How Yahoo! Japan Beat eBay at Its Own Game
Shigeki Ohya is a Pez fanatic. The 32-year-old engineer for Nihon Texas Instruments in Tokyo can't get enough of the kitschy little candy dispensers. So in 1995, Ohya began visiting the Web site of San Jose (Calif.) auctioneer eBay Inc. (EBAY ) to buy devices that were first a hit in 1960s America. Soon after, he was buying dispensers from eBay's U.S. site and selling them in Tokyo toy shops. His sideline didn't take off, however, until September, 1999. That's when Yahoo! Japan (YHOO ) introduced online auctions to the country. Ohya started selling his Pez dispensers and now nets a tidy $400 a month on Yahoo's Japanese-language site. EBay has since expanded to Japan as well, but Ohya can't be bothered. Why? In the Japanese e-auction game, eBay has been thoroughly trounced by Yahoo Japan.
In fact, the contest isn't even close. Yahoo Japan--the country's largest portal--has 95% of the online-auction market, where last year $1.6 billion worth of goods were traded. By contrast, eBay Japan--whose only business is auctions and whose parent dominates online auctions in the U.S.--has a measly 3% of the Japanese market. Concedes eBay Chief Executive and President Meg Whitman: "We're definitely in catch-up mode." EBay will likely start the catch-up with a new chief at its Japanese operations; the current CEO, Merle Okawara, will resign at the end of May.
If eBay doesn't boost its fortunes in Japan, that failure would imperil Whitman's plan to dominate global e-auctions. In April, she set a target of $3 billion in worldwide sales by 2005, a goal that requires annual revenue growth of 50%, up from 15% now. Whitman can't make those numbers without closing the gap in Japan, the world's second-largest Internet market. What's more, Yahoo Inc. could trump eBay in the rest of Asia because it has the No. 1 or No. 2 portal everywhere but China.
EBay's first mistake in the Japan market was coming in late. And when eBay Japan did launch--five months after Yahoo Japan--it charged a commission for each transaction. Yahoo Japan doesn't. Not that eBay is entirely out of the running, considering Yahoo's perilous finances. The portal's advertising is down in the U.S., and total sales are off 42% in the first quarter from the previous three months. That's forcing the company to look to its high-flying Japanese operation. Yahoo Japan plans to start charging auction users a $2.25 monthly fee this July and will add a commission on each sale, like eBay's, later on. That may dilute its advantage and send customers to eBay.
Ironically, not so long ago, most high-tech execs thought online auctions would never work in Japan. Even Masahiro Inoue, president and CEO of Yahoo Japan, thought status-conscious Japanese wouldn't buy used goods from strangers. But owing to the long economic slump and the emergence of environmental awareness, shopping in second-hand "recycle" shops is now chic. Internet auctions, for which Japanese customers can adopt Internet nicknames, take the sting out of buying other people's stuff. Besides, Japanese are well-known fans of collectibles--think Pokémon, Hello Kitty, and Mickey Mouse--that are perfect fodder for the online-auction experience.
It was Jerry Yang, co-founder of Yahoo, which owns 32% of Yahoo Japan, who first got Inoue thinking about online auctions. While talking over sushi at a Santa Clara (Calif.) restaurant in April, 1999, Yang told Inoue he was uneasy about eBay, which was expected to launch soon in Japan. "Yang understood it was critical to be first," says Inoue. "We knew catching up with a front- runner is hard, because in auctions, more buyers bring more sellers." Back in Tokyo, Masayoshi Son, CEO of Softbank Corp., which owns 51% of Yahoo Japan, drove home the message. Inoue says Son told him: "If auctions are not a success, that's O.K. But if they are, and we're late, we'll be too late."
Inoue put four people on the project full-time. Four months later, the site was ready. Just before its launch in September, 1999, Inoue told his 120 employees to list items for sale and make the site look busy. He needn't have bothered. Thousands of collectibles, electronics, computer games, and brand-name goods were quickly put up for sale. Japanese were buying, too. Today, the site boasts 2.2 million users. Nicholas Spratt, an analyst at Lehman Brothers Inc. in Hong Kong, reckons the new monthly fees could earn Yahoo Japan $12.5 million, or 3% of revenues, this fiscal year.
By contrast, eBay's Japanese launch was hobbled by a series of missteps. The first was the decision to charge commissions of 1.25% to 5% and require sellers to provide credit card numbers, a hassle for young Japanese who often don't have plastic and prefer to pay cash on delivery or by bank transfer. Moreover, eBay had a chance to launch soon after Yahoo, but spent much of 1999 developing a site, preparing the legal work to open a Japanese subsidiary, and looking for managers to run the operation.
Another possible misstep was Whitman's choice of Okawara, a second-generation Japanese-American from Hawaii, as president and CEO. Okawara was well-known in Japan for turning a faltering frozen-pizza business into a $100 million company. But at 60, she was twice the age of most of her eBay Japan employees and new to the Internet. Okawara herself attributes the problems to the late launch: "When we arrived last year, the 800-pound gorilla was already positioned."
Even when eBay did get in gear, it took too long, critics say, to embellish its Japanese site with the local touches needed to attract users. Over time, categories had to be changed and more free features, such as horoscopes, product reviews, and newsletters, had to be added "so it makes more sense from a Japanese point of view," says Okawara. These alterations took months.
At the same time, eBay Japan also took a low-key approach to marketing, relying on its usual formula: rather than spend big bucks on advertising, just let auction fans spread the word. That passivity backfired in Japan because eBay had too few users. In contrast, Yahoo Japan spends some 8% of revenue on promotions that include renting billboards in trendy Tokyo districts, opening an Internet cafe with Starbucks, and covering the planes of a domestic airline with Yahoo's purple-and-yellow logo. Yahoo Japan aims to boost its ad budget by some 75% this year.
Still, eBay has the money to claw its way higher in Japan. The parent company had $314 million in cash as of Mar. 31, and its stock has more than doubled this year, to about $62, despite turbulence in Internet shares. (Yahoo stock is off some 31%.) But throwing money around doesn't guarantee success: eBay spent more than $200 million to buy a Korean site, Internet Auction, in February, and a European clone, iBazar, in March. Yet both had combined revenues of just $20 million last year, and analysts doubt if future results will ever justify the high price eBay paid.
Some analysts think eBay Japan should admit defeat and sell a majority stake in the venture to a big local player. But even then, eBay would face an uphill struggle. Okawara says the company's strategy to catch Yahoo Japan involves "more of the same" and "patience." Adds Whitman: "We're in it for the marathon, not the sprint." That's good. The race looks to be a long one.
By Ken Belson in Tokyo, with Rob Hof and Ben Elgin in San Mateo