Telematics and Informatics

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Technological innovations and 3G mobile phone diffusion: Lessons

learned 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

Article history:

Received 29 September 2009

Received in revised form 4 February 2010 Accepted 11 March 2010

Keywords: 3G mobile phone Technological innovation Competition policy Panel data analysis Value-added services Small gadget

a b s t r a c t

Technology and innovation become more important determinants of corporate competi-tiveness, and the telecommunications sector is no exception. A good example is found in the development of the mobile phones. Technological development, embodied in innova-tive functions developed from the first (1G) to third generation (3G) systems, has played significantly important roles in the growth and upheavals of the Japanese mobile phone market. In addition, development in contents, value-added services which are supplied by related firms 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 to identify what are factors to promote the Japanese 3G mobile phone by using panel data analysis. In constructing an estimation model, the number of subscribers to 3G mobile phone 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 are selected as independent variables. The study examines not only the 3G market as a whole but 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 to December 2008 is used for the analysis.

1. Introduction

The year 2001 was the ﬁrst to adopt the 3G network among the world by Japanese mobile phone operators. NTT DOCOMO commercially launched its 3G FOMA (Freedom of Mobile Multimedia Access) services in October 2001 for the ﬁrst time. Fol-lowed by DOCOMO, au and SoftBank (previously J-Phone and then Vodafone) introduced the 3G services commercially in April 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 operator entered into the market in June 2007 which is EMOBILE Ltd., offer only 3G services using W-CDMA technology.

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

* Tel.: +81 80 3835 1977; fax: +81 78 367 8625. E-mail address:[email protected]

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Telematics and Informatics

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In respect to mobile phone diffusion in the world,Ahn and Lee (1999)were first to undertake a cross-country modeling of mobile 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 fixed-telephone was estimated by Mad-den and Coble-Neal (2004)using ITU data 1994–2000 in a lagged dependent variable model. They found that mobile phones can be a substitute for fixed-telephones in many countries.Banerjee and Ros (2004)found that technological substitution in some countries and economic substitution in others can explain the differential patterns of development in global fixed and mobile telephony. Many of the diffusion studies are based on econometric, relying on aggregate measures of mobile phone penetration, compared across countries. Some researches explained penetration rates using geography, market competition and the income level, such asBaliamoune-Lutz (2003), market competition byRouvinen (2006), socio-cultural attributes and the Internet, telecommunications use byKamssu (2005)or national industry structure, pricing schemes and feature avail-ability byKshetri and Cheung (2002) and Minges (1999).Kim (2005)estimated the preferences of mobile phones in Korea for IMT-2000 (International Mobile Telecommunication-2000) services by using the conjoint analysis. He identified three major players in the Korean mobile market attracted subscribers by providing services like video calling, global roaming and upgrade services via the mobile multimedia Internet.

In the case of the Japanese mobile phone market,Iimi (2005)focused on the demand for mobile phone services during 1996–1999. A nested logit model was used to examine the influence of basic 2G services, including voice mail and specific discount packages offered by an individual carrier. He identified the effects of (a) price elasticity, (b) product differentiation of various carriers, and (c) network externalities increase the demand for mobile phones. Ida and Kuroda (2006)used a mixed logit model to estimate demand for mobile phones services in Japan. They compared both 2G and 3G mobile phones for major carriers to find whether 3G can be a substitute for 2G by using survey data carried by MIC (TheMinistry of Internal Affairs and Communications) and concluded that DOCOMO’s 2G services can be a substitute for its 3G. In case of au, 3G ser-vices were not substitute for DOCOMO’s 3G.Nelson (2004)analyzed the development of camera phone in Japan. She iden-tified technology, and social factors for the success of camera phone development.

Unlike 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 analyze competition 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 carriers using 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 different sources. 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 paydevelop-ment, digital TV, high speed Internet service, pricing strategy, taking all these services into consideration, this paper has conducted an empirical analysis to 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 of changing market demand, induces carriers to harmonize their businesses according to needs of subscribers. As the sector is highly services-intensive, technological innovations and new business models can play an increasingly important role. Operators under these circumstances are confronted with ﬁerce competition due to short product life cycle and the pressure to 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 in mobile phones in 1999. As of December 2008, the total number of subscribers amounted to 105.83 million, of which DOCOMO alone holds 51.17% market share. In contrast, au and SoftBank holds 28.87 and 18.90% market share, respectively.

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

In June 2007, EMOBILE Ltd., the fourth mobile phone operators, entered the market using the W-CDMA technology. The carrier offers only 3G services, having obtained DOCOMO’s 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 to

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

Corresponding toFig. 2, market share ﬂuctuation 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 raised to 50%. In response to au’s largest market share at the beginning can be identiﬁed as they offered almost same technology and 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 pricing strategies.

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 of value added service related to IP (Internet Protocol) based functions. Like any other technology diffusion, at the beginning of i-mode service, subscribers of Japan were not adapted with the new technology quickly while only 5000 out of 40.5 million subscribers registered for the service. For the time being, the other two carriers emphasized to develop the same IP functions and ‘‘EZweb” by au in April 1999, and ‘‘J-Sky” by J-Phone (now SoftBank) in December 1999, were introduced. The ﬁerce competition occurred inside the mobile Internet market which lowered the data communication charges and increased the number of subscribers.

2.2. Technology

DOCOMO aggressively invested in R&D (Research and Development) for user-oriented 3G mobile phones, and it aimed to be 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 DOCOMO were not eager to change their handsets to 3G easily. Although more than 47.49 million subscribers signed up for 3G FOMA service until December 2008, it is still less in terms of DOCOMO’s total subscribers.

0.00 20.00 40.00 60.00 80.00 100.00 120.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Mobile phone Fixed phone PHS

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

85.5%

50.0%

50.6%

50.8%

46.8%

33.1%

13.7%

34.6%

31.8%

39.8%

47.8%

65.5%

18.2%

14.8%

9.4%

5.4%

1.4%

0.8%

0% 20% 40% 60% 80% 100%

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

Table 1illustrates the diversiﬁcation 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 technoltechnol-ogy, W-CDMA, which DOCOMO and SoftBank chose. au found CDMA technology based on cdma2000 standards are capable of distinct carrier conﬁgurations, employing carriers with lower bandwidth, could make a smooth transition from 2G to 3G, because of the backward compatibility to CDMA IS-95 (Integrated Standard-95) systems within the CDMA technology family which requires lower data transmission rates compatible to 3G requirements.

SoftBank is lagged behind in entering the 3G market, probably due to its global strategy. The company thus owns a min-imal share in this market.

The technological development from 2G to 3G such as W-CDMA and CDMA2000 was thus aimed at providing high speed data communications. The maximum down load speeds of CDMA2000 and W-CDMA are 2.4 Mbps and 14.4 Mbps, respectively.

2.2.1. Bandwidth

While 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 for additional companies to enter the market without the allocation of new bandwidth. To correct this situation, and thereby promote the continuing development of ubiquitous connectivity in Japan, the ministry decided to allocate the 1.7 GHz and 2 GHz bands for new mobile carriers which are depicted inTable 2. For voice services, bandwidth shows little difference between 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 ﬁeld of contents providing such as web browsing, email services instead of simple SMS with limited capacity and Java functions since the introduction of i-mode in 22 Febru-ary 1999, au and SoftBank also kept emphasizing on consumers satisfaction by providing Internet services to their subscrib-ers which is referred to as EZweb by au and Yahoo!Keitai by SoftBank.

At the introduction of IP to mobile phone networks, most of subscribers felt highly satisﬁed with capacity and unpredict-able functionality development. The applications in all respect were satisfactory and convenient to users and operators were highly conscious of functional development based on new technology. Different kinds of actively utilized functions have been provided by carriers both in 3G and 2G mobile phones, including mail services (email, photo-mail, and video mail), web access, and download (music, movie and game). Moreover, carriers provide their customers more innovative functions such as video mail, video clips, video phone, broadcasting type video program, walk navigation, ringing tone songs, high speed Internet connection, wallet phone, double phone numbers and email addresses in single handset and digital terrestrial TV broadcasting. In short, 3G services add multimedia facilities to 2G phones by allowing video, audio, and graphic applica-tions. In terms of increasing demand for diversiﬁcation of data services,Table 3illustrates the category of technological inno-vations and dummy variables selected in the analysis.

3. Empirical analysis

Since mobile phone services are not durable goods, the measure of quantity sold by each carrier is deﬁned as the number of subscribers who have mobile phones contract at a certain point in time, such as the end of the month, instead of the net

Table 1

Types of 3G technologies in Japan.

Carrier Technology Service name Start of service Max. speed

DOCOMO W-CDMA FOMA October, 2001 384 Kbit/s

auKDDI cdma2000 1x cdma2000 1x April, 2002 144 Kbit/s

SoftBank W-CDMA VGS December, 2002 384 Kbit/s

auKDDI EV-DO WIN November, 2003 2.4 Mbit/s

DOCOMO HSDPA Hsdpa November, 2005 14.4 Mbit/s

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change of the number of subscribers who have made a new contract for a given period. Therefore, the quantity data used in this study includes monthly observations of the number of subscribers of each carrier from October 2001, when DOCOMO started 3G using IMT-2000 for the ﬁrst time, to December 2008. The period is appropriate for analyzing the real trend of 3G diffusion. For the simplicity of the analysis, we choose monthly data of number of subscribers for major three carriers as a dependant and the selected technologies and innovations as independent variables. The data sources are mainly provided by TCA (Telecommunication Carrier Association), MIC, and homepages of each carrier.

The standard plan of monthly charges of each carrier is almost same for every month due to high competition exist into the market. It varies between JPY 4300 to JPY 4500 among three carriers. Though it was very high at the beginning of the diffusion process, but for time being, it was reduced, because of cut-throat competition exist among carriers. Monthly charges were normalized by using the price index related to telecommunications services. Quarterly GDP is converted to monthly GDP by using the MA (Moving Average) method which is collected from the Statistical Bureau of Japan. Though there are a number of contents and value-added services introduced into the market by a major carrier almost every month based on existing technology, we select only the important technological innovations for the empirical analysis which are demonstrated inTable 3.

3.1. Empirical model and methodology

In this study, we conducted an econometric model by applying panel data analysis. To investigate the inﬂuence of impor-tant technology and innovation variables, we formulate the model as follows:

Table 2

Frequencies used by mobile phones.

Carriers 800 MHz 1.5 GHz 1.7 GHz 2 GHz

DOCOMO s s s

au s s

SoftBank s s s

EMOBILE Ltd. s s

Source: White paper of MIC.

Table 3

Category of technological innovations and dummy variables.

Category Variable Name of service Carrier Time

1. Entertainment i-motion (video clip) DOCOMO Nov-01

d1videoclip Ezmovie (video clip) au

Dec-01-J-movie (video clip) SoftBank Dec-02

Chaku-uta full (full-music) DOCOMO Jun-06

d2fullmusic Chaku-uta (full-music) au Oct-04

Music downloading (full-music) SoftBank Dec-04

Digital TV (One-Seg) DOCOMO Sep-05

d3oneseg Digital TV (One-Seg) au Oct-05

Digital TV (One-Seg) SoftBank May-06

2. e-payment Wallet Mobile (Edy) DOCOMO Jul-04

d4edy Wallet Mobile (Edy) au Sep-05

Wallet phone (Edy) SoftBank Nov-05

Mobile Suica (e-payment) DOCOMO Jan-06

d5suica Mobile Suica (e-payment) au Jan-06

Mobile Suica (e-payment) SoftBank Dec-06

Mobile nanoca (e-money) DOCOMO Apr-07

d6nanaco Mobile nanoca (e-money) au Apr-07

Mobile nanoca (e-money) SoftBank Sep-07

3. High speed High Speed Data (HSDPA) DOCOMO Aug-06

d7HSDPA High Speed Data(cdma2000 1xEV-DO) au Nov-03

High Speed Data (HSDPA) SoftBank Oct-06

d8highbands 1.7 GHz (FDD system) and 2 GHz (TDD system) bands as bands for 3G All Aug-04

4. Pricing strategies Discount for all (special discount) DOCOMO Aug-07

d9discount Discount for all (Special discount) au Sep-07

White plan (special discount) SoftBank Jan-07

5. Network d10IPphone Introduction of IP phone All Mar-03

d11IPnetwork The shift toward broadband IP network All Aug-02

6. Policy d12MNP Introduction of Mobile Number Portability All Oct-06

7. Other Two number (double functionality) DOCOMO May-07

d132in1 Two number (double functionality) au N/A

Two number (double functionality) SoftBank Jul-08

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Yit¼ b0þ bitXitþ

e

it

where Y and X are dependent and independent variables, respectively. In our model, the model can be written more precisely and more speciﬁcally as follows:

Subsit¼ b0þ b1Pitþ b2GDPtþ X j bj3dummy j itþ

e

it

e

it¼ kiþ

m

itð

m

it iidð0;

r

2_vÞÞ

where Subsitdescribes the number of subscribers of carrier ‘‘i” at time ‘‘t”, Pitthe monthly subscription charges of ‘‘Standard

Plan” at time ‘‘t”, GDPtreal quarterly GDP converted to monthly GDP using the MA method, ‘‘i” indicates the three carriers

and dummyitexplains the dummy variables attached to factors which take 0 before the events start and 1 after they start. An

error term is assumed to consist of one-way ﬁxed effect where kiis a ﬁxed effect and

m

it iidð0;

r

2v).

One of the main objectives of this paper is to ﬁnd the effect of technological innovations on 3G mobile phone diffusion by utilizing panel data analysis, and we assume that time and carriers have a slope parameter in common. Panel data analysis generally uses hundreds of samples, and it is impossible to estimate effects of each individual carrier. In this paper, however, since only three carriers are involved, we can estimate the effects of factors of an individual carrier. We thus estimate the whole market ﬁrst, and then estimate effects of each carrier. The summary statistics for estimation is provided inTable 4. 3.2. Result of the whole market analysis

Here we rigorously examine the effect of technologies and innovations for the whole market. The major objectives of esti-mating the whole market for 3G services are to find particular technologies and innovations affecting an increase in the num-ber of subscrinum-bers. To simplify analysis, innovations in services are classified according to their impact on 3G subscrinum-bers. In this respect, services are classified as enhanced applications of contents such as (1) entertainment, (2) electronic payment, (3) high speed data service, (4) pricing strategy, (5) policy, and (6) other, as shown inTable 3.

Table 5shows that GDP and monthly charges both are found at the 1% and 5% signiﬁcance level, respectively. These ﬁnd-ings indicate that GDP and monthly charges strongly satisfy the sign condition of the demand function.

With regard to dummy variables for technologies and innovations, we next discuss the results of identifying factors pro-moting 3G according to the estimated result. Dummy variables, which are classified as entertainment, electronic payment, high speed data service, pricing strategies, and miscellaneous value-added services, have been included in the whole market analysis for obtaining good estimation results. According to the estimation result shown inTable 5, dummy variables which are identified as significant are as follows:

1% signiﬁcance level:

d5suica(e-payment)

d7HSDPA(high speed)

d8highbands(high speed)

d132in1(other)

10% signiﬁcance level

d3oneseg(entertainment)

Table 4

Summary statistics.

Variable Observations Mean Std. Dev. Min Max

subscribers 241 14,200,000 13,400,000 1200 47,500,000 gdp 248 534943.2 21289.33 499233.7 564,644 charges 261 4034.077 221.454 3524 4446 d1videoclip 261 0.9348659 0.2472364 0 1 d2edy 261 0.5057471 0.5009275 0 1 d3suica 261 0.3716475 0.4841733 0 1 d4fullmusic 261 0.5019157 0.5009569 0 1 d5oneseg 261 0.4252874 0.4953363 0 1 d6HSDPA 261 0.4521073 0.4986572 0 1 d7nanaco 261 0.2222222 0.4165384 0 1 d82in1 261 0.0996169 0.3000639 0 1 d9discount 261 0.2183908 0.4139478 0 1 d10highbands 261 0.6091954 0.4888681 0 1 d11IPphone 261 0.8045977 0.3972719 0 1 d12MNP 261 0.3103448 0.4635236 0 1 d13IPnetwork 261 0.8850575 0.3195654 0 1 Source: Author.

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In what follows, we discuss these technological innovations one by one, in more detail which are identiﬁed as factors pro-moting 3G mobile phones in Section 5.

3.3. Summary of the whole market

Corresponding to the estimated results, a graphical explanation is illustrated inFig. 3, in which particular technologies and innovations are identified as associated with significant increase in 3G subscribers, that is, big jumps of subscribers oc-curred after the introduction of new services into the market. The findings clearly indicate that technological innovations and services selected in the analysis are deployed 3G mobile phones in Japan.

4. Analysis of individual operators

Here we apply the same methodology to analyze the individual operators, and an attempt to ﬁnd how individual oper-ators are affected by different technologies and innovations. In what follows, the analysis of DOCOMO is followed by those of au and Softbank.

Table 5

Estimation of whole market.

Coefﬁcient Std. Error t-value P-value

Dependant variable: No. of subscribers to 3G mobile phones

GDP 236.868 50.19434 4.72 0.000*** Charges 11067.97 4449.672 2.49 0.014** d1videoclip 777715 3,683,517 0.21 0.833 d2fullmusic 1836701 1,051,310 1.75 0.082 d3oneseg 2,267,816 1,309,596 1.73 0.085* d4edy 2448223 1,186,370 2.06 0.040 d5suica 5,306,848 1,219,279 4.35 0.000*** d6nanaco 678,449 1,353,278 0.50 0.617 d7HSDPA 2,949,457 989,658 2.98 0.003*** d8highbands 3,578,562 1,129,413 3.17 0.002*** d9discount 6052046 1,291,169 4.69 0.000 d132in1 13,800,000 1,246,315 11.05 0.000*** _cons 73000000 38,500,000 1.90 0.059 No. of obs. 228 R2 Within 0.9064

No. of groups 3 Between 0.7712

Overall 0.6676 Source: Author. *_{10% significance level.} **_{5% significance level.} ***_{1% significance level.} 0 20 40 60 80 100

Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08

0.0 0.5 1.0 1.5 2.0 2.5

Total subscriber Monthly subscriber growth * HSDPA was introduced by au in November 2003

Suica

“OneSeg”

HSDPA*

“2in1”

Highbands

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4.1. Analysis of DOCOMO

DOCOMO is characterized by sound network infrastructures and diversiﬁed value-added services. It was DOCOMO that offered PDC (Personal Digital Cellular) branded as 2G mova in March 1993 providing 2.4 kbps data speed and increased to 9.6 kbps in April 1995 using both 800 MHz and 1.5 GHz bandwidth. 3G FOMA services were commercially launched in October 2001 for the ﬁrst time all over the world embedded with 384 kbps data speed, 2 GHz bandwidth, and varieties of services meeting needs of subscribers.

Due to the shortage of infrastructure and network coverage, services were available only in Tokyo metropolitan and a part of Yokohama and Kawasaki areas at the time of service inauguration; area was however expanded in Osaka and Nagoya in December 2001 and to 99% of the nationwide population until March 2004. As part of the ongoing expansion, it emphasized on FOMA base stations in existing service areas that helped to provide full access 3G services in high-rise buildings, under-ground shopping malls and subway stations. Note that, as a part of the giant NTT family, DOCOMO’s 3G FOMA maintains high quality of services ranging from communication to behavior assistance.

Because of disrupted result, irrelevant variables are excluded. The purpose of this estimation is to ﬁnd factors promoting 3G mobile phones for DOCOMO. The estimation result is illustrated inTable 6.

GDP and monthly charges find significance at the 1% level which satisfies the economic relationship and sign condition of the demand function. Let us summarize the estimation result shown inTable 6. Dummy variables which are identified as significant are as follows:

d5suica(e-payment)

d6nanaco(e-payment)

d7HSDPA(high speed)

d8highbands(high speed)

10% signiﬁcance level d12MNP(policy)

4.2. Analysis of au

au holds the second market position according to total number of subscribers. Following DOCOMO, au introduced 144 kbps high-speed cdma2000.1x 3G services simultaneously in major cities across Japan in April 2002. CDMA2000 was recognized by the ITU to be an IMT-2000 3G communications system. Initially, 2 GHz bands were required for accreditation, but the ITU later determined that frequency bands other than 2 GHz, such as 800 MHz bands, were acceptable in IMT-2000

Table 6

Estimation for DOCOMO.

Coefﬁcient Std. Error. t-value P-value

GDP 265.0104 47.7223 5.55 0.000*** charges 9628.608 3272.1 2.94 0.004*** d3oneseg 5,087,901 1,032,634 4.93 0.000*** d4edy 1,252,086 1,689,744 0.74 0.461 d5suica 4,620,295 1,033,982 4.47 0.000*** d6nanaco 4,006,993 1,733,811 2.31 0.024** d7HSDPA 3,177,772 1,303,476 2.44 0.017** d8highbands 3,761,379 1,684,032 2.23 0.029** d10IPphone 3598869 903279.7 3.98 0.000 d12MNP 2,297,528 1,344,439 1.71 0.092* d132in1 1,165,486 1,964,450 0.59 0.555 _cons 92,700,000 31,600,000 2.94 0.005 No. of obs 82 R2 0.9915 Adj R2 0.9902 Source: Author. *_{10% significance level.} ** 5% significance level. *** _{1% significance level.}

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systems. au thus took the ﬁrst initiative toward the development of 3G services using 800 MHz which caused its high market share compare to DOCOMO and SoftBank at the beginning which is demonstrated inFig. 1.

In response to increasing demand for data transmission, au started cdma1xEV-DO technology, an IMT-2000 high-speed 3G wireless data services that operated at a frequency of 2 GHz and offered transmit data economically at a speed of up to 2.4 Mbps for the ﬁrst time in Japan in November 2003. Thus, it is obvious that au’s introduction of cdma1xWIN, a new 3G services that enabled the full functionality of actual 3G.

In the estimation, both GDP and monthly charges find significance at the 1% and 5% level and satisfies the sign condition of demand function. Let us summarize the estimation result shown inTable 7. Dummy variables which are identified as sig-nificant are as follows:

1% signiﬁcance level d2fullmusic(entertainment) d6nanaco(e-payment) d10IPphone(network) d11IPnetwork(network) 5% signiﬁcance level

d7HSDPA(high speed)

4.3. Analysis of SoftBank

SoftBank uses the same W-CDMA technology as DOCOMO for its 3G network. This operator is renounce for its picture mail (‘‘sha-mail” in Japanese) innovation for 2G services across the world for the time in November 2000. For 3G services, a number of technological innovations ﬁnd signiﬁcance to compete with other operators.

In what follows, we discuss dummy variables one by one which are significant in the estimation in the following section. Since the number of selected dummy variables is large in number and cause disruption in the estimation, only the rele-vant variables are accounted. Following three estimations before, GDP and monthly charges are correctly signed and find significance at the 5% and 1% level, respectively. Based on the estimation, SoftBank’s monthly charges is the most elastic compare to DOCOMO and au, which is consistent with the findings of elasticity based on the ADSL market, obtained byTsuji and Tomizuka (2006)andAkematsu (2008). They emphasized the pricing strategy of ADSL carrier such as entering the mar-ket with quite low charges. Let us summarize the result of estimation shown inTable 8and dummy variables which are sig-nificant are as follows:

1% signiﬁcance level d4edy(e-payment)

d6nanaco(e-payment)

d9discount(pricing strategy)

d132in1(other)

d7HSDPA(high speed)

Table 7 Estimation for au.

Dependant variable: No. of subscriber to 3G mobile phones

GDP 296.8959 19.96092 14.87 0.000*** charges 3084.208 1336.976 2.31 0.024** d2fullmusic 1,743,373 407125.1 4.28 0.000*** d6nanaco 1,538,565 569951.3 2.7 0.009*** d7HSDPA 1,169,232 438508.9 2.67 0.010** d10IPphone 2,780,398 437400.8 6.36 0.000*** d11IPnetwork 2,537,542 494382.5 5.13 0.000*** d12MNP 235214.4 501472.7 0.47 0.641 _cons 136,000,000 12,600,000 10.82 0.000 No. of obs. 77 R2 0.9931 Adj R2 0.9921 Source: Author. **_{5% signiﬁcance level.} ***_{1% signiﬁcance level.}

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5. Discussion

In accordance with the recognition of the importance of factors promoting 3G mobile phones as discussed earlier inTable 3, explanation is based on the ﬁndings from empirical analysis and its implications to whole market and individual operator followed by technological innovations, policy and different marketing strategies to capture subscribers.

5.1. Entertainment

According to the ﬁndings, entertainment content such as video, music and digital TV plays a key role in the achievement of 3G subscribers. In 1999/2000, screen savers and ringing tones were popular among young people to use their mobile phones as a tool for entertainment. Based on the concept, operators deﬁned and upgraded standards for screen savers and ringing tones transition to high resolution camera to quality video, polyphonic ringing tones to ‘‘chaku-uta full” and ana-log tunes (both radio and television) in 2003 to digital TV ‘‘OneSeg” in 2006. Let us focus on music and Oneseg in what follows. 5.1.1. Music

The largest category of mobile entertainment in terms of market size has been music. au is pioneering thorough its music services from the beginning by launching ‘‘CHAKU-UTA” in November 2002 that allowed users to download songs in their original format as released by music distributors, and to set these songs as the ringer tone on mobile phones. Following the concepts of ‘‘CHAKU-UTA” the EZ ‘‘chaku-uta Full” service was introduced into the market and subscribers enjoyed full download of their favorite music whenever and wherever they like. Thus, based on the estimation and increasing trend of ‘‘chaku-uta Full” which is elaborated inTable 9, it is clearly identiﬁed that music promotes 3G subscribers of au.

5.1.2. OneSeg

With OneSeg, users can watch the television programs, access data, or do both on a split phone screen. The number of subscribers is increasing rapidly for every operator which can be seen from the uprising growth of handsets equipped with OneSeg functionality. While until 2006 only 15% of handsets were equipped with OneSeg, the growth rate was sharply in-creased to 50% in 2007 and to 77% by March 2009. However, the programs are currently free and users can download them irrespective of time and place. In response to the whole market, only this variable ﬁnds signiﬁcance at the 10% level. The

Table 8

Estimation for SoftBank.

GDP 26.96682 11.98975 2.25 0.028** charges 7028.516 1542.106 4.56 0.000*** d3oneseg 1,195,102 414692.7 2.88 0.005** d4edy 1,439,244 383095.7 3.76 0.000*** d6nanaco 2,608,157 521889.8 5.00 0.000*** d7HSDPA 1,166,448 504034.9 2.31 0.024** d9discount 2,413,437 478171.7 5.05 0.000*** d132in1 2,450,346 529603.1 4.63 0.000*** _cons 14,100,000 10,300,000 1.37 0.176 No. of obs 69 R2 _0.9842 Adj R2 0.9821 Source: Author. ** _{5% signiﬁcance level.} *** _{1% signiﬁcance level.} Table 9

Development of ‘‘chaku-uta Full” and subscriber achievement (au).

Time Music downloads (millions) Supporting websites Available songs

March, 2005 3 10 13,000 April, 2005 5 24 22,000 June, 2005 10 37 37,000 September, 2005 20 46 60,000 December, 2005 30 70 110,000 May, 2006 50 80 150,000 February, 2007 100 105 400,000

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reason can be explained, therefore, OneSeg is new for 3G mobile services, whereas music and video services are offered both for 2G and 3G, so users find nothing particular of using music/video services accept download speed. For DOCOMO, on the other hand, this variable finds significance at the 1% level. Among 43 handsets available for DOCOMO in 2009, 34 are equipped with OneSeg functionality which is 79%, comparing to 2% up from the total market. In the case of SoftBank, this variable finds significance which clarifies the importance for 3G diffusion. This operator captures the content market by pro-viding the high quality OneSeg features thorough its 3G network, which are illustrated as follows:

Capable of receiving terrestrial digital and analog TV broadcasts

‘‘Cycloid Style” 90 degree rotating LCD (Liquid Crystal Display), optimal for watching TV.

Large-size 2.6-inch mobile ASV (Advanced Super View) LCD, for high-resolution, widescreen TV viewing. Support all the latest 3G services.

5.2. e-payments

A large number of ‘‘wallet phone” subscribers have emerged in Japan since DOCOMO ﬁrst released wallet mobile phones in 2004 using Sony’s FeliCa technology. Two types of mobile payment services are available in the market, namely credit (future payment) and electronic money (advanced payment). iD, QUICPay, Smart plus are classiﬁed as credit payment, while Edy, Suica, PASMO, nanaco, and WAON are e-money (electronic money) services as of 2009.

In the empirical analysis, Edy, Suica, and nanaco are selected to find its significance on 3G diffusion. Among them, Suica finds significance at the 1% for whole market and 5% level for DOCOMO, respectively. Meanwhile, Edy finds significance for SoftBank and nanaco for each individual operator accordingly.

For every wallet service, operators have their own marketing strategies to capture market share. The number of installed terminals, usage limits, and availability of stores are keys to success for subscriber’s achievement. For example, as of 2008, DOCOMO’s installed terminals were available to 75,000 stores for Edy, 48,700 for Suica, and 19,673 for nanaco which is a clear indication of the availability of wallet functions in mobile phones throughout Japan.

In terms of the interaction between subscribers and operators, the popularity of e-payment services for train or airline tickets and as a method of payment in convenience stores reﬂects the needs of commuters, train and airline companies, and convenience store users. Commuters place a great deal of value on products that enable them to reduce their commuting time. Wallet phones enable them to do so by completely bypassing the ticket machine and by accelerating the purchase of foods, drinks, snacks, and newspapers in kiosks or convenience stores. These applications contrast with traditional payment systems, such as for purchases in department stores and restaurants, where users and the department stores and restaurants are less concerned with saving a few minutes of time. Thus, subscribers ﬁnd the use of e-payment services based on mobile phones more convenient than traditional payment systems, which is a clear indicator of factors promoting 3G mobile phones usage.

5.3. High speed data service

To encourage high speed data services for next-generation mobile phones, MIC set up a licensing scheme in August 2004 which specified the 1.7 GHz (FDD system) and 2 GHz (TDD system) bands as bands for 3G mobile phone use. Consequently, in November 2004, the Ministry approved establishment of particular base stations for the three operators. To cope with this trend, DOCOMO and SoftBank considered HSDPA as high speed data services in their technological evolution strategies, while au chose cdma2000 1xEV-DO. Operators expect the paradigm of next-generation mobile phones to be constructed around W-CDMA and cdma2000 mobile data services, and are encouraging a vast amount of investment in HSDPA. The three operators launched HSDPA in large cities such as Tokyo Metropolitan areas and then to whole nation. Both of these techno-logical advancements for high speed data are selected as factors promoting 3G mobile phones in the empirical analysis and find significance in all respects. The findings suggest that network speed is a crucial innovation for 3G subscribers who fre-quently browse websites to download full music, ringing tone melodies, full-access movies, and many other animated gam-ing sites.

In the case of 2G services, data speed was the most crucial factor that triggered carriers’ to shift toward 3G development. The motto for data speed was that the faster the speed, the more subscribers they could obtain.Table 10shows the devel-opment of data speed.

Still, there exists a signiﬁcant difference among three operators’ HSDPA technology. While DOCOMO and SoftBank use W-CDMA technology and the service name for high speed is HSDPA, au, on the other hand, uses cdma2000 1xEV-DO technology as WIN. Comparing the three operators, au launched its high speed data services (EV-DO) at a speed of up to 2.4 Mbps in November 2003, more than 2 years after DOCOMO had launched FOMA, its W-CDMA service in October 2001. One of the main attractions of EV-DO was that it provided faster download speeds than W-CDMA, making it quicker and cheaper to download data-rich contents, such as full-songs. On au’s network using EV-DO it would be normal for a subscriber to reach a download speed of approximately 500 kbps, compared with 200–300 kbps with DOCOMO’s FOMA and SoftBank’s 3G ser-vices at that time. When DOCOMO and SoftBank commercially launched HSDPA in 2006 using 2 GHz frequency bandwidth, the market became competitive to provide high speed data services for 3G subscribers. HSDPA-compatible terminals, radio frequency band, send-receive frequency interval, and data transmission speed all become the mainstream for operators’ to

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compete with each other. DOCOMO invested a large amount to facilitate the most for subscribers. As of 2008, a combination of ﬂat data plan, mobile content services and high network speed start bearing fruit for DOCOMO as the overall data ARPU (Average Revenue per User) reached to JPY 2200, a healthy increase by 9.5% from 2007. For comparison, the data ARPU of users on a ﬂat data plan with HSDPA phones alone was impressive JPY 3,950. Therefore, according to DOCOMO’s analysis, a direct correlation has been found between HSDPA and ARPU. That is why it aggressively rolling out HSDPA compatible de-vices and emphasized to serve the every corner of Japan with HSDPA coverage. Accordingly, HSDPA coverage reached to 100% only within 2 years and 4 months while 2G mova took about 8 years and 3G FOMA 5 years.

5.4. Network

In the case of networks other than for mobile phones, IP phones starting with the 050 and 0AB/J launched in Japan in March 2003 offering lower rates (JPY 8.4/3 min) comparing to fixed-telephone (JPY 10/3 min) and mobile phones (JPY 40/ 3 min). In addition, MIC established a standard to shift telecommunication to broadband network which increase the net-work speed and quality to provide better services to subscribers. Both of these variables find significance at the 1% level with high coefficient for au. As discussed earlier, only au started its 3G services using 800 MHz; the introduction of services such as IP phones and the shifts of networks from narrow to broadband are assumed to be factors promoting 3G mobile phones for au.

5.5. Policy

The 3G market was originally designed to develop under a competitive framework, and MIC has less intervention in the market in contrast with the ADSL market, which was analyzed byTsuji and Tomizuka (2006) and Akematsu (2008). In order to benefit subscribers and to increase competition among operators, and thereby lower the prices, the MNP (Mobile Number Portability) policy was first introduced in Japan by MIC in October 2006.The main regulatory objective of this policy is to benefit subscribers and to increase competition among operators.

The availability of MNP has been thought to bring substantial benefits to subscribers such as lower price, higher quality and a greater range of services by allowing subscribers to wider choices of carriers and making the market more competitive. According to the estimated result, MNP finds significance at the 10% level only for DOCOMO which is consistent with the findings ofShin (2006)who discussed instead of small mobile operators of the US, only the top five national operators added subscribers with MNP. This is because of switching cost, subscribers lock-in, and customer loyalty. Switching cost is incurred when switching, including time, money and psychological costs, and is defined as perceived risk of performance of losing contents related to existing operator. DOCOMO offered free campaign after the launch of MNP to switch subscribers and dif-ferent packages to lower switching cost. In addition, DOCOMO’s customer loyalty and market dominance are also notable examples of its ability to capture subscribers. The largest switching cost for 3G mobile phones is changing the email address. Since most of subscribers use mobile email (59.5%) more often than via PC (55.0%) as of MIC survey 2007, MNP itself is not enough to shift subscribers to another carrier in this aspect. A policy such as Address Portability in which subscribers can maintain the same address under a different carrier requires in future.

5.6. Pricing strategies

Based on the estimation, special discounts do not play any specific role for 3G subscribers. Various discount schemes of-fered by an individual carrier did not indicate any promotion to subscribe with 3G mobile phones. Thus, in the case of 3G, subscribers seem to be more focus on services than charge. For Softbank, however, this variable finds significance at the 1% level, which is due to the ‘‘White Plan”. Three marketing strategies are observed: lower basic monthly charges (JPY 980), free domestic voice calls between SoftBank from 1:00 to 21:00, and free mail exchange between SoftBank 3G handsets. While lower monthly charges is empirically proved with the largest coefficient of price elasticity among three carriers, free domes-tic calls and mail exchange between SoftBank handsets are observed by network externality. Note that, network externality is measured by having or using the same mobile phone carrier wit in a group of people. If having a larger number of sub-scribers who own mobile phones can be shown to increase the likelihood of owning or wanting to own a mobile phone, then this is verification of network externality. Until May 2007, white plan subscribers reached to 4 million (24.64% of total and

Table 10

Development in data communications.

Year Speed

1995 2400 bps–10 kbps

1995–2000 10 kbps–100 kbps

2000–2005 100 kbps–2.4 mbps

2005–2009 14.4 mbps

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46% of 3G) and in November 2008 it exceeded 15 million (75.51% of total and 88.71% of 3G) which clearly indicates the importance of the White Plan for 3G diffusion.

5.7. Other 3G services

Substantial numbers of 3G services exist into the market as illustrated inTable 3. DOCOMO launched a service called ‘‘Imadoco” (Japanese for ‘where are you now?’), a child security service in November 2005 followed by SoftBank with ‘‘YOZAN” in July 2006. Both of these services require the child to have a 3G mobile phone and the parent to have any 2G or 3G handset that supports wireless data service. Because of local government intervention, students were prohibited from using cell phones at the majority of public primary, middle and high schools from 2008, under a plan announced by Osaka Governor Toru Hashimoto. In Saitama Prefecture just north of Tokyo, 96% of public middle schools do not allow students to use cell phones while at school. Meanwhile, PTT (push-to-talk), another notable service by DOCOMO and au, followed by the US Nextel’s success with its PTT service running on Nextel’s proprietary iDen network in early 2000’s, launched in 2005. However, the concept never really took off in Japan. According to DOCOMO, about 100,000 users use the service on a monthly basis. As a result, both operators announced the pending retirement of PTT services which au shutting down it in August 2009, followed by DOCOMO with the plans to close the service in September 2010. Based on the argument as dis-cussed above, these services are excluded from the analysis.

In order to further differentiate the FOMA service from other operators, DOCOMO developed a system for 2in1 services that makes it possible to assign two phone numbers and two mail addresses to one mobile terminal, and use them separately through the collaboration of the mobile terminal and the network. The service launched in May 2007 followed by SoftBank in July 2008. To date, au does not have this service. As of December 2008, total number of 2in1 service was 469,700, in which 461,000 for DOCOMO and 8700 for SoftBank. In the estimation, the variable does not find significant for DOCOMO, but it finds significance at the 1% level both for whole market and Softbank, respectively. Meanwhile, it is also identified that after the introduction of 2in1 services in May 2007 by DOCOMO, the growth curve shows downward slope which is demonstrated inFig. 3.

5.8. Implications to other countries

Based on the discussion, 3G mobile phone diffusion of Japan can be classiﬁed in terms of technological innovations, mar-keting strategies and competition policy of mobile phone operators. Findings from empirical analysis and its implications to whole market and individual operator suggest that technological innovations, policy and different marketing strategies can promote 3G mobile phones to other countries in the world. But there is a huge gap among countries those who have adopted 3G services or thinking to adopt because of skilled R&D, infrastructure and income. Besides, there are many countries in the world still do not have full coverage of mobile network irrespective of full access to 3G services. For example, while Japan has already reached to 100% HSDPA coverage to support beyond 3G services, Myanmar on the other hand has only 10% mobile network coverage (ITU, 2008). In this perspective, it is difﬁcult to support all those features of 3G mobile phones such as entertainment, e-payment or high speed data for the countries which do not have minimum level of mobile network infrastructures.

The main highlight of 3G services is thus high speed data transmission, entertainment, and e-payment in terms of empir-ical ﬁndings, particularly relate to Internet access. In the world, very few countries have been successful with the mobile Internet both for 2G and 3G services due to lack of sound mobile network infrastructures like Japan. Wireless Access Protocol (WAP) in Europe has suffered from low transmission speeds, paucity of content and disenchanted users. Besides that, devel-oping countries in Asia and Africa or even some parts of the US suffer from infrastructure to support high speed Internet or handsets to use e-payment and entertainment services. Moreover, income affordability, mobile network coverage, high

Table 11 Summary of result.

Innovations Whole market Carrier

DOCOMO au SoftBank

Entertainment (+) (+) (+) (+)

e-payment (+) (+) (+) (+)

High speed (+) (+) (+) (+)

Pricing strategies () N/A N/A (+)

Network N/A () (+) N/A

Policy N/A (+) (*) N/A

Other (+) (*) N/A* (+)

Source: Author.

(+), significance at the 1%, 5%, and 10% levels, respectively; (), not significant; N/A, excluded from analysis; (*), positive ‘‘t” statistics with high coefficient; and N/A*, service not available.

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subscription charges and telecommunication infrastructure to support all these services classified with regard to findings is difficult for developing or even some developed countries in the world (Abu, 2010).

Japan, on the other hand, has introduced a wide array of mobile Internet services, and witnessed phenomenal growth in usage and subscribers. Operators invested a lot for infrastructure development and user-oriented R&D that supports high speed mobile Internet or handsets to use e-payment and entertainment services anywhere at any time. Much can be learnt from Japan’s experience with data services that can help guide the strategies, technological innovations and pricing ap-proaches of operators outside Japan. The paper identiﬁes substantial opportunities are yet to be possible for Japanese oper-ators by elucidating high speed Internet services, entertainment and e-payment. The study also poses a new idea for the developing and developed economies which are thinking to adopt 3G services or already have adopted in terms of their in-come level, mobile network infrastructure and skilled R&D.

6. Conclusion

Using rigorous panel data analysis, we heuristically identified the effect of technological innovations and policy on the diffusion of 3G mobile phones. This study identifies specific technological innovations which have been developing in the Japanese mobile phone market to betterment of services and advancing to 4G. In accordance with the estimated results, technological innovations in entertainment, e-payment, and high speed data services are crucial and are found significant in all aspect for the 3G diffusion. A brief summary of result is elaborated inTable 11. DOCOMO leads the market for every functionality development until now. Following DOCOMO, other two carriers emphasize to develop the same technology or upgrade according to their skilled R&D.

A number of implications can be derived from analyzing and comparing technological innovations and policy for 3G, and looking beyond mobile communication technologies in Japan, while focusing on the mobile TV, e-payment and high speed data service such as HSDPA and EV-DO. Still, for now it is difﬁcult to predict which technological innovations will be the ﬁnal winner of the next-generation mobile phone market. Furthermore, aside from the currently commercialized technologies, new technologies like LTE (Long-Term-Evolution) are under development and expected to launch for 4G. Since this paper examines Japan’s case from the technological innovations and policy impact on 3G mobile phone diffusion, it might serve as a guideline for other countries that are considering evolving into 3G standardization. This study, however, has its own research limitations in that Japan has experienced different technological innovations and policy failure such as PTT and MNP for 3G diffusion. Further studies are required to perform a quantitative analysis on which technological innovations and policies are valid, considering the country’s unique characteristics of geographical coverage, population, topography, and income level.

Acknowledgements

The author expresses his heartfelt gratitude to Professor M. Tsuji, Graduate School of Applied Informatics, University of Hyogo, for his support and encouragement throughout the course of this research, and to Dr. Y. Akematsu, researcher, Tsuji Laboratory, for his help with the statistical analysis. The ﬁnancial support of the Japanese Government is gratefully acknowledged.

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