Pitched Battle in Japan’s Cell Phone Industry
In a battle worthy of David and Goliath, upstart MVNOs are taking market share from the big 3 MNOs, and consumers like me are reaping the rewards.
What’s new: At the end of June 2023, Japan's Ministry of Internal Affairs and Communications published a memorandum suggesting that the Japanese telecommunications market may have reached a turning point. The upstart low-cost mobile operators, until recently written off as having little chance of breaking through the entrenched competition of the oligarchic structure of three major companies, are showing new signs of life. Their struggle has often been compared to the biblical story of David versus Goliath. There are signs that the market has reached a turning point and that the chances of the new kids on the block are improving.
Why it matters: Japan's huge telecommunications market is about to undergo significant change, with intense competition among the major players likely to lead to a shake-up—to some extent—of the top three players. Consumers should benefit from even lower prices.
Industry jargon and key facts and figures: Japan's smartphone market is valued at around US$120 billion, with a market saturation rate of over 90%. With such a high penetration rate, which limits the ability to grow market share by simply recruiting new prospects, internecine warfare among existing players has become the norm.
First, a primer on some of the key acronyms that industry experts routinely throw around.
MNOs: The term MNO (mobile network operator) refers to the three major telecom operators NTT DoCoMo, KDDI and SoftBank. According to the Ministry of Internal Affairs and Communications, these three MNOs have a dominant presence in the domestic mobile phone market, with a collective share of over 80% at the end of March 2023.
Rakuten Mobile: The subsidiary of the homegrown equivalent of Amazon.com, which entered the market in April 2020 with the aim of becoming the fourth major telecom operator, has seen its subscriber base decline significantly over the past year, partly due to the discontinuation of its “Zero Yen Plan.” The Zero Yen Plan attracted considerable attention for its unique pricing model, which aimed to provide subscribers with a basic mobile phone plan at no monthly cost. However, there were still potential fees associated with the plan, such as device payments, data usage charges above a certain limit, and other optional add-ons. While it lasted, the Zero Yen Plan was a great deal. Rakuten Mobile's strategy behind the Zero Yen Plan was to attract customers to its network and ecosystem by leveraging its other services such as e-commerce, financial services and more. The company aimed to disrupt the traditional mobile market in Japan by offering competitive pricing and innovative features. Now that Rakuten Mobile's pricing is essentially in line with its competitors, the perceived value to consumers has taken a nosedive. The company is now losing customers like there is no tomorrow, causing revenue to plummet on top of an already overstretched cost structure. As a result, Rakuten Mobile is creating a serious financial headache for its parent company, Rakuten Group. Rakuten Group recently posted its biggest ever loss of 372.8 billion yen ($2.6 billion). Although its e-commerce and finance businesses are doing well, the 459.3 billion yen ($3.2 billion) loss at Rakuten Mobile, which is burdened by capital expenditure, is a drag on the group as a whole.
MVNOs: The hidden assassins—ninja—of the Japanese telecommuncation market are MVNOs (Mobile Virtual Network Operators), commonly referred to as “budget smartphones.” At the end of March 2023, MVNOs held a 14.3% share of the domestic mobile phone market, up 1.3% year-on-year, the largest year-on-year increase ever. MVNOs borrow communications lines from major operators to provide communications services. In many cases, MVNOs are said to be inferior to the carriers in terms of speed and other aspects of communication quality, but so far their pricing plans have been cheaper than those of the major carriers. There are currently around 1,800 operators nationwide, with IIJ, which operates “IIJmio,” being the largest in the industry. Other well-known operators include Japan Communications, which became Japan's first MVNO in 2001, and Optage, a subsidiary of Kansai Electric Power Company, which operates “mineo.”
Comparing the three major operators, Rakuten Mobile and MVNOs, only the MVNO camp increased its market share last year. According to the Ministry of Internal Affairs and Communications, the total number of subscriptions for the four MNOs (including Rakuten Mobile) fell by 610,000 last year, while the number of MVNO subscriptions rose by 860,000.
MVNOs are known for their low-cost calling plans. However, the fact that MVNOs are increasing their market share is somewhat surprising. This is because the price gap between MVNOs' plans and those of the major operators has narrowed as a result of price cuts that began in earnest in spring 2021. Without a significant price advantage from a user perspective, the attractiveness of MVNOs has diminished.
This is why Nomura Research Institute (NRI), a major Japanese think tank, predicted at the end of 2021 that the number of MVNO lines would fall by 70% over the next seven years. The opposite is happening, proving that NRI was wrong about the market. What's going on?
Driving the news: There are three reasons why "MVNO pessimism" has been turned on its head.
Enhanced Unique Selling Proposition (USP) for Consumers and Lower Costs: First, MVNOs are introducing medium to high capacity plans with capacities of 20 GB or more. In the past, MVNO plans were mostly in the low capacity range of 10GB or less, and were separated from the medium to high capacity range where carriers excelled.
Over the past 24 months, however, MVNOs have accelerated their expansion into segments where the big three operators excel. Japan Communications, for example, began offering a "Rational 20GB Plan" (20GB data usage, from 2,178 yen/month including tax) in February 2021. According to the company, this was to compete with NTT docomo's new "ahamo" plan (20GB, from ¥2,970/month or $20.52/month), which was launched in March of the same year.
Neuromobile, an MVNO operated by a Sony subsidiary, also began offering its "NEO Plan" (20 GB, from 2,699 yen or $18.65) in November 2021, and in March 2023 began offering a 40 GB plan (from 3,980 yen or $27.50), which is unusually large for an MVNO.
One of the reasons for the introduction of medium and large capacity plans is that the communication line rental paid by MVNOs to operators has been on a downward trend.
The unit price of the communication line rental paid by an MVNO to a carrier is calculated by taking the sum of the carrier's costs and a certain amount of profit as the numerator and dividing it by the total traffic (communication volume). Recently, the denominator, traffic, has been increasing due to the expansion of video viewing and other factors, and communication charges have been decreasing year by year.
The decline in per-unit communications charges is leading to cost reductions for MVNOs. As a result, MVNOs are able to offer high data plans and attract high data users that they could not reach before.
New Market Entrants Targeting Specific Customer Segments: The second reason is that the number of MVNO operators themselves is increasing. According to the Ministry of Internal Affairs and Communications, the number of MVNO operators stood at 1,783 at the end of March 2023, an increase of around 10% on the previous year.
In the past year or two, "Hollie Mobile," produced by Takafumi Horie, the founder of the web design firm Livedoor, for his fan base, and "Chatwork Mobile," another start-up launched by SaaS company Chatwork for corporate clients, have created a buzz in the industry.
"Currently, there are many new entrants, such as local cable TV stations and language schools for foreigners.” — Shigeo Yabuki, general manager of IIJ's MVNO business division, which is also involved in MVNO business support
These users include general consumers in rural areas who subscribe to cable TV, as well as foreign students and other foreign residents in Japan. In addition, an increasing number of operators are offering MVNO services for the IoT (Internet of Things).
These new entrants all have one thing in common: they already have a specific customer base or fan base. Although the MVNO market may appear to be a red ocean, it seems that many operators are trying to seize business opportunities by marketing to their particular market niche, and it is working.
Exodus from Rakuten Mobile: Third, there may be an influx of users who have left Rakuten Mobile. Since May 2022, when Rakuten Mobile announced that it would discontinue its Zero Yen Plan, the number of subscribers to Rakuten Mobile has plummeted—with no end in sight. MVNOs that had previously suffered from an exodus of consumers to Rakuten now have an opportunity to win back users with a strong preference for low-cost services.
MVNOs are finally gaining recognition and a foothold in the Japanese telecommunications industry. They have reached the stage where they can compete on equal terms with NTT DoCoMo, KDDI and SoftBank.
“We are now at the stage where we can compete with carriers on an equal footing.” -- Naohisa Fukuda, president of Japan Communications Inc.
As a result, the mobile market has become more fluid as operators compete to lower prices by introducing new price plans.
What’s next: Rakuten Mobile's future is certainly in doubt, given its abysmal financial performance and steady loss of customers. While the company may be able to cut costs significantly by building more of its own cell towers, these cost-cutting efforts may end up being too little, too late to save the company.
For MVNOs to become the competitive axis that breaks the oligopoly of the three MNOs, the question is whether the highly fragmented market of small operators can each develop their own unique services. With so many new entrants, there is plenty of room for creativity as each tries to carve out its own slice of the market, which should prove beneficial to Japanese consumers by driving down prices even further.
The MNOs are not giving up their market share without a fight. They are developing their own low-cost carrier brands, offering "teaser" level basic plans such as NTT DoCoMo's bare-bones plan1 that only costs 550 yen ($3.80) per month, and using their market power to bundle services. MNOs are also starting to offer ultra-high-speed data plans such as NTT Hikari's 10 Giga service to support a very fast home WiFi network, which was once only available to businesses. At present, this service is only available in major metropolitan areas and costs extra—although the premium prices are still quite reasonable2.
Personal experience: Earlier this week, my wife and I became the latest statistic in the "win column" for the MVNOs. According to the salesman who helped us switch operators, our journey is apparently quite common.
Although we gave up our landlines and have been using mobile phones exclusively for more than 20 years, we had been used to paying Softbank, one of the major MNOs, 12,000 ~ 15,000 yen/month/phone ($83 ~ $104) for years. When Rakuten Mobile launched its Zero Yen Plan a few years ago, we jumped at the chance to reduce our monthly phone bill to just a few thousand yen/month/phone (well under $20). Rakuten Mobile's network generally worked well for us in Japan's major cities, but we experienced spotty coverage near our rural home, which was annoying. Since Rakuten Mobile discontinued its Zero Yen Plan, we have remained loyal customers, but we were toying with the idea of exploring alternative options. We thought we were too lazy to make a concerted effort to investigate potentially cheaper solutions...until now.
After a typhoon knocked out our WiFi for a few days earlier this week, leaving us to rely solely on our mobile phones for spotty service at home, we were motivated to get serious about upgrading our various telecommunications needs.
A visit to our local NTT DoCoMo shop, which required an appointment in advance, proved to be enlightening.
Clear the air! First, we learned that Rakuten Mobile relies on KDDI's network of mobile phone towers managed by the brand au to provide coverage in the area near our home. Their nearest cell tower must be far away. This is in stark contrast to the nearest NTT cell site tower, which is literally less than 100 meters from our front door. It turns out that while Rakuten Mobile is able to cover 96% of the country with its own network of some 60,000 cell towers, we, of course, live in part of the 4% of the country that KDDI still has to cover. It is likely that KDDI's nearest cell site tower may be quite far away and/or blocked by some of the hilly terrain. In any case, a seemingly no-brainer solution to our reception problem was at hand.
Show me the money! Second, we found out that since July 1, 2023 NTT DoCoMo's own MVNO, ahamo, is now offering some very competitive pricing schemes by bundling payment for all our telecommunication services and choosing from a variety of payment plans tailored to the amount of data we use and the number (and duration) of calls we make. By bundling the bill from our WiFi provider, a subsidiary of NTT, it would be possible to get everything (two mobile phones + WiFi for our home) for well under 10,000 yen/month ($69). Sign me up! The ahamo registration process is normally only available online, but our local NTT docomo shop was willing to set everything up for us because we agreed to bundle all the services and also buy a brand new, state-of-the-art mobile phone.
Although it took almost four hours at the NTT DoCoMo shop to complete the process of coordinating all of these services, we went home with everything in order, a simplified, consolidated billing program, much improved mobile phone reception, a new phone, and the satisfaction of having saved some money in the process.
What about you? Maybe it's time to review your existing personal telecommunications contracts.
Links to Japanese Sources: https://toyokeizai.net/articles/-/689724 and https://k-tai.watch.impress.co.jp/docs/column/ishikawa/1479539.html.
Additional Source: https://www.is.com/community/blog/an-inside-look-at-the-japanese-mobile-economy/
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You don’t get much for this basic plan. It only includes 0.5 GB worth of data per month. For someone who plans to rely primary on WiFi and does not intend on speaking by phone very much, it is certainly a viable option.
Price Premium for Extremely Fast Internet Service at Home: Whereas NTT Hikari 1 Gigabyte service costs 5,720 yen ($39.50) per month for a connection to a stand-alone home and only 4,400 yen ($30.40) per month for an apartment or condominium, service that is 10x faster costs 6,380 yen ($44) per month for either type of dwelling.
This is a very interesting article, but data through December 2023 indicate that it is out of date. Last August, Mark Kennedy wrote that Rakuten "is now losing customers like there is no tomorrow, causing revenue to plummet on top of an already overstretched cost structure." But figures from Rakuten Mobile show the number of subscribers hitting bottom at 4.98 million in 4Q of 2022 and then rising each quarter to 6.46 million in 4Q 2023. Negative EBITDA reached a maximum of ¥91.9 billion in 1Q of 2022 and then declined to ¥29.5 billion in 4Q of 2023. Rakuten is projecting EBITDA breakeven by 4Q 2024 on subscriber growth to 8 - 10 million. That may be over-optimistic, but the trends have turned positive. Rakuten Mobile revenues fluctuate, but were higher in 4Q of 2023 than they were a year earlier.
Extremely fascinating, especially from the point of view of someone who does not own a mobile. My wife made me buy one when she was expecting our second son, so she could reach me anytime, but I got rid of it as soon as he was born and have lived happily ever after.
I'm not anti-technology, mind you. I'm practically chained to my PC. It's just that I don't seem to need one.