How Long Can DoCoMo Resist A Move to NFC?

It is coming up on six years since NTT DoCoMo launched the first of its contactless wallet phones, and we have to conclude that the rollout has not been successful.

Sure there are more than 60 million wallet phones in circulation and many thousands of places to use them, including many stores that accept DoCoMo’s own payment brand, iD. But DoCoMo mandated the chip in most of these phones and paid for most of the more than 420,000 contactless point-of-sale terminals that support its brand, at least indirectly.

Use of the wallet phones for payment, ticketing and other services amounts to fewer than 20% of subscribers who carry them, according to most independent estimates. Mobile payment has not taken off, and the rollout of wallet phones, or Osaifu-Keitai as DoCoMo calls it, is a money loser for the telco and a drain on its two major competitors that have been dragged along without a business case.

I recently had a joint interview with the respective leaders in the wallet-phone programs at all three of Japan’s major mobile operators, NTT DoCoMo, KDDI and Softbank Mobile. And it wasn’t long before talk turned to the need to move to Near Field Communication from Japan’s proprietary FeliCa technology from Sony Corp.

Well, that talk was from KDDI and Softbank, which see the promise of more applications and lower costs from a move to NFC.

“Now it’s a FeliCa world, but we want to extend to the NFC world,” said Naoki Kinoshita, general manager in Softbank’s mobile payment planning office. “Each FeliCa chipset costs, and most people don’t use this function. How can we get back the cost of the handset for our side? When the NFC world comes to Japan, maybe we have to find how we can earn money from the NFC world.”

Lofty Fees
Though Kinoshita didn’t get into the figures, NFC Times has learned the licensing fee handset makers pay to the Sony-DoCoMo joint venture, FeliCa Networks, to put the FeliCa chip into their phones is about US$15 per handset. Of course, the total cost for implementing the mobile wallet, including the FeliCa chip with the secure element, the software and licensing fees, is more than that. All or most of the cost gets passed on from handset makers to the mobile operators, which probably can, in turn, pass along at least part of it to subscribers.

For DoCoMo, this has been a calculated investment­–part of its bold move into consumer finance in late 2005, when it launched its own mobile credit brand, iD, and later its mobile credit card, DCMX. That followed a $1 billion dollar investment in Japan’s No. 2 credit card company at the time, Sumitomo Mitsui Card. To get terminals rolled out, the telco bought millions of dollars worth of stakes in some of Japan’s ubiquitous convenience store chains, and it fronted the cost of terminals for other merchants.

KDDI and Softbank have no such ambition to become mobile credit card companies, and in the past considered quitting the wallet phone by no longer ordering it. But they believe it would cost them subscribers. For while mobile payment, ticketing and points programs are not reason enough for Japanese consumers to choose a particular handset or operator, if the mobile wallet functionality isn’t there–all other features being equal–consumers would buy the handset with the FeliCa chip.

A notable exception is the iPhone, which has been a popular seller for Softbank even without the mobile wallet. FeliCa licenses are generally hard to come by for foreign handset makers. But in this case, Apple may have balked at paying the licensing fees or in meeting the requirements for license. Those requirements can be tough, including accommodating the super-fast Suica transit application from commuter rail operator JR East.

More Applications with NFC?
Costs aside, DoCoMo’s two smaller competitors say NFC could allow them to offer subscribers more applications.

Among other things, the FeliCa chip provides a free area that merchants and other service providers can use for loyalty programs at no charge from FeliCa Networks. But this free space is only open to DoCoMo. It hasn’t been used as much as expected, perhaps because service providers could reach only subscribers from one of the three major operators.

And the FeliCa-only infrastructure, while supporting a variety of Japanese contactless e-money and credit schemes, keeps out international contactless payment brands Visa payWave and MasterCard PayPass. Those payment applications, for example, could one day be used to pay transit fares both in Japan and abroad.

“This is a model we are very interested in,” said Kenichi Bandou, senior manager for the mobile IC business group at KDDI.

KDDI sees other services possible with NFC, including the potential for tens of millions of subscribers carrying government applications, such as driver’s licenses and resident IDs, on their phones. These applications are now on standalone contactless cards supporting the type B option of the ISO/IEC 14443, international contactless standard. NFC also supports Type B.

Given the privacy concerns that preceded the rollout of these cards, I’m not sure the Japanese government would allow the apps to move to phones. And even if it did, subscribers might not want their government ID on their handsets. The subscribers I talk to on my trips to Japan, even the tech-savvy ones, always raise security fears as one of the top reasons they don’t use the wallet feature of their phones. That’s despite security measures DoCoMo and others have had in place pretty much from the beginning–including being able to kill applications remotely if phones get lost or stolen.

A Pressing Question 
Nonetheless, pressure is building on DoCoMo to begin the move to NFC. The ability to offer more applications, let subscribers roam internationally with their wallet services, bring in more foreign-made handsets and lower costs for contactless equipment, is hastening that call to the international standard.

But it would take time to develop phones and SIM cards supporting ISO 14443 in addition to FeliCa. And then there is the vast infrastructure of FeliCa readers at transit gates and the point of sale in Japan, which will have to somehow be preserved, while at least part of it is brought into compliance with international standards.

Nokio Nakamura, DoCoMo's executive director of the NFC services and innovation department, would not say during my interview where the telco stands on NFC. His job title notwithstanding, it’s hard to tell when DoCoMo will move to real NFC.

DoCoMo has talked about wanting to enable its subscribers to use their wallet phones to, say, ride the Underground when they travel to London. Or they could make retail payments in, for example, Seoul, with the same phones. But the wallet phones would have to support NFC for this. DoCoMo is also a sponsor member of the NFC Forum trade group, which pushes the internationally standardized version of the technology.

Still, DoCoMo has a big investment in FeliCa to protect. After the wallet phones had conquered Japan, the telco had hoped to try to export FeliCa wallet technology abroad.

In fact, DoCoMo had once believed its contactless wallet-phone services would represent as much of a sea change for Japanese consumers as the cellular voice calling and, later, i-mode mobile Internet DoCoMo had ushered in during the 1990s. For both, the telco used proprietary technology or a domestic “standard.”

DoCoMo may now have realized this third wave of m-commerce isn’t coming, at least not with the business model and proprietary technology it now promotes.

It’s not clear NFC is the answer. After all, DoCoMo and Sony have done what telcos and their technology suppliers in the West only dream about–rolling out an entire contactless-mobile infrastructure nationwide with plenty of applications on offer.

But without NFC, Japan’s contactless wallet phones will remain part of a closed system dominated by a few players and unable to participate in what one day promises to become an international marketplace of contactless-mobile devices, applications and services.

Dan Balaban is editor of NFC Times.

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