With 40 million 3G subscribers, Japan’s NTT DoCoMo network is in a rare position to offer the rest of us a clearer vision of the hits and misses of mobile internet services. It doesn’t make for a pretty picture.

At a briefing last week with Takeshi Natsuno, one of the principal architects behind DoCoMo’s wildly successful 1999 launch of i-mode, one message became abundantly clear: content is not king.

According to Mr Natsuno, DoCoMo’s traffic revenue outpaced content revenue yet again in the last fiscal year, this time by a margin of $11 billion to $2 billion (£5.5 billion to £1 billion). This means that eight years after the launch of i-mode, the mobile internet service available with O2 in the UK, the basic functions of talking and texting are still far more compelling to consumers than content-based services such as mobile TV, music downloads and traffic alerts.

As Mr Natsuno says, most of this can be explained by the Pareto Principle, commonly referred to as the ‘20/80 rule’. Need a refresher? In the case of mobile operators, it means that 20 per cent of the customer base will generate 80 per cent of revenue.

This formula is elegantly applicable throughout the business world, of course, but in the telecoms industry there are consequences to such a split. Europe’s telecoms giants are still paying off the combined $129 billion (£64 billion) they spent on 3G licences seven years ago. By my humble reckoning, they need one high-margin “killer app” every year to 18 months just to break even on this investment. For the rest of our lifetime. So investors are singularly focused on the progress operators are making in getting the average consumers – say, the 21st to 49th percentiles – to pay for more services. ARPU (average revenue per user) is the acronym about which they care most.

According to Mr Natsuno, to attract that 21 to 49 crowd, you can count out music downloads. “Two years ago, music on mobile phones was to be the killer app, but now, not so many people are saying so. [It is] because music downloads are too expensive,” he says of the Japanese market.

In Japan, downloading a single track onto your mobile costs the consumer about $4 (£2), he says, after you factor in the network costs. “It’s better to buy a CD,” he says frankly.

To get around this pricing issue, Japanese mobile operators have settled on a flat-rate plan of about $35 (£17.50) per month per subscriber for 3G services. The all-you-can-eat model works well for broadband services, we now know after disastrous on-the-clock pricing plans from the net’s early years. For telecoms firms, this too should stimulate demand for mobile net applications. And, by slapping a flat fee on the subscription plan, the 20/80 rule, in the short to medium-term anyhow, looks more like a 30/80 or 40/80 split as the overall revenue pie swells.

But even in setting flat rates of their own, Mr Natsuno fears, European operators have already screwed up. “European operators set the flat rate too early, even before they were able to establish the demand,” he says.

This has basically suffocated the i-mode business model in Europe, he says. There are currently just over 7.2 million i-mode subscribers outside of Japan. In five years, the i-mode international business has grown at a far slower pace than the domestic market (where it is also beginning to slow as the market matures), which isn’t all that surprising when you consider that 3G services is only now beginning to show some promising usage up-take in Europe.

But even before the 3G market has the opportunity to get off the ground here, Mr Natsuno contends that European operators have already shot themselves in the foot by setting monthly rates too low – in some cases as low as €6 (£4.20) per month. It will be virtually impossible to raise the fees even as new services such as video-on-demand or mobile TV come available on 3G networks, he predicts.

Outside Japan, the likes of O2 in Britain and Ireland, Telefonica in Spain and Wind in Italy are DoCoMo’s partners. They set the pricing while DoCoMo provides the technology. “We cannot operate i-mode outside of Japan,” Mr Natsuno says ruefully.

If he could, he wouldn’t be focussing on music downloads.

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Bernhard Warner, formerly Reuters' internet correspondent in Europe and senior editor for The Industry Standard Europe, writes about technology, the internet and media industries. He can be reached at techscribe@gmail.com

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