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For Apple iPhone, Japan Could Be the Next Big Test

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Apple Inc. may be close to the most important test yet of its iPhone's global appeal.

Apple Chief Executive Steve Jobs recently met with officials from Japan's dominant mobile operator, NTT DoCoMo Inc., including NTT's president, Masao Nakamura, to discuss a deal to offer the iPhone in the country, say people familiar with the situation. These people say Apple has also been talking to Japan's No. 3 operator, Softbank Corp. Executives from both NTT and Softbank have also made multiple trips to Apple's Cupertino, Calif., headquarters.

In Japan, one of the world's largest and most demanding mobile-phone markets, Apple will face ferocious competition from other handset makers. Indeed, it will be joining a long list of foreign phone makers that have tried to break into the insular Japanese handset market, most with little success. It also remains to be seen whether a top Japanese carrier will accept Apple's unusually tight control over the design of the iPhone.

Representatives at Apple, DoCoMo and Softbank declined to comment.

Success in Japan is crucial if Apple is to keep up the momentum of a product that has sold well but not quite as well as some Wall Street analysts initially forecast. Since its launch in late June, the iPhone has been one of the top-selling smart phones in the U.S., where it is sold through AT&T Inc., the nation's largest carrier based on number of subscribers. More recently, the product went on sale with carrier partners in the U.K., France and Germany, where Piper Jaffray & Co. analyst Gene Munster believes its sales have been "good, but not over-the-top good."

Reaching agreement with a wireless partner in Japan soon is an important step toward Apple's oft-stated goal of gaining 1% of the global cellphone business by the end of 2008. That would mean it would have to ship some 10 million iPhones, a goal Mr. Munster and many other analysts now believe Apple will exceed. Through late September, Apple says, it sold a total of 1.4 million iPhones. Mr. Munster predicts that 15% of iPhone sales next year could come from Japan, placing that country behind only the U.S. and the U.K.

Japan, the world's second-largest economy after the U.S., is an attractive market for Apple. The company has long had a strong brand there through its Macintosh computers and iPod products. It also has seven retail stores there -- one of its largest presences overseas -- including a flagship store in Tokyo's Ginza shopping district that is often jammed with gadget lovers.

What's more, Japan's nearly 100 million mobile-phone users buy new phones every two years on average. And Japanese consumers are already used to shelling out hundreds of dollars for expensive phones with advanced features such as digital TV, music and a camera.

Apple has said it will launch the iPhone in Asia sometime next year. The iPhone that Apple will ship in Japan is likely to be a new version that supports "3G" networks, which provide far faster Internet surfing speeds. Analysts expect that device to be available by the middle of next year. The current iPhone wouldn't work in Japan, where older networks are based on a different technology standard than the rest of the world.

Still, Japan will be a difficult market for Apple to crack. More than 10 domestic mobile-phone makers work closely with the three major operators there to develop phones that cater to Japanese consumers' tastes. While the market share of foreign manufacturers has been rising slowly, they make up only about 10% of Japan's annual phone sales of about 45 million to 50 million units, according to Yano Research Institute. Sharp Corp. was Japan's dominant mobile manufacturer with a 26.2% market share in the April-to-September period, according to Japanese market research firm MM Research Institute.

And though Apple's iPod music devices are popular in Japan, they have faced competition. Sony Corp. has made a small dent in Apple's share with its Walkman music players, as have Japanese mobile-phone makers, which equip their models with sophisticated iTunes-like music features. Many Japanese consumers already purchase and download music over their current mobile phones.

Apple has nearly 50% of Japan's digital music-player market, according to industry data, but that's smaller than the roughly 70% share it has in the U.S. In the Japanese market, where each mobile operator refreshes its lineup twice a year with the latest phone models, packing them with advanced technology and features, the Apple iPhone will have to keep pace.

Still, Yasumasa Goda, a telecom analyst at Merrill Lynch & Co., says Apple could do quite well in Japan. "Apple and iPod are already established brands in Japan, so they're starting from a different place than other foreign manufacturers," he says.

Richard Doherty, an analyst at the electronics research firm Envisioneering Group in Seaford, N.Y., says he saw excitement about the iPhone in Japan firsthand in October. He was attending a technology conference and was mobbed by executives from electronics and wireless companies who wanted to see his Apple phone. "It attracted crowds everywhere," he says.

In Japan, Softbank has been widely believed to be interested in partnering with Apple. But people familiar with the matter say DoCoMo is likely to be Apple's first choice because of the strong preference the U.S. company has shown so far for signing agreements with top mobile operators.

The two sides are still negotiating terms, these people say. One sticking point is the share of subscriber revenue that Apple is demanding. People familiar with the situation say Apple is asking for a percentage of revenue that is comparable with what it receives from other carriers. Some analyst estimates put that figure between 10% and 20%. If it can't reach a deal with DoCoMo, Apple may turn to Softbank, which has been making an aggressive push to take customers away from its larger rivals. A person familiar with the situation says Apple doesn't expect to have any difficulty concluding a deal with a Japanese operator.

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