March 01, 2002

Article at MBusiness

Would you like some content with that Coke?

Coca-Cola Japan and NTT DoCoMo take a gamble on a new mobile vending business

High school student Kayo Tamaguchi, accompanied by her friend Mai Amano, approaches a gleaming new Coca-Cola vending machine in Shibuya, a trendy Tokyo neighborhood. Besides the usual coin slot and change dispenser, the machine has a keypad, a sensor, a printer (for coupons, maps, and tickets), a speaker, and a small LCD, which is currently running a movie preview. She presses a large red button on the keypad, holds her i-mode phone up to the sensor, and selects a Diet Coke. Out pops a can - no coins needed for this transaction. She takes a swig and hands the drink to Mai. They watch the movie preview and consider buying theater tickets from the machine but decide to just have dinner. Kayo presses a few buttons on her phone, holds it up to the machine again, and receives a printout with a map showing local restaurants, some with icons indicating discounts.

This experience was made possible by Cmode, a system created by three Japanese companies - NTT DoCoMo, Coca-Cola Japan, and trading company Itochu, which provides operational and infrastructure support and whose CTC systems-integration subsidiary designed the Cmode payment system. As of late January, there were 21 Cmode units in Tokyo. The Cmode kiosks' contents are stored on DVD discs, which can be kept timely because bottling companies service most machines daily, and swapping in a new disc is simple for them. NTT DoCoMo could use its new third-generation (3G) networks to update the Cmode kiosks wirelessly, but that would increase DoCoMo's costs at a time when it is looking to recoup its already large investment.

Tomonobu Tominaga, head of the Cmode project at Coca-Cola Japan, estimates, based on trial usage, that each Cmode machine generates 10% more traffic than non-Cmode machines. If Cmode takes off, that extra percentage could significantly boost the company's bottom line. Coca-Cola Japan, which dominates the Japanese beverage market, has nearly 900,000 machines in the world's second-largest economy.

"In Japan, the market for Cmode could be as big as that for i-mode subscribers," says Frost & Sullivan analyst N Balaganesh. Other industry observers agree with Balaganesh that Cmode and similar services will steadily increase in the coming years as mobile phones become ever more integrated into daily life and their owners seek out local terminals from which to print, download, and perform transactions.

Such is the vision behind the unlikely pairing of Cmode's primary partners, Coca-Cola Japan and NTT DoCoMo. The beverage maker hopes to rejuvenate its vending machine sales; the cell phone giant wants an additional source of data packet fees, a useful new service to associate with its popular brand, and local information kiosks to complement its i-mode handsets. What these companies see in Cmode is a new and viable mobile business service. They're in the right country to try it - Japan has the most vending machines and arguably the savviest cell phone users - but if Cmode is to succeed, some kinks need to be worked out, both in the user interface and in the business alliance.


It's easy to understand the inspiration behind Cmode by walking around Tokyo, where both vending machines and cell phones are ubiquitous. According to Takashi Kurosaki, secretary-general of the Japan Vending Machine Manufacturers Association, the country hosts 5.7 million vending machines, or about one for every 23 people. By comparison, there are 7.5 million vending machines in the U.S., according to the National Automatic Merchandising Association, which averages out to about one per every 40 people. Meanwhile, the Telecom Carriers Association counts nearly 67 million cell phone users in Japan.

Coke's goals. Coca-Cola Japan needs some way to boost vending machines' sales, which have been declining over the past decade as Japanese consumers increasingly turn to 24-hour convenience stores, where Coca-Cola's per-unit profits are lower. Cmode, Tominaga claims, will liven up the drab old vending machine, win back customers, and increase revenues.

Jupiter Media Metrix analyst Kazuko Ichikawa says that Cmode also presents marketing opportunities for Coke. "For example, the machine can be used for sweepstakes or prizes, or for an instant winner promotion," she says.

NTT DoCoMo's goals. NTT DoCoMo is looking to increase data traffic and extend the usefulness of i-mode phones. The wireless carrier hopes that Cmode will encourage customers to choose DoCoMo over competitors KDDI and J-Phone, says Frost & Sullivan's Balaganesh.

The cell phone giant would also like to establish a new transaction method, says Takeshi Hosoya, an analyst at Jupiter. "Right now it's just providing the fixed-rate services, the YEN 300-maximum-per-month [$2.35] i-mode services. DoCoMo is interested in charging on a per-transaction basis for services that it normally charges for based on a subscription model." Cmode lets users download individual ringtones, for example, stored along with other digital content on a DVD drive inside the Cmode machine. Instead of paying YEN 300 to download an unlimited number of ringtones - as is the case on i-mode - Cmode users can pay just YEN 50 (39 cents) for the one melody they're really after. NTT DoCoMo also charges a transmission fee for Cmode purchases.


While the companies are predictably upbeat on the Cmode opportunity, there are some fundamental problems in the business model. Most striking is the lack of any real synergy between the main partners. Ultimately, Coca-Cola doesn't care about increasing network packet fees any more than DoCoMo does about selling drinks.

High-school student Kayo says that packet-based transmission fees, along with a clunky user interface, are the top Cmode turnoffs among her friends. Never mind that packet fees add just YEN 3 (2 cents) to the cost of a drink. Coca-Cola's Tominaga worries that DoCoMo's packet fees turn off customers and says he's already looking ahead to infrared as a simpler, less costly alternative. Using infrared, Cmode content could be beamed directly from the vending machine to the cell phone, and the need for DoCoMo's network could be reduced or eliminated.

Jupiter's Hosoya sees sense in that strategy for Coca-Cola but not for DoCoMo, which wants to increase paid data usage. Still, infrared is a ways off from being properly standardized in Japan, and for now, concedes Tominaga, Cmode's connection to i-mode helps popularize a new vending machine concept.


However, it's unclear why a vending machine is needed to download ringtones, screen images, and other wireless content. Unlike printouts of maps and movie tickets, such content is more easily downloaded directly from i-mode sites. Tominaga contends that ringtones can be promoted on the vending machine screen displays. He also notes that users can pay one time for a ringtone, instead of a per-month subscription fee. But with so many online alternatives, going through a Cmode vending machine to pay for such content may be more trouble than it's worth.

Jupiter's Hosoya sees Cmode as a "not very serious" experiment by huge Japanese companies with yen to burn. But others, such as Frost & Sullivan's Balaganesh, think Cmode really does have a shot at becoming a viable mobile computing service for the i-mode-toting masses. Says Yoshihiko Tamemoto, an analyst at Mitsubishi Research Institute: "Now it's only an experiment, with very cheap and short content. But much more content will be provided, and the market will become large." Osamu Harasawa, a vending machine specialist at the Social Systems Business unit of Omron, an electronic components firm involved in the vending industry, is equally upbeat: "Right now Cmode is just an experiment in Shibuya, but the machine will become a nationwide information terminal."

The fact that Cmode is being tested on Japan's youth culture, instead of on the like-minded businesspeople or technology geeks that technology providers often target, shows how serious the partners are about making this a popular service. These companies understand that a system needs to do more than merely work: It needs to be fun and exciting. As for the fundamental differences between the beverage seller and the network operator, considering the Japanese tendency toward teamwork and compromise, the two firms will likely find ways to align their interests.

It's just a matter of finding the right buttons to press.