ASIA MARKETS: Smartphones May Transform Japan's Mobile Market

By V. Phani Kumar

The rising popularity of smartphones in Japan is likely to transform the mobile-phone industry there, helping service provider Softbank Corp. and handset-parts makers at the cost of local companies whose offerings revolve around the home-grown "i-mode" mobile Internet service.

The launch of smartphones, such as Apple Inc.'s (AAPL) iPhone and Google Inc.'s (GOOG) Android phones, will encourage a transition from high-end mobile phones to smart phones over the next two years, and may "mark the start of the end for i-mode era," say analysts at Deutsche Bank.

I-mode is a wireless technology, developed by Japan's largest mobile service provider NTT DoCoMo Inc., which allows user to access Internet services on their handsets.

Deutsche Bank analysts said that the Japanese mobile phones are currently largely produced and sold in Japan, but that smartphones are leading a change there, with service providers aggressively luring subscribers from rival companies through smartphone promotions.

"The emergence at last of a successful overseas handset in Japan will have an impact beyond a smaller market share for Japanese handset makers," Deutsche analysts led by Yoshio Ando wrote in a recent note, referring to the iPhone's growing popularity in Japan.

Among Japanese mobile service providers, Softbank currently offers the iPhone, with rivals NTT DoCoMo and KDDI Corp. reportedly planning to offer smartphone-based services in coming months.

Although penetration rate for smartphones is only estimated to be about 3%, "smart phones are pivotal due to the potential they hold for the high-end mobile-phone sector," Deutsche Bank said.

The brokerage named Softbank as the "carrier with the best prospects." They also listed parts makers such as Toshiba Corp. (TOSYY) and Disco Corp. , which make flash-memory parts, as having "the best outlook for Japanese shares, as they stand to reap greater sales."

At the same time, the emergence of smartphones is likely to shrink the market for Japanese handsets, with new models offered by Korean and Taiwanese manufacturers expected to intensify price competition further.

"The only alternative is for manufacturers to remain viable by continuing to merge with the aim of generating survivor benefits," said Deutsche Bank analysts.

"The largest grouping, the NEC/Casio/Hitachi combination, has shown no intention of adopting Android. We believe this reveals insufficient desire to enter overseas markets," Deutsche Bank said, referring to Casio Computer Co. (CSIOF), Hitachi Ltd. (HIT), and NEC Corp. (NIPNF), which merged their handset businesses last year.

On the other hand, electronics major Fujitsu has committed itself to a mobile operating system, "which has achieved limited traction beyond Japan. This leaves it inadequately placed to develop internationally," they said, referring to Fujitsu Ltd. (FJTSF).

In Thursday's trading, shares of Softbank slipped 1.2%, NTT DoCoMo (DCM) gave up 0.8%, and KDDI (9433.TO) added 0.5%. Toshiba Corp. lost 1.1%, and Disco slid 1.8%.

The moves came amid broad-market weakness, with the Nikkei 225 Average sliding 0.9% to 10,106.59. Elsewhere, Australia's S&P/ASX 200 fell 1%, Hong Kong's Hang Seng dropped 0.8%, China's Shanghai Composite rose 1%, and India's Sensex declined 0.3%.