iPhone News Updated

by Kenji Hall

The world's most sophisticated users of wireless technology may be unimpressed by Apple's high-tech gadget

The Japanese fell for the iPod. So why should they not embrace the iPhone, too? It's tempting to think that Japan's love affair with Apple's (AAPL) iPods would extend to the mobile phone that shares the same high-tech DNA. After all, the iPod controls about 50% of the Japanese market for portable media players, according to Tokyo market researcher BCN, and Apple's carefully cultivated image as a maker of hip, edgy, yet user-friendly gizmos should work in its favor.

But when the Cupertino (Calif.) company wades into the world's most advanced wireless market next year, it could find Japan's 98 million cell-phone users a hard bunch to please. For one thing, consumers here won't be as starstruck by the iPhone's high-tech gadgetry as users elsewhere. Japan's 10 handset makers, which dominate the domestic market, already offer dozens of models typically costing several hundred dollars that send e-mail, browse the Internet, shoot photos and videos, and even pick up live TV broadcasts. Most come with a built-in global positioning system, and some even double as credit cards and commuter passes or safeguard personal data using fingerprint or face-recognition technology.

In its current form, the iPhone doesn't work on Japan's advanced third-generation, or 3G, network. Rumors abound that Steve Jobs & Co. will release a new, faster 3G iPhone next year. But analysts are skeptical that will be enough to please consumers in Japan. In its current form, the iPhone's 3.5-inch touchscreen and its access to online applications such as YouTube and Google (GOOG) Maps are about all that set it apart from other handsets in Japan.

Potential Turnoff

In other ways, the device is inferior, and some of its functions won't be all that useful. The iPhone's Wi-Fi networking, for instance, won't get much of a workout since few Japanese retailers are wired for such short-range broadband wireless Internet service. "I don't think it's going to do that well," says Makio Inui, a managing director at UBS (UBS) in Tokyo. He predicts the iPhone's high price and limited features will be a turnoff for many in Japan.

Where the iPhone will fill a need is with consumers like Keiko Ohashi. The 32-year-old sales manager already owns an iPod, doesn't care for all the bells and whistles of Japanese handsets, and prefers the full QWERTY keypad and browser of a computer-like device. "I'd love to get an iPhone," she says.

She may get her wish. In recent months, Jobs has met with Masao Nakamura, chief executive at Japan's No. 1 wireless operator, NTT DoCoMo (DCM), to discuss a possible deal, DoCoMo spokesman Shinya Yokota said. Connecting the iPhone to DoCoMo's high-speed 3G network isn't the only draw for Apple. It also could tap into DoCoMo's sales and marketing muscle. That gives Apple a better shot at grabbing a chunk of the roughly 50 million cell phones sold in Japan annually, and meeting its target of selling 10 million iPhones worldwide by 2008. (Apple had sold 1.4 million by Oct. 22.)

Stumbling Blocks in DoCoMo Talks

But industry executives think the negotiations are likely to get bogged down. DoCoMo declined to elaborate on the details of the talks, but Jobs is reportedly pushing for a cut of the iPhone's revenues. (Apple officials couldn't be reached for comment.) DoCoMo executives are likely to strongly resist such demands. One reason: Caving in to Apple would embolden other handset makers to try to win more favorable terms from DoCoMo.

DoCoMo also might balk at the idea of letting iPhone owners activate their handsets using Apple's iTunes online music store, as AT&T allows in the U.S. DoCoMo subscribers now can only activate their phones at a licensed DoCoMo shop. Letting iPhone owners circumvent DoCoMo's sales channel suggests they also would be able to avoid using DoCoMo's proprietary i-mode portal site and all the music, shopping, and investing services that are offered through it. Stripped of the high-margin earnings from services, DoCoMo would simply be left managing the towers and servers of a wireless network. "If that happens, DoCoMo would be reduced to the dumb pipes they live in fear of becoming," says one telco industry executive, who requested anonymity.

The two sides have a few other options. DoCoMo could rent spectrum to Apple in an arrangement known as mobile virtual network operator, or MVNO. But that would set Apple back at least $30 million just for the data centers to handle voice calls and data transmissions, and Apple would have to hire a local staff to manage the operations of a full-service wireless carrier. The two could work out a hybrid solution, such as having Apple pay a fee for spectrum in exchange for a cut of the iPhone's revenues from DoCoMo. But finding a middle ground could take some time.