

Naturally, because of the mass of people, there is lot of body contact, but that is taken for granted. For a few days I continued to say ‘I’m sorry’ when I bumped into somebody, but then I adjusted and also took the jostling for granted. I didn’t find it rude if somebody bumped into me without apologising. It simply is part of Tokyo train travel.

In the city trains there is complete silence. A train can be packed to the brim and yet you could hear a pin drop. People do not talk to each other and the use of mobile phones for calls is frowned upon (using them for silent data transmission, however, is accepted now also even for the more conservative businessmen).

I even got nervous that I hadn’t switched off my phone and couldn’t reach my pocket to switch it off because I was packed into the train. It would have been just as embarrassing to have your phone ringing on a Tokyo train as it would be in the front row of an upmarket theatre. Fortunately this nightmare did not eventuate.

However, travelling further towards the outskirts of the city, as I did to visit Hakone, there is more social contact on the train – much more relaxed.

As there is simply no room in the trains to read a newspaper, people either read comic books, or study English from a text book.

Over the last three months or so I have had to begin changing my predictions for WiMAX.

As is so often the case in our industry, the ideas look good on paper, but the implementation is far more difficult. Without any significant projects aimed at moving into mass market operations, I can only conclude that the role for WiMAX in the overall personal wireless broadband market will be limited.

The best hope for WiMAX at this stage is that some of its technologies will be integrated into the 4G model, which will, however, be dominated by the mobile operators. I don’t see a big market for alternative WiMAX players in competition with the mobile operators.

Even in developing countries WiMAX will be battling to become a dominant player. For the foreseeable future the cost of WiMAX installation will still be rather high; also, the mobile operators are constantly carrying out massive expansions to their networks and they, like their counterparts in the more developed countries, will aggressively protect their markets. As far as they’re concerned, the longer it takes to get commercial WiMAX services off the ground the better.

My current view is that WiMAX will find its niche in certain markets. There will be room for the technology to complement fixed broadband services, where the coverage is poor or non-existent, but the business case for such areas is shaky and often requires some form of (government) subsidy.

Of course, in markets where the mobile operators fail to come up with affordable personal wireless broadband services there may be a role for WiMAX operators to enter that market. But the sheer size of the mobile operators is an enormous deterrent to potential competitors, who would be placing their investments at risk since the mobile operators could easily overbuild their installations.

While the mobile technology earmarked to make the transition to personal wireless broadband has already arrived – known as Long-Term Evolution or LTE – as with all other technologies, we need to see the commercial reality before we get excited.

See also:- Global Wireless Broadband

With the recent news in China regarding their 3G policies, the question is whether this announcement has made anything clearer than when I made my previous analysis on this market a year or so ago? I don’t think so.

In September 2005, I wrote:

• The only firm promise the government has made is to have [3G] introduced before the Beijing Olympics, but there is nothing to stop them simply having a 3G system in place that only covers the major sites and tourist areas.
• With China’s reputation at stake it is reasonable to expect that the first licence issued will be based on the Chinese TD-SCDMA standard. This is a prickly issue in itself, as not all players in the 370 million Chinese mobile subscribers market are keen to use this technology. The world’s largest mobile operator, China Mobile, operates a GSM network and wants to move to WCDMA. China Unicom has a bit of CDMA, GSM and fixed lines, and to complicate this with yet another technology would cripple this already weak player even further.
• Apart from this, there are still questions about the technical readiness of this standard for major commercial deployment. A large-scale test was planned for later this year, but by September there was still no clarity on the issue.
• While the government would obviously like to use the Olympics to launch its own 3G technology, it is still questionable whether they are going to use the still largely untested Chinese 3G standard for the event. They can’t afford to have a failure, or problems related to this new technology, on such a world stage occasion.
• However, having said this, the opposite could also happen – the government may spend ‘prestige funds’ to buy Chinese TD-SCDMA handsets and hand them out, free of charge, in and around the Olympic venues. This, however, would not be well received by the international community, as they are very wary of the influence of government ‘subsidies’ in the telco industry and this would clearly be seen as anti-competitive, and could contravene WTO rules.

The government has indicated that it still wants to see the introduction of TD-SCDMA, the China-only 3G standard. But what exactly is the strategy behind this? The decision-making process has gone on for years and it is hard to see that China will get any opportunity to compete elsewhere in the world with their own standard in what is an already very heavily standardised 3G market. Yes, China would like to let the world know that it wants to play a role in the standard making process, but I don’t think this a clever way to do it. The current situation is really only highlighting what China cannot do.

But also in the context of its domestic market, what on earth are the current players going to do with their hundreds of millions of customers that at some time will need to be moved to a 3G system? The TD-SCDMA standard they are proposing doesn’t allow an easy migration path for the existing customer base. So if anything it might become a huge financial burden for these operators if the government mandates that they implement the TD-SCDMA standard. True, the government has indicated that it isn’t ruling out other 3G systems, but nevertheless we all know what heavy-handed government policy can result in. The government has all the political power it needs to bring about a smooth migration to the current global 3G standards, a move that would in normal circumstances be a sound commercial decision.

As I mentioned last year, the last thing that the government needs is a failing Chinese standard during the Beijing Olympics in 2008; so it will be very interesting to see how this story will unfold over the next two years.

In May 2005, I also analysed the industry structure and I provided some scenarios that could possible unfold:

Restructuring Scenario 1

• China Telecom acquires the GSM business of China Unicom and the northern part of the China Tietong (Railcom) network;
• China Netcom acquires the CDMA business of China Unicom and the southern part of the China Tietong (Railcom) network;
• China Mobile acquires the rest of China Unicom plus China Satcom

Restructuring Scenario 2

• China Telecom and China Netcom receives one of China Unicom’s mobile networks and they divide it up between themselves;
• China Unicom is left intact as a fourth key player.

With China’s new mobile policies, it looks like a restructuring is getting more urgent. It doesn’t make sense to have this multiplicity of operators/standards. As we have seen in other markets around the world, there will need to be some effort put into consolidation in the upcoming restructuring. However, the official line from the government still remains non-committal on any such structural change.

I don’t know if I need to wait for yet another year before I can make the next analysis on this ongoing saga. Time will tell.

Paul Budde

For more info see:-
BuddeComm Annual report
2006 Telecoms Mobile and Broadband in China
BuddeComm Web reports
China – Broadband Market – Overview & Statistics
China – Convergence – Triple Play & Digital Cable TV
China – Convergence – Digital Satellite TV, Digital Terrestrial TV & iTV
China – Infrastructure – FttH and NGNs
China – Infrastructure – IP Networks
China – Key Statistics, Telecom Market Overview & Analysis
China – Major Telcos – Overview & Statistics
China – Mobile Communications – 3G Development
China – Mobile Communications – Voice and Data Services
China – Mobile Market – Overview & Statistics
China – New Internet Economy
China – Regulatory Environment

At an industry roundtable in Sydney 40 representatives from the telco and utilities industry discussed the latest developments in Broadband Power Line (BPL) developments. They concluded that there is clearly far more to BPL than an alternative broadband offering.

For example with projects underway across Australia the smart electricity meter reader market is rapidly developing.

However, it would be a grave mistake if we fail to consider the use of a telecommunications network beyond that of meter reading. We do need to take into account that this market and our society have changed since smart meters, based on narrow band technologies) were introduced some 25 years ago (as a matter of fact that technology dates back to the 1890s). While the electricity regulators are looking at current environmental, energy saving and global warming issues they appear to have their blinkers on and risk spending millions of dollars onnarrowband technology, which could read meters but could exclude the full benefits that broadband would deliver going forward.

The decision makers in State Government and in the utilities industry need to understand that there are big risks involved in spending so much money on a narrowly technology. In our rapidly changing environment with issues such as global warming, water shortages and electricity outages due to extreme hot temperatures, we clearly do need to think forwards and not as is currently is the case in most States backwards.

The industry needs to make a stand now, before it is too late and this old technology gets installed, they need to speak up to politicians and other decision makers in this field to build a case that will see smart meters integrate features that allow utilities and their customers to address these critical issues in our society.

BPL can most certainly be used to create far greater energy use awareness and can empower users, by making information about individual domestic (or business) consumption directly available to the user’s PC, TV or mobile phone. There is also potential for new energy devices that people can use to better manage their own energy use. There is large pent-up consumer and small business demand for energy consumption information that allows them to better mange their own energy usage. It was estimated that by simply providing this information to customers you could create a national 10-15% saving in energy, basically saving the nation a few power stations. Smart water meters could also be linked into this system, with similar saving results.

Wouldn’t be an enormous waste if we overhaul all these meters and uses old technologies that are not taking these future energy saving and management issues into account, yet the State Governments of Victoria has recently decided to go for old technology.

The information obtained from these smart meters also allows utilities to manage energy use in their networks at peak times (managing hot water systems, street lighting, etc). With another hot summer looming it should be very obvious to all involved that we do need to address this issue – BPL can play a key role as long as our energy decision makers are willing to show vision on this matter. It is estimated that investing in broadband-based smart meter solutions could save our society and our environment literally hundreds of millions of dollars.

At the Roundtable the vendors invited the utilities to let them know what they want from smart meters, how much they are prepared to spend and how many meters are needed. This could see the cost gap between the obsolete narrowband technology and the new BPL technology, bridged to an acceptable level. Representative at the Roundtable believe that they as an industry owe this to our society and to our environment. We need to ensure that we deploy the latest technology that not simply makes meter reading cheaper but more importantly also contributes to the implementation of solutions that immediately benefit energy savings and contribute to safeguarding our environment.

Paul Budde

See also: Australia – Broadband Power Line – Smart Meters

When, in May 2006, Telecom made the extraordinary announcement that it would actually pre-empt government policies and ‘voluntarily’ start to work towards operational separation and better wholesale services, there was a general reaction of disbelief. After a decade of anti-competitive behaviour and many false promises, would the company be able to make that change?

I was one of the few who said that we should give Telecom the chance to make the changes it had put on the table. The company made some good moves and launched industry groups to facilitate working together towards a better, more competitive, telecoms environment. It also foreshadowed better UBS services in 2006, ULL in late 2007 and Naked DSL in 2008.

Unfortunately, at that stage Telecom didn’t take the opportunity, as a gesture of goodwill, to end some of the disputes it had with companies such as CallPlus. This created a certain amount of disquiet, as it would have been reasonably easy to do so, as evidence of good faith. However, I understand that since then, these issues have to some extent been resolved. At a TUANZ-organised industry meeting I suggested that we should not demand the CEO’s scalp and we should give the company six months to implement at least the first set of changes.

I still believe Telecom was genuine in its promises and I am cautiously optimistic that over the longer term we will see the positive effects of that:-

• There are no indications that the company is attacking the new legislation – it seems to have accepted it.
• Telecom initiated working groups with the industry and is seriously discussing issues such a LLU, NGNs and fibre rollouts.
• There is far more openness than ever before and this remains a good basis for further industry work.

As I have mentioned before, I greatly prefer a voluntary solution to a regulatory one. For a while it appeared that we were moving in this direction and that perhaps the regulatory stick was enough to create the necessary change.

Unfortunately, however, there are also some negatives to report.

The company has certainly lost the PR battle again, in relation to broadband and in particular to UBS. Despite having some sympathy for Telecom here, it has handled this situation very poorly. At the same time it began to look as though it was backing away from the BT model and this made the government nervous as well. The Vodafone /ihug (Vodahug) deal also has, in my view, something to do with that. This company is potentially far more dangerous to Telecom than TelstraClear (this point is discussed below).

So, at the end of the day, it is a 50/50 result.

We also need to take a balanced approach to UBS. By moving into new wholesale territory, ISPs will have to realise that commodity products attract commodity prices and by necessity, this requires large-scale operations.

For most of New Zealand’s relatively small ISPs, this means they need to move into value-added niche markets; or consolidate, or otherwise they will perish. With the arrival of Vodahug, Telecom’s own broadband margins are also coming under pressure, as they will have to far more aggressively defend their retail market.

And it is not only the smaller ISPs that are under threat. For various reasons the future of Telecom is also vulnerable.

So the commercial reality is that the smaller players will need to adapt, and there is no way back. If they don’t have a Plan B in place, life will become even more miserable for them in the future. Real market competition will soon move to LLU and DSLAMs, which requires significant new investment. Can the current New Zealand ISPs afford this? I am sorry to have to say that, in most cases, I think not.

Sure, Telecom could have managed the UBS issue much better. It should have tried to get a much better buy-in from its wholesale customers, but I am afraid that the long-term outcome wouldn’t have been much different. And TelstraClear doesn’t seem to be too unhappy with the service it receives from Telecom.

What worries me more is Telecom’s backtracking on the BT model. The company seemed to have embraced that model earlier in the year, but there is no doubt about its current position on this. What this has meant is that unfortunately the government now has to step in with heavy-handed legislation, because it is most unlikely that Telecom will act without this being in place.

This puts the industry in limbo – basically we can’t expect anything serious to happen before the government lays its cards on the table. And, for the sake of New Zealand, they’d better be good. As long as there are grey areas Telecom will use them and, to a degree, it will argue that this is in the shareholders’ interest.

I would argue that the issue of corporate citizenship should also be considered, but it is obvious that this doesn’t count for much in the current developments.

Furthermore there are still products, especially in the SME markets, where the Telecom wholesale price is higher than its own retail price. But without the regulatory support behind issues like this from TelstraClear, there simply isn’t enough power in the industry to continue to challenge Telecom.

This and much more will all be further discussed and analysed at my Roundtables in Auckland and Wellington on 4 and 5 December. For more info see:
New Zealand roundtables