The Japanese Hang Up On Handyphones

The alternative to cellular can't compete

Several years ago, Tokyo hairstylist Mitsuko Shimizu decided it was time to get a mobile phone. Like many Japanese consumers looking for economy and quality, she opted for the new personal handyphone system, or PHS, the homegrown technology that offers cheaper service and a smaller handset than normal cellular phones. But after a free six-month trial, Shimizu, 26, grew frustrated over the difficulty in placing calls because of PHS's limited range. So she switched to cellular, where prices and handset sizes were shrinking. "I can call anywhere now," says Shimizu. "I wish I'd started with a cellular."

It's the kind of talk that makes hearts sink among backers of PHS. When it was launched by a government-backed consortium in 1995, PHS--Japan's counterpart to the Personal Communications System used in the U.S.--was billed as a major rival to cellular technology dominated by Motorola and Ericsson. But since peaking at 7.1 million subscribers just last September, PHS users are dropping out at an alarming rate--even though Japan's three providers are giving the phones away. Meanwhile, NTT DoCoMo, Tokyo Digital Phone Co., and other providers of cellular phones based on Japan's PDC standard, which is similar to Europe's GSM, have boosted their subscriber base by 50% in the past year, to 30.3 million. The main reason: Average monthly bills for cellular users have dropped from $175 to $60 since 1995, while PHS service is still around $40. PHS providers "have run out of reasons to exist," says Salomon Brothers (Asia) telecom analyst Makio Inui.

Given Japan's global telecom aspirations, it's a demoralizing blow. After establishing PHS at home, backers hoped to expand across phone-starved Asia. Instead of transmitters atop tall towers beaming signals as far as 16 kilometers away, PHS uses many small, short-range cells mounted on buildings or telephone poles. While the quality isn't as good as cellular, the technology was considered ideal for developing nations because it was much cheaper to use and install.

HYPED? But PHS providers didn't expect the prices of more powerful digital cellular service to drop so quickly. Critics also think PHS's early success was hyped. To enlist subscribers last year, NTT Personal, DDI Pocket, and Astel offered $300 handsets for as little as $40. Then they handed them out for free. As a result, nearly 60% of PHS subscribers are in their teens or 20s, the age groups most likely to lose interest when bills start rolling in. "We made a marketing mistake," concedes Yoshiaki Yoshida, Astel's planning manager. "We damaged our image and attracted the wrong kind of subscribers." With giveaways, Astel has kept its subscriber base at 1.4 million. But 10% drop out every month.

The real shock came in February, when Japanese telecom giant Nippon Telegraph & Telephone Corp. announced a 1997 write-off of $530 million by NTT Personal. The unit's cumulative losses are estimated at $1.9 billion. "PHS is not attractive anymore," said NTT President Junichiro Miyazu in a recent statement. Analysts predict NTT Personal, with 2 million subscribers, will get folded into NTT's profitable cellular subsidiary.

Japan's PHS hopes aren't dead. It's still seen as a low-cost way to provide communications in Asian, Middle Eastern, and South American cities. But as demand grows, it becomes cheaper to set up a few big cellular stations than scads of PHS units. Asia's economic crisis has also hurt. Indonesia was about to award contracts for PHS before its currency tanked. TelecomAsia Corp. of Thailand also has postponed its PHS launch, originally planned for last October. But even when the region recovers, PHS will be in for a rough time. The market is saturated, and cellular prices are still tumbling.

"A MATTER OF SURVIVAL." That means PHS providers may have to rely upon niche markets. For example, computer data transmission accounts for only 2% of PHS use. But the share could grow when the Internet takes off in Japan, because PHS data transmission is three times faster than cellular and--at 15 cents a minute--is five times cheaper. Providers also are promoting pager-type PHS units for children, housewives, and the elderly. "It's a matter of survival," explains Junichi Takahashi of DDI Pocket, which controls half of the PHS market.

But mere survival doesn't mean victory. To be respected as a major world standard, PHS requires serious market share. And that dream is fading fast.

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