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SALES INCENTIVES IN JAPAN

Who’s paying for those free cell phones?

by Shinichi Terada

No longer just a simple device for placing calls, the mobile phone is now a must-have item for most people. To promote market penetration, many of these multimedia, high-tech handsets are sold at a discount, or sometimes even given away.

However, the sales incentive system that underpins these low-cost models has been drawing fire for the way it shifts the cost of subsidizing new handsets onto the shoulders of subscribers.

Following are some basic facts about the system:

How does the sales incentive system work and when did it start?

Retailers can sell mobile phones at low cost because they are subsidized by the mobile phone operators. For example, NTT DoCoMo Inc. and KDDI Corp. spent on average some 37,000 yen per handset in fiscal 2006, which ended in March. At the same time, however, mobile phone operators pass the cost on to subscribers through a monthly subscription fee. The sales incentive system started in 1994, when operators were allowed to sell handsets, instead of leasing them, to consumers.

What is the cost to subscribers under the system?

Price packages have become so sophisticated that it’s difficult to determine how much each subscriber pays toward the incentive system. But by using a simple calculation — dividing the sales incentive money per handset by 24 months — mobile phone companies recoup their outlay by adding 1,500 yen or so to monthly subscription fees. Two years is the benchmark used by the industry for a handset purchase cycle.

Does the sales incentive system bring any benefit to subscribers?

Subscribers who change their handsets in two years or less would benefit, because the low purchase cost for a handset would likely offset the cost added on to subscription fees. But those who use the same handset longer than two years would pay more by shouldering a greater portion of the sales incentives.

Are there any moves to change the sales incentive system?

The Internal Affairs and Communications Ministry argues that the handset-cost sharing among subscribers is unfair. The ministry has set up a mobile business study panel comprising scholars and industry analysts to discuss whether the sales incentive system is appropriate, as well as other issues related to the mobile phone business.

What do carriers say about a review of the system?

KDDI says it might consider charging customers more for handsets and less in monthly subscription fees. DoCoMo says it is considering the same kind of review as KDDI.

Is the system unique to Japan?

No. The sales incentive system can be seen in major mobile phone markets such as Britain, the United States and Germany, according to a report compiled by Nomura Research Institute.

In Britain, for example, subscribers can get free handsets if they sign contracts for 12 months or longer with high monthly fees, or they can choose to pay for handsets and be charged more for their handsets and less for monthly subscription fees or spend less on handsets but pay higher subscription fees.

Is there any opposition to a review of the sales incentive system?

Large-scale retailers and handset makers are cautious about such a review. According to the Telecommunications Carriers Association, some 97 million people in Japan, or about 76 percent of the population, have mobile phones.

As the market is already saturated, some retailers and handset makers are afraid that if handsets are sold at wholesale prices, nobody would want to pay 50,000 yen to 60,000 yen for a new telephone.

Is there any chance the sales incentive system will disappear?

Nobutake Shirai, spokesman of the mobile business study panel, said: “We don’t intend to completely ban the sales incentive system.”

Instead, Shirai said, the industry should let customers know that each subscriber is paying for handset costs through monthly subscription fees and that it should create a system where subscribers can choose to pay more for their handsets and less for monthly subscription fees or spend less money on handsets and pay higher subscription fees.