One way to look at the worldwide market for handsets is to look at Japan. What goes on in Japan may indeed be a good indicator of future trends - fertile ground to understand what works and doesn’t work with new technology and business models.

Art Berman
Insight Media Consultant

And what’s going on in Japan? For one thing, a change in marketing strategy by the major carriers that could have some good short term results, but more negative long-term results. Another factor is include the arrival if iPhones and the deployment of Goggle’s Adroid platform. All this could lead to a slowing of handset sales and market consolidation.

NTT DoCoMo started this trend with a change in its marketing strategy that raised handset prices in return for a discount on monthly telecommunications charges. In November, the company simultaneously introduced monthly installment plans for purchasing its handsets, enabling customers to obtain its latest models without a down payment.

The result? Japanese domestic handset shipments jumped 24.9% year over year in December, according to the Japan Electronics and Information Technology Industries Association. In addition, annual shipments for this fiscal year are expected to come close to the all-time high marked in fiscal 2003, thanks to replacement demand for models featuring camera functions. Techno Systems Research (TSR) for example, sees Japanese handset sales reaching 48 million in FY 2007 (to earn more about the TSR Mobile Display Quarterly Report, click here).

But…shipments are widely expected to fall, possible dramatically, next fiscal year. The main reason for this is that new marketing strategies are being adopted by Japanese cell phone carriers. One effect of these new strategies will be to significantly lengthen the handset replacement cycle.

Analyzing the results of consumer surveys, MM Research Institute predicts that the replacement cycle will lengthen from 22 months or so in fiscal 2002 to some 30 months in fiscal 2008 and beyond to at least fiscal 2010. As an example of this trend, when DoCoMo and KDDI Corp. now sell new handsets, they require the customers to use the sets for at least two years.

MM Research Institute also forecasts that unit sales will slump 8.5% on the year to 45 million in fiscal 2008, with a further slide expected for fiscal 2010 to slightly more than 42 million.

Masafumi Matsumoto, an Executive Vice President of Sharp Corp., was even more pessimistic saying, "Domestic shipments of cell phone handsets will fall as low as 42 million units in fiscal 2008". This forecast is about 15% lower than that predicted for fiscal 2007.

Other factors are likely to further complicate the dynamics of the handset marketplace.

• The imminent arrival of Apple in the Japanese market. The U.S. firm is conducting talks with both DoCoMo and Softbank Mobile Corp. with a target of introducing its iPhones in Japan later this year.
• Google recently released a free software stack for mobile devices, called Android. It includes an operating system, middleware, e-mail and applications. Google distributes the software bundle for free to mobile phone handset manufacturers. Android has the potential to revolutionize the way handsets are developed in the near future by setting the global standard for mobile phone operating systems. If this turns out to be the case, Japanese cell phone handset makers will be able to reduce their costs of developing software, which apparently account for half of their overall R&D expenses. That’s the good news. The bad news is that this course of events is expected to give more advantage to overseas rivals such as Nokia and Samsung Electronics thanks to their much larger output capacities.
• Texas Instruments unveiled a handset prototype incorporating the Android bundle at the third Mobile World Congress, an international trade fair for the industry that was held earlier this month in Barcelona.

In the past, Japanese firms have tried to expand overseas. Most attempts failed. Toshiba, Panasonic Mobile Communications and NEC each pulled out of their overseas operations between 2004 and 2006. In addition, Kyocera withdrew from the Chinese market.

Although the Japanese market accounts for less than 5% of global demand, as many as 11 Japanese makers and six foreign companies compete in Japan. If, as predicted, the market shrinks, this combination of factors suggests the strong possibility of imminent industry consolidation. Insight Media is monitoring developments so…stay tuned for the latest news from the front.

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