The Beep Heard `Round The World?

In the black marble lobby of Tokyo's Westin Hotel, employees get their marching orders from wireless phones about the size of cigarette packs. In Kuala Lumpur, a professor uses a similar phone to call a student across campus. At the National University of Singapore, a researcher tries hooking the same gizmo to a videophone.

Each is using Japan's new entry in the worldwide mobile-phone sweepstakes. Called PHS, for "personal handyphone system," this so-called minicellular phone makes its official debut on July 1. It is Japan's first homegrown telecommunications technology--a low-powered, low-cost variation of cellular that can work both as a mobile phone and as a cordless phone in a home or within an office building. Some 33 Japanese companies are making PHS gear, and the technology is being pushed by the powerful Ministry of Posts & Telecommunications. Tokyo newspapers are choking with PHS ads and bullish forecasts--7 million Japanese subscribers by 2000.

Reaching that number would be impressive anywhere, but especially so in Japan, where the penetration rate for conventional cellular is low--4% of the potential market, vs. 8% in the U.S. But PHS has some big advantages. It transmits from small, low-power base stations that can be mass-produced and slapped up on walls, telephone poles, and buildings, making PHS ideal for use in the house and around the neighborhood. Low power also means that phones can be smaller and cheaper, and calling rates will be about half those of Japanese cellular--starting at around 2,700 yen ($32) per month and 20 yen (25 cents) per minute. The trade-off is calling range: Each minicell in the PHS network covers up to 2,000 feet, compared with 10 miles for conventional cellular.

CHURNING OUT SETS. But Japan's PHS frenzy is being fueled by more than the domestic market. PHS could be an ideal low-cost local-phone system--just the thing for millions of homes throughout Asia, where phones are still a rarity. The potential payoff is huge: Over the next five years, China, Malaysia, Thailand, and other Asian nations plan to pump $300 billion into new phone infrastructure. Industry experts say the market for PHS-style minicellular setups in Asia could be $100 billion by 2000.

But PHS won't be allowed to overrun Asia unchallenged. Japan's technology is one of several minicellular systems. Others include Digital European Cordless Telephone (DECT), now undergoing trials in Porvoo, Finland, and the Personal Communications Services (PCS) system, which will start rolling out in the U.S. by the end of this year.

Being first out of the gate may give PHS the edge in Asia. Japan's PHS equipment makers will soon be enjoying the cost advantages of high-volume production. Toshiba Corp. and NEC Corp. each are already churning out 30,000 handsets a month. Prices are now 30,000 yen to 50,000 yen ($350 to $580), about the same as cellular handsets in Japan, but are expected to drop by half in the next several months.

Base stations are rolling off production lines at a rapid clip, too. The first three services--NTT Personal Communications Network, DDI, and Astel--anticipate they will buy more than 100,000 by next March, when they expect to be up in 150 cities. If PHS takes off as planned in Japan, falling prices could spur greater volume. "The whole thing could begin to snowball," says Gerard A. Dennis, a PHS engineer for Nippon Motorola Ltd., which makes PHS base stations for NTT.

The entire effort is getting a big boost from the government. The Ministry of Posts & Telecommunications has directed PHS licensees to cover half of Japan's population within five years and is pressing behind the scenes for the lowest possible prices for both service and equipment. So far, the plan seems to be on track. NTT Personal signed 20,000 subscribers in Tokyo in just six weeks and is getting 1,000 inquiries a day.

What could derail the PHS plan? Plunging cellular prices, for starters. Prices of cellular sets have dropped by half since last April's deregulation of service providers, which have been picking up subscribers at an annual rate of 300,000 ever since. And while PHS will work only in areas crammed with base stations, cellular will allow calling everywhere. Which is why Toshiyuki Nishihara, head of NEC's mobile-communications division, sees PHS sales hitting only 500,000 handsets per year by March of 1996, about half the government's projected number. "It will grow, but not as fast as people seem to imagine," says Nishihara.

As for the rest of Asia, Japan shouldn't count out the competition. The DECT camp is planning "dual-use" handsets that would be able to switch between DECT minicellular networks and GSM, a European digital cellular format used in 90 countries, including every Asian nation except Japan and South Korea. One problem: The phones will be twice as heavy as a single-mode handset. Still, DECT backers are pushing hard with promises of dual-use systems by 2000. If the PHS camp can't match that capability, the Europeans are likely to beat them in Asia, asserts Anssi Vanjoki, senior vice-president at Nokia Mobile Phones Inc.

EQUAL SHOT? Japan's PHS push has created friction with some European and U.S. equipment makers. They allege that NTT is determined to leave PHS gear out of a 1992 agreement under which foreign and domestic suppliers are supposed to get an equal shot at selling gear to the phone giant. NTT's position is that NTT Personal is a private company--and one that's 5% owned by a foreign outfit, Britain's Cable & Wireless PLC. Plus, Motorola is already a major supplier. But other foreigners, including AT&T, are miffed. They charge that the Japanese government still holds 60% of NTT, which directly or indirectly owns 61% of NTT Personal, so it should not be exempt from the 1992 pact. The Americans may push for the U.S. Trade Representative to find Japan in violation of the telecom provisions in Section 1377 of U.S. trade law.

Meanwhile, the PHS push is gathering steam--and not just in Asia. Takayoshi Hamano, a manager of overseas planning at NTT, has traveled to Argentina and Chile to get PHS into the minicellular competition there. Next stop?


Minicellular-phone systems use a large number of mass-produced, low-power base stations to cover the same area as the large, powerful base stations of conventional cellular systems.


-- More base stations means high capacity, low cost per call

-- Lower power means longer battery life for handsets


-- Mobility limited to low city-driving or walking speeds

-- Not economical except in cities that are densely populated

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