Reference | FYI

Will government pressure slash Japan's intricate web of smartphone fees?

by Kazuaki Nagata

Staff Writer

Last August, Chief Cabinet Secretary Yoshihide Suga dropped a bombshell remark that rattled Japan’s mobile phone industry: “There is room to lower people’s smartphone bills by around 40 percent.”

In the wake of the remarks by the government’s top spokesman, a bill aimed at facilitating competition among the top three carriers was deliberated and passed by the Diet last week.

On top of this, the industry expects to see Rakuten Inc. make an attempt to become Japan’s fourth major carrier in October, challenging NTT Docomo Inc., KDDI Corp. and SoftBank Corp.

Here are some questions and answers about the government’s push to lower mobile phone fees and how the industry is responding.

Why does the government want smartphone bills reduced?

The government has been adamant about pushing mobile phone carriers on this matter in an apparent effort to stimulate consumption. It started in September 2015, when Prime Minister Shinzo Abe mentioned during a key economic policy meeting that phone bills were too high.

This led the companies to come up with billing plans for consumers who don’t need large volumes of data for their communication needs.

In the meantime, the communication ministry has been trying to promote mobile virtual network operators, or MVNOs, who rent network bandwidth from the mega-carriers but offer cheaper data plans.

According to surveys by Tokyo-based MM Research Institute, which studies the mobile phone industry, the average monthly phone bill in Japan fell about 10 percent to ¥5,680 in September 2018, from ¥6,353 in December 2016, excluding the price of handsets.

But this apparently was not enough.

In his “40 percent” speech, Suga criticized the carriers, saying their ¥700 billion to ¥800 billion in annual profits is far too high, considering the companies are using wireless infrastructure that actually belongs to the public. Unlike other countries, Japan allocates spectrum to mobile carriers instead of holding auctions and licensing to the highest bidder.

While the Abe administration can also tout this policy for the Upper House election in July, it is also believed the government is using the measure as a kind of buffer to soften the blow from the second stage of the consumption tax hike this October.

Will phone bills really drop? And is a 40 percent reduction even possible?

It will be for Docomo customers, the company claims.

Last month, Japan’s biggest carrier in terms of subscribers unveiled new pricing plans for next month.

Docomo currently offers several plans for individuals and families, but the latter are especially complicated because there are so many patterns to choose from.

To make things simpler, Docomo has trimmed this down to essentially two monthly plans based on two-year contracts.

The first charges ¥6,980 for up to 30 gigabytes of data, while the other starts at ¥2,980 for a fixed amount of data and grows from there. In addition, it will offer a ¥500 monthly discount to customers with family members who subscribe to Docomo. The maximum discount is ¥1,000, and each member of the family enjoys the discount.

Ultimately, Docomo said many customers will be able to receive something in the area of 20 to 40 percent discounts on data fees.

Docomo CEO Kazuhiro Yoshizawa said customers who use less than 1 GB of data per month and have more than two family Docomo users, for example, could see payments drop as much as 40 percent under the new plans.

The firm says 70 percent of its customers have family members who are also subscribers, and 40 percent of its smartphone users consume less than 1 GB of data per month. The new plans are likely to slash about ¥180 billion from Docomo’s operating profit for the business year ending in March, it said.

KDDI unveiled its own “price down” data plans on Monday, with one mimicking part of Docomo’s new plan.

Under this system, the monthly rate stays at ¥2,980 when less than 1 GB is used but offers a ¥1,000 discount to customers with two or more family members who use its smartphones. KDDI said some of its lightest users will thus see discounts of up to 40 percent.

SoftBank said last week that its plans are competitive enough for now but that sub-brand Ymobile is set to unveil new plans by September.

What are the main issues in the mobile phone war now?

The domestic market is a mess because the top three behemoths are offering excessive incentives to steal customers, said Shunichi Kita, a partner at the Nomura Research Institute and a member of a communications ministry panel that has been discussing how to create healthier competition.

Signs of the tug-of-war between the dominant firms are plastered to the walls of their shops and at other retailers, offering discounts or cash back plans amounting to tens of thousands yen. These are usually targeted at people who often buy new handsets and switch carriers.

“The three carriers have been eager to take users from their rivals through the power of such financial incentives,” Kita said.

These inducements have hindered the ability of the smaller MVNOs to attract customers — despite their cheaper fees, he added.

Another issue is that the source of the enticements is data fees from loyal subscribers who rarely, if ever, change phones, since they don’t get huge cash back deals or discounts after the initial two years.

How will government pressure promote better competition and lower fees?

The bill that passed the Diet stipulates that carriers must offer equal treatment to customers who often purchase new phones and those who don’t.

To do so, they will be obliged to separate the handset fees from the data prices.

It has been common practice in the industry to mix these two and give discounts bundled together with two-year contracts.

For instance, if a consumer desires a smartphone priced at ¥96,000, the person would typically agree to a two-year contract and pay ¥4,000 monthly for the handset itself. The carrier would then throw in a ¥4,000 monthly discount on the data fee, also lasting two years.

This makes the handset cost “effectively ¥0,” as the ad slogans say.

In some cases, fees can go even lower if the monthly discounts exceed the price of the phone.

After the two years elapse, however, the data discount ends if customers continue using the same phones, as opposed to those who switch carriers and buy new phones to receive the incentives again.

Critics claim this sales tactic is difficult to grasp for the average consumer.

“People don’t really know exactly how much they are paying for certain services,” Kita said.

Banning data discounts for frequent handset switchers is expected to resolve the situation.

The government is also targeting current customer-retention methods that prevent people from switching carriers smoothly. Under this campaign, the carriers are likely to be banned from charging customers under two-year contracts a nearly ¥10,000 penalty for terminating contracts early.

Both KDDI and SoftBank have provided an option to pay for smartphone handsets under a 4-year commitment, which lowers the monthly burden. If such customers agree to upgrade to a new model after two years, this option will exempt them from the rest of the payments for the old smartphone.

But this option is also likely to be deemed an excessive customer retention practice.

“Once the complete separation of the handset and data fees comes into effect, we hope that users will be free to choose the handsets and networks that they want” without worrying about the contract, Kita said.

Under this scenario, the carriers will have to provide more attractive plans and services in a business environment that will allow MVNOs to grow. This will eventually lower phone bills for many people, he added.

Data fees will likely fall, but if there are no data incentives offered to cancel out handset prices, won’t handsets cost more?

Theoretically, yes. And this is probably a worrisome point for those who love buying the latest devices, which rise in price with each passing year.

Apple’s top iPhone model currently costs over ¥150,000 and an emerging foldable smartphone is expected to be even more expensive.

Kita said the market for used smartphones is expected to grow as Japan has been discussing such an option.

The details aren’t yet clear, but mobile carriers say they are working on plans to ease the burden on consumers.

For example, Yoshizawa said, Docomo is considering providing more midrange smartphones as opposed to expensive high-end models.

Shoji Takashi, a KDDI executive, said during a Monday news conference that the carriers will have to wait to see the government’s new guidelines on handset discounts.