Down to the Wire

Thomas Bleha

From Foreign Affairs, May/June 2005

Summary:  Once a leader in Internet innovation, the United States has fallen far behind Japan and other Asian states in deploying broadband and the latest mobile-phone technology. This lag will cost it dearly. By outdoing the United States, Japan and its neighbors are positioning themselves to be the first states to reap the benefits of the broadband era: economic growth, increased productivity, and a better quality of life.

Thomas Bleha, the recipient of an Abe Fellowship, is completing a book on the race for Internet leadership. Previously, he was a Foreign Service officer in Japan for eight years.

PLAYING PHONE LAG

The United States is even further behind Japan in wireless, mobile-phone-based Internet access, even though that platform is increasingly versatile and valuable. More and more, mobile phones can be used for tasks traditionally performed on computers. Except for the most office-oriented applications, such as word processing, spreadsheets, and presentation software, mobile phones will soon be used for nearly everything. In fact, many, including the Japanese, are already planning for a convergence of wireline and wireless technologies. By 2010, it is expected that such "ubiquitous networks" will permit Japanese to access the Internet at high speeds from a desktop, a laptop, a hand-held personal digital assistant, or a mobile phone.

Japan now has a commanding lead in mobile-phone Internet technologies and usage. With a nationwide cell-phone infrastructure in place by the mid-1990s, Japan began the shift away from voice services to Internet data services in early 1999. Then NTT DoCoMo introduced the "i-mode" service, providing e-mail and customer access to over 60 Web sites especially created for mobile-phone use. These sites offer news, financial services, weather, personal ads, games, and much more. (This service was recently introduced as "m-mode" in the United States.) Competitors soon emerged, and customer response was stunning. By December 2004, total mobile-phone subscriptions had reached 83.5 million in Japan (representing more than 60 percent of the population), of which more than 72 million included Internet services. The lesson the NTT DoCoMo leadership took from this experience was that if you develop a new technology and market it, consumers will buy it.

Following this philosophy, in October 2001, NTT DoCoMo launched a third-generation videophone service. By December 2004, thanks to thriving competition, Japanese videophone subscriptions had reached nearly 26 million and were growing by nearly 190 percent a year. As expected, this new market prompted notable mobile-phone innovation such as global-positioning-linked advertising, television reception, and music videos. Now Japan is testing fourth-generation, high-speed broadband phones that can support high-definition-television reception, movie downloads, more sophisticated games, and other multimedia applications.

The Japanese government played a critical part in these developments. It made well-considered and timely decisions to allot cost-free spectrum for each new mobile-phone generation. In so doing, it gave up badly needed revenue, but it retained full control over the terms of licensing and the flexibility to reassign spectrum according to future technological developments. In 2007, the government is expected to announce new spectrum allocations for the fourth-generation broadband mobile phones planned for 2010. Meanwhile, to protect consumers, the government has set important conditions before granting a service license, insisting that a carrier's network cover a certain area of the country and guarantee a certain level of service (with minimal dropped calls or interference, for example).

By contrast, U.S. mobile-phone policy was born of a colossal blunder from which the industry has yet to recover fully. In the early 1980s, after the management consultancy McKinsey estimated that there would be little demand for mobile phones and a small prospect of profitability, the FCC carved the United States into 734 tiny mobile-phone districts. It handed out two provider licenses in each district: one automatically went to the regional telephone company, and the other was drawn by lottery. The resulting infrastructure was cripplingly fragmented. It could not support nationwide calls, and inefficiencies and expensive connection rates translated into sky-high charges for customers.

Twenty years later, the Clinton administration made a belated effort to encourage nationwide cellular networks. The government opened up enough spectrum for six nationwide networks and invited bids. Thanks to an imaginative on-line auction, it had sold off the spectrum for $7.7 billion by early 1995. Although the networks that entered the market still struggle to offer consistent quality, competition among them sharply reduced the price of mobile-phone service and spawned millions of new customers.

Since the Bush administration took office, however, the FCC has only tinkered with spectrum policy around the edges. It has allowed companies to trade bits of spectrum to round out their infrastructure and opened modest amounts of spectrum to new wireless technologies such as WiFi and WiMax. Meanwhile, although the number of would-be national carriers dwindled from six to four and they expanded their infrastructure, U.S. mobile-phone service remains awful by European, let alone Japanese, standards. U.S. mobile phones can take digital pictures and connect to the Internet, but the cellular infrastructure is so spotty that even in large cities calls from an ordinary wireless phone may not go through. Sadly, U.S. mobile-phone competition is still based on price and the extent of a company's coverage rather than the kind of advanced data services available in Japan and elsewhere.

In 2004, third-generation mobile service came on the market in selected U.S. cities. As in Japan, two somewhat different technologies are being used, both of which require upgrading the existing infrastructure. For the time being, third-generation mobile-phone service is available in only eight cities. (The much slower, older service can be had in several others.) Although the FCC has provided some additional badly needed spectrum, the third-generation cellular infrastructure remains painfully inadequate: most of the country has no service at all. Meanwhile, the FCC has announced that it will auction third-generation spectrum "as early as June 2006." Plans for fourth-generation mobile service in the United States are well beyond the horizon.