Tokyo Telco Bets Big on VoIP

Japan Communications is set to offer mobile phones that make calls using voice-over-Internet protocol technology, which could lead to lower rates

Sometime in July, telecom services venture Japan Communications is expected to lease wireless spectrum from NTT DoCoMo (DCM) for a new type of cell-phone service. The Tokyo company is likely to be the first operator in Japan to offer mobile handsets that can make calls on-the-go using voice-over-Internet protocol technology.

JCI's service and other mobile VoIP services like it have the potential to change drastically the economics of cellular services. Analysts say that VoIP should mean lower rates for subscribers, especially for long-distance calls. That's good news for users in Japan, where basic monthly rates average around $60 and are among the highest in the world.

JCI officials have a loftier goal: Simplify communications by routing mobile-phone calls through the same digital channels we now use to browse the Net. Microsoft (MSFT) and Cisco (CSCO) have been pushing this concept, known as "unified communications," in recent years, but hurdles remain even for these tech giants.

Formatting Everything as Data

The ordinary Net-connected worker now uses an office PC for work e-mails and appointment scheduling, a personal laptop for instant messaging or Internet-based calls, a home line or cell phone for ordinary calling, and a conference room system rigged for multiparty calls. Unifying all those so they can be easily accessible from a single mobile device requires having everything formatted as data. The problem is, phone calls and data have traditionally used different pathways.

VoIP has narrowed the gap by routing home or office phone calls through the same physical lines that e-mails use. Doing that over the airwaves has proved much harder, yet that's exactly what JCI's service aims to let businesses do. Eventually it plans to assign every user one 11-digit VoIP number that will work over both phone and computer networks. "If you leave a message to my cell phone or landline phone, it's sent as a text or a voice file to one place," says JCI's CFO Naohisa Fukuda. "That's so powerful. But it requires complete telephony and computer integration."

Since mid-April, when JCI first unveiled its plan, the company's shares have nearly tripled and are now hovering near their highest levels in a year. Analysts say that offering value-added services is the way to go. For companies like JCI, called in the industry "Mobile Virtual Network Operators," or MVNOs, "it's not enough to just offer lower prices," says Nomura Research Institute analyst Satoshi Awamura. "Their services have to be unique."

Switching Technologies on the Fly

Still, the company faces plenty of technical challenges. JCI must guarantee that voice data travels smoothly over the airwaves and between the cellular network and a Net connection such as a fiber optic or cable line. That's not a simple matter, experts say. Some skeptics say dropped calls and interrupted connections could quickly alienate users.

Ultimately, wireless operators will want to let users switch between cellular, WiFi, and WiMAX technologies on the fly. "There's no best solution available right now," says Willie Lu, a former Stanford University professor who founded the U.S. Center for Wireless Communication, a Palo Alto (Calif.)-based private venture.

Bigger wireless operators are now eager to do what JCI is pushing for. This month, DoCoMo plans to introduce its own VoIP cellphone, which will handle ordinary cellular calls as well as Web-based calls via a WiFi connection at home for a flat monthly fee. A smaller carrier, eMobile, is slated to start a similar service in July for smartphones that run on Microsoft's Windows Mobile software.

But while JCI's service will work anywhere there's a cellular connection, DoCoMo and eMobile phones will have to be near a Wi-Fi router.

The battle of mobile VoIP services comes as tech brands flood into the cell-phone market. In the past, Japan's wireless operators didn't face any real challenges to their dominance. But now that there are 107 million mobile subscribers, growth has slowed, and the government is looking for ways to boost competition. In March, the Telecommunications Ministry issued guidelines that effectively force the carriers to lease bandwidth to companies that ask for it. Now any dot-com startup, cable provider, or media company can piggyback on a carrier's network to offer cell-phone services. Walt Disney Japan (DIS) did this when it started renting spectrum from Softbank in March, and JCI is near an agreement with DoCoMo.

Targeting Niche Groups

As these so-called mobile virtual network operators pile in to target niche groups, the market could expand. Japanese could also get more hardware options such as Apple's (APPL) expected iPhone debut, new handsets running on Google's (GOOG) Android software platform, and perhaps even Web-based phones like Skype (EBAY). Revenues from wireless services could rise from around $85 billion now to around $100 billion by 2015, according to Nomura Research Institute estimates.

Would-be MVNOs still may be up against tough negotiations with the carriers. Mobile carriers have long viewed VoIP as a threat to their businesses because it can circumvent their networks. That worries them because they have spent billions on cellular towers, computer servers, and handset retail shops. With a few exception—T-Mobile and Cincinnati Bell (CBB) in the U.S. and Hutchinson 3G in Europe, for instance—many carriers have prohibited the service on their handsets. DoCoMo seems to have been forced to offer some VoIP services because of competition from upstarts. "You will see more mobile VoIP service providers, but they won't appear overnight," says Gartner (IT) telecommunications analyst Akiyoshi Ishiwata.

JCI is being closely watched by others eager to enter the fray. The company's CEO, Frank Seiji Sanda, is a former Motorola (MOT) engineer and Apple Japan exec who has aggressively pushed for market openness. Seven years ago, JCI became the first MVNO when it leased part of Japanese operator Willcom's network to offer businesses a low-cost option for connecting laptops wirelessly.

In mid-2006, JCI approached DoCoMo with a proposal for phone services. But a year later, the talks bogged down and JCI asked the government to arbitrate. Earlier this month the government ordered DoCoMo to reach a deal, which JCI executives expect to be finalized by late June. JCI is also negotiating separate deals with cable companies and regional broadband service providers.