Japan's Net Builders

Web entrepreneurs are out to win on a global scale--and bring profound change to Japan's business culture

It looked like a scene out of Japan's Roaring Eighties. On Feb. 2, several thousand young Japanese stood cheek-by-jowl in the dimly lit Velfarre, Tokyo's hottest disco. The suit-clad professionals hadn't come to dance 'til dawn. They were here to absorb every precious syllable from the mouth of Masayoshi Son, 42, founder of Softbank Corp. and longtime evangelist for the Way of the Web. "The most amazing opportunities await you," Son told the mesmerized crowd, exhorting them to find an inner dream, pin it to a business model, and quickly seek venture funding. The hidden subtext: Don't miss the boat. "Japan is going through its biggest social upheaval since the Meiji Restoration [of 1868]," Son intoned.

The comparison is apt. For the first time since the Meiji period, when thousands of new businesses were spawned in a rush to modernize, the country is marshaling its resources to catch up to the West and build a New Japan. Its young elite are starting to migrate from Old Economy banks and trading houses to Internet ventures--start-ups whose technical resources and pluck almost make up for their lack of cash flow. Smart, aggressive Japanese techies versed in software and network engineering are burning midnight oil in "Bit Valley," a maze of small office buildings that stretches away from Tokyo's Shibuya Station. And orchestrating this migration, in myriad unseen ways, are a half-dozen native-born empire builders and investors--you might call them the Sons of Son. They have found Internet religion, and they have the brains and the bucks to make it stick.

If this were just a brigade of bowing, name-card-shuffling Son-clones, the rest of the world might not need to take note. But economists and market analysts say something much more important is brewing at gatherings like the Velfarre disco event and other high-level gabfests. Money and power are coalescing in a new, uniquely Japanese way. Softbank's startup investments of about $400 million in Japanese Net firms are valued, on paper, at about $50 billion. Now Son, with a 38.2% stake in Softbank that's worth about $68.6 billion, is poised to break into the banking business. Then there's Yasumitsu Shigeta, 35, the hard-charging founder of Hikari Tsushin Inc., a mobile-phone retailer turned Net investor. With backing from private investors, Shigeta has built a $300 million venture-capital war chest, with plans to launch an even bigger one, worth $500 million, in March. Trans Cosmos Inc., a systems integrator that helps U.S. ventures set up in Japan, created a $100 million fund late last year, targeted at Japanese start-ups. And there's Masatoshi Kumagai, who has $40 million for acquiring new ventures to expand his interQ group. "The Internet is about to revolutionize Japan," says Hikari's Shigeta. "We're investing in startups with the aim of becoming a dominant force."

Some observers use the word keiretsu to describe these growing families of Net companies. But Son, Shigeta, and others say these business hybrids bear closer affinity to the family-run industrial combines, called zaibatsu, that were broken up after World War II. Still others like the new coinage "Net-batsu." Whichever term you prefer, these new Net builders are a breed apart from traditional Japanese corporate groups and could bring profound changes to local business culture and society. The government is beginning to recognize their importance and is easing regulations to give the ventures more room to maneuver. One thing is certain: If you want know where Japan's Internet is headed, these are the people to ask.

To be sure, the new Net builders won't have the field to themselves. Sony, Fujitsu, NTT, and even carmakers such as Toyota are charting their own Net strategies. Foreign companies, such as Microsoft, AOL, and Amazon.com, want pieces of the pie--as do U.S. and European venture capitalists. In the past half-year, J.H. Whitney, Hambrecht & Quist, and others have funneled more than $1 billion into Japan.

TRANSFORMED. Still, at this moment, there's a shimmering opportunity for pioneers whose names and companies are barely known today--just as Son and Softbank were barely known in the mid-1990s. "This is an opportunity that occurs only once in 100 years," says interQ founder Kumagai, 36. "It's our chance to create new businesses."

These Net builders believe that Japan, and soon the rest of Asia, will be transformed by the Internet revolution. Independent and highly ambitious, they struggled during the dark years to build up core businesses and eke out profits. So far, they've managed to maintain friendly ties by operating in different spheres. Softbank invests mainly in e-commerce sites, while Hikari is focused on the mobile Net, buying stakes in companies that are developing services and technology for wireless Web surfers. Son and Shigeta regard each other as friends and regularly meet on the golf course. Shigeta sits on the Softbank board as an outside director.

But it's not clear how long the good relations will prevail. As Hikari casts its Web investments wider and Softbank moves into the mobile Internet, they could clash. Moreover, Softbank, Hikari, and Trans Cosmos have all formed tie-ups with brokerages, retailers, telecoms, and TV or satellite broadcasters to create businesses that will compete directly against each other.

The model for nearly all the budding Net builders is Masayoshi Son, who oversees the world's largest conglomerate of Net-related firms. His Softbank Corp. has equity holdings in more than 300 ventures--160 in the U.S., 120 in Japan, and the rest in Europe and Asia. Five years from now, he sees himself at the helm of a Net-batsu spanning 800 Internet ventures scattered through the Americas, Europe, and Asia.

While Son's roots are in software distribution, his riches all flow directly from the Net. And so, he believes, does the future. So, while U.S. dot-coms are stocking up on physical products and distribution channels, Son has started to shed some of his non-Net assets, such as the Ziff-Davis Inc. publishing group. And soon, Softbank is expected to win a bid to become the first non-financial concern to purchase a Japanese bank--the failed Nippon Credit Bank, which the government has put on the seller's block.

Son's basic game plan is to import the most successful U.S. Web companies, set them up in Japan, and take them public. The pattern will be repeated in South Korea and other parts of Asia. His first project, Yahoo Japan, turned out to be a high-wire stock market success: Son's stake now is worth some $10 billion. In coming months, he expects to list about 30 Softbank companies on Japanese markets, including Nasdaq Japan, or "Jasdaq." The new bourse, in which Son has invested, will open in June and offer fast-track listing procedures for high-tech companies. Critics complain that this will represent a conflict of interest. They also voice concern about Softbank's $2 billion in long-term debt and its lack of cash flow, issues Son shrugs off.

Following in Son's footsteps is Shigeta, who struck gold in Japan's booming retail market for cellular phones. With his cash horde, Shigeta has purchased stakes in more than 70 Internet ventures in Japan, China, and the U.S.--mostly in the past year. Some competitors say its investments are haphazard, while others question whether Hikari has the finesse needed to run such a broad operation. But Mahendra Negi, an Internet analyst at Merrill Lynch Japan, says the scattershot approach works for Hikari: "That increases their chances of hitting on a success."

Close behind Softbank and Hikari is Trans Cosmos. Founded in 1966 as a data-processing venture by Osaka entrepreneur Koki Okuda, Trans Cosmos has grown into a leading network service company, with such clients as Sony, Microsoft, and Apple. It beat Softbank to the U.S., setting up office in San Francisco in 1989. Okuda's aim was not to gamble on future Web stars, but to invest in ventures with the technology it wanted to import into Japan.

Ultimately, Trans Cosmos took equity stakes in more than 50 U.S. Web outfits, including Amazon.com, Autobytel.com, DoubleClick, and Liquid Audio, in their initial stages. And in the past year, it has helped set up more than a dozen joint ventures in Tokyo, including that of online-advertising venture DoubleClick Japan, of which it owns 53%, and Autobytel Japan (16%). Some of these deals have already paid off. Last December, Liquid Audio Japan listed on Mothers, a new over-the-counter bourse in Tokyo, and it has since seen its value triple.

"NET-BATSU." These New Age conglomerates indeed bear an uncanny resemblance to the old zaibatsu, which started out as retailing ventures, then grew into mighty groups engaged in trading, insurance, and shipping. Organized as family-run holding companies, they invested in new businesses and ballooned in size, until they were disbanded under the U.S. occupation of Japan--only to be reborn as the corporate groups called keiretsu. Now, history could be repeating itself. "The new zaibatsu will transform Japan from an industrial to an information society," says Son.

The transformation already is playing out. After years of lagging far behind the U.S., Japan's spending on information technology is finally shooting up and should account for 20% of all capital outlays in 2000, up from 12.5% last year. Many observers now foresee an information technology-led recovery in Japan, mirroring that of the U.S. in the early 1990s. "The power of it is strong enough to create a vigorous economy," says Jiro Kokuryo, a Keio University Business School expert in high-tech trends.

Investors are betting on this. With so few pure Internet companies listed on Japanese markets, they're falling over themselves to grab the early players. Atop everyone's list is Hikari Tsushin, which is hell-bent on the wireless Internet.

Hikari's share price has quadrupled in value, to $2,009, since it debuted on the Tokyo Stock Exchange's main board on September 2. Its market cap is now $62.1 billion, compared with $36 billion for NEC.

Everywhere, it seems, the New Japan outshines the Old. As Softbank's share price zoomed from $72 to $1,648 in the past year, its market cap soared above that of Sony Corp., at $121 billion. Nothing compares, though, with Yahoo Japan--51% owned by Softbank--whose shares go for a whopping $1.4 million, more than 2,000 times projected earnings for fiscal 1999. The scarcity of pure Net stocks accounts for some of this fizz. (Yahoo Japan has issued only 13,000 shares on the Jasdaq.) But the situation should ease later this year, when an estimated 250 Internet or high-tech ventures expect to go public.

If the many scenarios sketched by the Net builders sound like a sure bet, they aren't. Even if everything goes according to plan, some experts doubt there will be room in Japan for more than three or four dominant Net-batsu. One of them will likely be Softbank, says Hiroshi Fujiwara, an astrophysicist-turned-entrepreneur who runs Internet Research Institute Inc. The other two could be Sony and NTT, he says.

That prospect disturbs up-and-coming entrepreneurs, such as Susumu Fujita, president of Cyber Agent. Japan's largest online advertising company, it recently sold stakes to both Hikari (6.6%) and Softbank (2.6%) in hopes of neutralizing the competition. "They are fearsome rivals that could take over my company," says Fujita, 26.

Others believe Japan needs many more people like Son. The important thing, at this early stage, is to teach Japan's risk-wary youth how to become entrepreneurs. So Kiyoshi Nishikawa has founded a company called NetAge whose sole function is to "incubate" new Net companies. And there's Joichi Ito, 33, chairman of Infoseek Japan, who recently raised $20 million in venture funding from J.H. Whitney & Co. and PSINet Inc. to seed startups. "We're going to need lots and lots of entrepreneurs to rebuild Japan," says Ito.

WILD CARDS. That could mean more competition down the line for top-tier Net builders, such as Hikari and Trans Cosmos. At the same time, these two must keep an eye on the Net aspirations of blue chips like Sony or Fujitsu. These are Japan's "click-and-mortar" equivalent of Wal-Mart Stores Inc. and IBM, which are now duking it out with U.S.-based dot-coms.

In the click-and-mortar circuit, some potent wild cards could compete with the Net builders. Seven-Eleven Japan, the No. 1 convenience-store chain, is partnering with banks and electronics companies to turn its 8,000 outlets into depots where consumers pick up and pay for online purchases. Taking a page from Softbank, NEC just acquired a 30% stake in eBay Inc.'s brand-new Japanese subsidiary.

Internal competition aside, other factors could cloud the future for Japan's new Net builders. There's a dearth of experienced, flexible managers for fast-changing Net firms. Also, many people ask if Japan can reform its rigid political and business structures quickly enough to nurture the new Net-batsu. Japanese consumers still pay inflated prices for energy, telecommunications, and other basic outlays. That may be one reason the economy is teetering back toward recession. "We need sweeping deregulation in every sector," says Toshifumi Suzuki, chairman of Seven-Eleven Japan. Net builders such as Son have been nudging Japanese policymakers toward faster deregulation. And it seems to be working. After years of pressure, NTT plans to introduce affordable Net access rates--comparable with U.S. rates--starting in Tokyo in May.

Such changes can't come fast enough for Japan's Net builders. And as the revolution they started gathers steam, more men--and women, too--will find inspiration in their successes. That should further undercut Japan's ossified business structures and breathe more life into the manifold Net ventures. At this early stage, Japan is experiencing entrepreneurial drive it hasn't seen for 125 years. Or at least since the postwar days, when entrepreneurs Akio Morita and Masaru Ibuka founded Sony in a firebomb-devastated Tokyo. If the Net builders keep pushing, the bullish prophecies of the Roaring Eighties could come roaring back: The 21st century may be Japan's century after all.

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