Farewell to the first golden era: iPhone XR price cut and the end of Japanese carrier subsidies

The Wall Street Journal piece Not So Big in Japan: Apple Cuts Price of iPhone XR to Boost Sales outlined iPhone XR prices cuts in Japan along with iPhone X production starting up again. It made a small ripple in the tech blog sphere but the news was not particularly surprising. Back in September I wrote:

The more important question for the Japanese market however is not the top-tier models but the iPhone 7 replacement aka iPhone SE 2 as tweeted by Guilherme Rambo. SE 2 should have Global FeliCa as well and will make a great entry-level Apple Pay Suica device, not only for Japanese students on a budget but older Japanese who don’t need or want the latest bells and whistles. An entry level Global FeliCa iPhone has been missing from the JP lineup and will certainly help Apple hold onto Japanese market share.

The SE 2 didn’t appear so iPhone 8 is holding up the lower end because:

  • the 64GB entry point is a sweet spot that iPhone 7 doesn’t fill
  • iPhone 8 is the highest spec Touch ID iPhone available in a market where lots of people use face masks that don’t work with Face ID iPhones

Cutting iPhone XR prices just before the Japanese winter bonus season starts makes sense but won’t be enough: the long festering iPhone X Suica problem is still corroding Apple’s reputation in the Japan market and the market itself is about to change drastically. Things are hanging on a precipice.

The end of carrier subsidies
Apple was already under pressure from the Japanese government Fair Trade Commission for the 2 year subsidized contact model upon which Apple built their iPhone 50% market share. On November 26 the Ministry of Internal Affairs and Communications (MIC) held a public hearing on the competitiveness of the mobile market with the participation of the Japanese carriers: Docomo, KDDI au and SoftBank. The MIC made it very clear that:

  • mobile pricing must be uncoupled from 2 year carrier contracts and be drastically simplified
  • subsidies must end

At the same time JP carriers are under pressure from the government to reduce data pricing across the board.

The writing is on the wall: carrier subsidized iPhone contracts are ending and Apple has to come up with a whole new sales strategy for Japan in less than a year before the Japanese sales tax hike comes into play (October 1, 2019) which will add a whole other layer of market FUD. Carriers should start rolling out new unsubsidized contacts and plans in the 2019 March/April graduation season/new fiscal year season. That’s very little time.

The Docomo iPhone XR price cut

Just 4 days after the WSJ story ran, Docomo announced new discount options for iPhone XR starting November 26. Calculating the new ‘price cut’ is the old style nonsense of finding out what discount campaign goes with what contract, exactly what the MIC is putting an end to.

IT Mobile says it boils down to a measly ¥8,424 discount and calls it a cheap trick. Abema Times calculates the least expensive Docomo iPhone XR price with a new/MNP contract and discounts added is ¥25,920:

Docomo iPhone XR New/MNP
iPhone XR/64GB ¥25,920 (previously ¥98,496)
iPhone XR/128GB ¥32,400 (¥104,976)
iPhone XR/256GB ¥44,064 (¥116, 640)

Docomo iPhone XR Upgrade
iPhone XR/64GB ¥93,312
iPhone XR/128GB ¥99,792
iPhone XR/256GB ¥111,456

The new/MNP carrier migration pricing is attractive for new Docomo customers but the reality is that most users are upgrading not changing carriers. At best they would only see a ¥8,000 discount. Docomo has not said if the new discounts retroactively apply to customers who already bought an iPhone XR but people are already asking on Twitter.

Meanwhile in other news iPhone XS fell out of the top 10 BCN retail sales rankings this week and iPhone 8 remains the best selling iPhone model in Japan. All in all it feels like Japanese carriers have run out of options with carrier subsidized contracts to sell top of the line iPhone models. Market conditions are morphing and will only become more challenging and complex. There are a few things Apple can do other than price to hang onto iPhone market share. In order of importance these are:

  • Issue a iPhone X Suica problem repair program
    This is essential. As I have written many times before, Apple damaged their reputation in the Japanese market by sweeping defective NFC iPhone X production under the carpet. Apple can repair some of the damage by replacing iPhone X Suica problem devices in addition to the already announced iPhone X Display Module Replacement Program, and by aggressively fixing iOS 12 Suica Express Card performance issues.
  • Extend Apple Pay Japan and lower transaction fees
    Apple Pay has been a big success but to grow service revenue Apple needs to extend the service to include important missing pre-paid cards that are on Android Osaifu-Keitai and Google Pay: nanaco (7 Eleven), WAON (AEON), Edy (Rakuten). Nanaco and WAON are particularly important in areas rural outside of the JR transit hubs. The Japanese government pushing for a card transaction fee cap of 3.25% on the merchant side plus contactless payment incentives on the consumer side as part of the sales tax increase in 2019. For example Suica transaction fees are 3.75% but Google Pay Suica transaction fees are said to be 3.25%. Apple would be smart to work with payment networks to lower merchant transaction fees inline with government proposals now instead of later, and also work to get the major reward cards into Wallet like the recently added Ponta.
  • Add TV content and improve Apple Music services
    Japan is the 2nd largest music market after the United States. Japanese TV content is missing on the Apple content platform that everybody else has (Amazon, Netflix, Hulu, etc) and can bundle, Apple cannot. If Apple waits for their subscription service rollout, it may be too late. With big bad Dentsu, the Imperial Death Star of Japanese media as the power driving Spotify in Japan, Apple Music also has to work overtime to keep up: hire the best Japanese music curators, create some cool J-Pop Beats 1 programs instead tired old UK content and fix the iCloud Music Library Japanese music metadata mess so Apple can sell HomePod.
  • Fix Apple Maps and Siri
    This is a given that has been covered before: the total experience needs to greater than the sum of the parts.

Update: I consolidated iPhone XR price cut and end of carrier subsidy news here

MUFG iOS App 8.0.1 Update adds Face ID/Touch ID

It was a long time coming but good news for iPhone users with Mitsubishi UFJ bank accounts: the MUFG iOS app 8.0.1 update has finally added Face ID/ Touch ID login support. MUFG app uses secure one-time passwords for transactions and new bank cards use biometric confirmation, but the app login with the old bank card PIN always felt retro and a little insecure. It’s nice to have that last vestige cleared away for users with Face ID/ Touch ID.

Why Apple Pay Suica is a success and Apple Maps is not

Inbound Apple Pay Suica user experiences are endlessly fascinating and occasionally enlightening. This tweet video captures the usual ‘whoa, that’s fast’ first time reaction.

The responses are equally interesting with a few ‘so what? we have that in (London, Moscow, China, etc.)’ which is true but it’s not the same. Almost all of them are slower, don’t have e-money functions, don’t have nationwide coverage and are not hosted natively on pay platforms like Apple Pay or Google Pay. They rely on slow buggy EMV contactless credit card transactions on transit gates instead, in short they are not transit payment platforms.

Apple Pay Suica is clearly a great service and success that has not only changed contactless payments in Japan but changed Apple as well, with Apple incorporating global FeliCa and implementing A-12 Bionic powered Express Card with power reserve technology which matches the performance of dedicated Sony FeliCa Chips on the A-Series.

What makes Apple Pay Suica a success? It is a unique layering of hardware and software that tightly integrates into a single seamless experience. At the core is the basic Suica IC card format and the transit gate system technology was created by JR East and Sony in the 1980s to solve a user experience problem with magnetic commuter pass cards. Successive layers were added over time: e-money, nationwide Transit IC card interoperability, and perhaps most important of all, Mobile Suica. The Super Suica additions will further enhance the fundamental technology in 2021.

Apple Pay support arrived in October 2016, global FeliCa was added in 2017. These were 2 layers from Apple that fit perfectly and extended the entire platform with a whole new ease of use service level. The result is a service where each layer builds on and enhances the whole. This is Steve Jobs 101: work from the user experience back to the technology so that the total experience is greater than the sum of the parts.

The Apple Maps problem
Contrast this with Apple Maps. Justin O’Beirne recently published a detailed progress report of Apple’s ‘new’ (in America only) map. There was surprisingly little discussion on tech blog sites, Nick Heer was one of the few to share a few observations. O’Beirne and Heer both focus on data collection and prioritization as the core problem for Apple to fix if Apple is ever going to close the map gap with Google. I think that is a misconception that got Apple Maps in trouble in the first place.

I’ve never seen data collection as the biggest problem that Apple needs to fix. In Japan for example the data collection problem can be solved quickly by swapping out 3rd rate data suppliers with first tier JP suppliers like Zenrin who already field large data collection and verification teams. Google and Yahoo Maps Japan both use Zenrin and build on top of that solid foundation with their own data.

Integration and coordination have been, and continue to be the biggest problem. If Apple cannot do a good job integrating and coordinating different map service layers so that they build on each other, it will continue to be what it is now: a collection of loosely connected technology services that don’t work together very well and tend to pull each other down instead of up. A few examples:

  • Transit
    Apple has a very good Japanese transit data supplier Jourdan, the same one Google uses. Unfortunately the good transit data gets wasted by the limited search and sort App Maps transit UI that is completely manual, doesn’t dynamically update travel times or arrival estimates, or even provide location-based alerts when you arrive. Those kinds of integrated transit notifications on Apple Watch alone would sell a lot more devices.
  • Siri
    Siri is one the most important service layers for integrating navigation, transit and indoor maps. Unfortunately Siri is poorly connected where it should be hooked into every nook and cranny. Japanese Siri can locate the nearest station, usually, but that’s it. Siri doesn’t do transit searches or suggestions.
  • Navigation
    Turn by turn has been offered in Japan for a few years but it still basically useless without traffic information, which is still missing. Lane Guidance was only added just recently.
  • Data Duplication
    This happens all the time as Apple fails at coordinating and verifying data sets from different JP suppliers.

And so on. I included data duplication as it illustrates my basic point that no matter how good the basic data collection is, it’s worthless without a robust integration and coordination process. A smart team of human editors with deep local knowledge understand how services should connect, what works and how it should work. A truly  great team also knows how to focus and do more, much more, with less. This is impossible to achieve with the current one size fits all mentality.

Apple Maps Japan is a classic ‘the total is less than the sum of its parts‘ product. To be sure there are some good parts, but in Japan they don’t add up. The different layers stay separate and never integrate into a seamless whole like Apple Pay Suica does. It’s great that Apple is making process with its map reboot effort in America but the real test will be how well they integrate it all. A laser focus and smart integration is the only way Apple can close the map gap with Google.

Apple Maps Japan adds Lane Guidance

Apple Maps Japan Lane Guidance
Land Guidance addition to Apple Maps Japan

Like the recently added Indoor Maps for Narita International Airport, Apple Maps has silently added another missing feature: Lane Guidance. Neither feature is listed in iOS Feature AvailabilityThe Taisy0 blog noticed the change.

It’s not clear who is supplying the data as Apple Maps Japan has only started mapping Tokyo and Increment P is still the only Japanese map source listed. Traffic has yet to be implemented so Apple Maps Japan is still very limited compared to mature full featured navigation systems which are standard equipment in almost all Japanese cars. I don’t have a car to test it right now but look forward to giving it a try on my next business trip.

The Contactless Payment Turf Wars: why Oyster is missing from mobile

  1. Contactless Payment Turf Wars: Transit Platforms
  2. Contactless Payment Turf Wars: PiTaPa Pitfalls
  3. >Contactless Payment Turf Wars: why Oyster is missing from mobile
  4. Contactless Payment Turf Wars: tapping the potential of TAP

Open Loop EMV
It is very strange that the TfL Oyster card, which completely transformed London area transit still isn’t hosted natively on Apple Pay or Google Pay. Other MIFARE based cards are hosted on both digital wallet platforms and TfL has an Oyster app for account management and online recharge (top-ups). From a technical standpoint there doesn’t seem to be any particular problem preventing them. Perhaps it is a political thing.

TfL decided in 2011 to put their resources into the emerging EMV contactless standard. The reason was simple:

The current Oyster system, though very popular, is expensive and complex to administer. Contactless bank cards use existing technology, responsibility for issuing cards would lie with the banks rather than TfL, and the operating costs should be lower.

That is politician think, not business think: everything is a budget problem, not a business opportunity that needs investment, reduce costs by letting someone else pick up the tab but let them take their cut first. I wonder if TfL publishes how much they pay out in transaction processing fees to banks and Cubic? Perhaps not. Meanwhile budget pressures are not letting up as Londonist notes:

In 2017 there was a push to nudge people away from their Oyster cards and towards contactless. One announcement rang out all over London’s tube stations: Why not use your contactless bank card today? Never top up again, and it’s the same fare as Oyster.

The die was cast in 2014 and probably won’t change. Instead of putting resources into hosting Oyster on Apple Pay or Google Pay, TfL and Cubic already have a mobile solution which is ‘open loop’ ticketing with EMV contactless bank cards. Open loop does not address the finer issues of different fare schedules (children, seniors, etc.), commuter passes, season tickets, nationwide transit interoperability, regional promotion, nor does it offer the business advantages of a transit payment platform, Express Cards with power reserve or any kind of future vision. That’s the end of the open loop story because EMV contactless is a very dumb smart card.

It’s a shame really because TfL loves to say they generate the most transactions in all of Europe. That’s a value capture gold mine to build an empire, budget problems solved. Unfortunately TfL gives that gold mine away to the banking industry and Cubic.

You can see the same thinking with Oyster’s Australian cousin, the Opal card system, built and managed by Cubic, just like Oyster. Opal is also going the ‘open loop’ route instead of transit cards on mobile.

Open Loop QR

Hong Kong’s Octopus (FeliCa) and Singapore’s EZ-Link (Ex-FeliCa now CEPAS) are going open loop but in different ways. EZ-Link has been testing EMV contactless for over 2 years now, users report a less than smooth experience. Kaohsiung Rapid Transit in Taiwan which uses MIFARE based iPASS and EasyCard is also considering EMV contactless open loop while the recently opened Taoyuan Airport MRT offers QR Codes and a cute YouTube video.

Hong Kong going the QR Code route shows how badly AliPay wants in on Hong Kong transit, and MTR Corporation in on China transit, bad enough that Hong Kong will sacrifice a great transit payment platform for AliPay, another gold mine giveaway. Judging by the AliPay branding and retrofitted QR Code readers on Hangzhou Metro gates in the pictures above, what AliPay wants, AliPay gets, but the fast FeliCa based Octopus smart card stands in the way. Instead of improving Octopus or extending mobile Smart Octopus, it looks like Hong Kong will invest in very slow and very dumb QR. The Hong Kong Economic Journal had this to say about the development:

MTR has set its sights on a major revamp of its fare collection system, accepting new electronic payments methods rather than just single journey tickets and Octopus Cards. From the passengers’ perspective, it means there will be no need to have an Octopus card on hand for a journey on local trains, if MTR’s new fare collection system supports all the mainstream contactless payment methods such as Visa payWave and MasterCard PayPass, or mobile payment means like Apple Pay, Samsung Pay and Google Pay.

Japan in the middle
TfL/Oyster and Transport for NSW/Opal, Octopus, EZ-Link are government held transit authorities, not private independent companies. Publicly run transit authorities are subject to politics and special interests like any government agency, this sometimes leads to poor decisions and short-term thinking.

Japan was fortunate that major transit players like JR East, are private companies with strong technology partners, like Sony and NTT Docomo. Out of this fortunate set of circumstances Suica was created and finally reached  the market in 2001 (a fascinating engineering story). Suica became the Japan IC Transit card template which evolved into the ubiquitous Japan Transit IC Mutual Use Association project for transit and e-money use. Mobile Suica was introduced in 2006 by NTT Docomo and now resides on the Apple Pay and Google Pay platforms.

The ubiquity and scale of interoperable transit IC cards sets Japan apart from all other countries. China copied the Japanese model for China T-Union but the cards cannot be used as e-money and have been upstaged by AliPay and WeChat Pay which, surprise, can be used for e-money and transit.

Japan occupies a very unusual middle ground between EMV contactless from the West and QR Codes from China, neither of which play well together. The scale of Suica provides the breathing space for Japan to pick and chose what works best for, and enhances their transit payment platform. The result is an incredibly rich and varied contactless payments market anchored around Suica and similar FeliCa prepaid cards.

Future trends
For every marketing report that predicts QR Code payments growing into a 70 billion USD sized market by 2023, someone else calls it nonsense because Suica is becoming the card for everything. In many ways Suica already is. MITI said it is investigating using QR Codes for small rural transit systems that cannot afford IC card systems. This loops back to TfL complaint that IC cards are expensive to issue and manage.

Low-cost QR Codes certainly make sense for lightly used rural transit operations but they have a fatal weakness: they don’t have plastic card versions that work anywhere and seniors prefer the simplicity of plastic, QR Codes require a high cost network connected smart device, an app and are strictly one way read with no offline processing.

JR East and Sony have announced that they will solve cost problems for rural transit and much more in early 2021 with Super Suica.

Update: Open Loop QR Code Security Risks
One issue that was in the back of my mind while writing this post was the privacy and security implications of letting AliPay inside with direct transactions on transit gates. Japanese customers are very sensitive about where and how transaction records are held and used but I have yet to see any security discussion in connection with Hong Kong MTR opening up transit gates to AliPay and WeChat Pay. QR Code transactions are very different from offline FeliCa Octopus transactions. Where and how does the QR Code transaction data from Hong Kong MTR transit gates get stored, does the Chinese government has access to it to gather intelligence from transaction and location records?

If there is one thing we do know about Chinese companies is that they do what they want when nobody is looking. Witness China Telecom spoofing the BGP protocol to poison internet routes and suck up massive amounts of American and Canadian internet traffic for intelligence analysis. If I was living in Hong Kong I would be concerned about the privacy implications of MTR going open loop with QR codes.