Show Time at Softbank

CEO Masayoshi Son is still betting on the Net--but he needs profits soon

Spend a few minutes with Masayoshi Son these days, and odds are he will sit you in front of his computer screen and give you a demo of Yahoo! BB, his new Japanese high-speed Internet access service. First comes a crisp, smooth video news clip of Osama bin Laden firing his Kalashnikov, followed by a performance from the local rock group Glay. "This is the fastest broadband access anywhere," Son says, smiling. "We have a mad scientist engineer who did this."

The president and CEO of Tokyo-based Softbank Corp., the globally ambitious Internet venture fund, has reason to be obsessed with the five- month-old service. After all, its transmission speed is twice as fast as anything in Japan, the U.S., or South Korea. And Son is counting on Yahoo BB to be the smash hit that will start to turn around the fortunes of his struggling company. The service has already signed up 200,000 subscribers and is angling for 1.5 million more. Moreover, Yahoo BB is not merely a new add-on to Softbank's 51%-owned Yahoo Japan, the offshoot of megaportal Yahoo. It could allow Softbank to migrate all its Japanese affiliates--including online broker E*Trade Group and an assortment of e-commerce retailers--to a faster and more profitable broadband track.

That's the plan, anyway. Certainly, Son needs to counter all the bad news about Softbank of late. A sprawling operation with about $3.6 billion in revenues and a patchy profit record, Softbank has invested in 600-odd Internet and wireless outfits since the mid-1990s. Son made a killing by getting in early on Yahoo, E*Trade, and mobile-phone service provider UTStarcom, which makes broadband and wireless network gear and has a strong presence in China. But many Softbank companies are losing money, and Son and his lieutenants are vowing to start closing or restructuring them.

Back in 1999, when Softbank was sitting on unrealized gains from its Internet stock portfolio of about $15 billion, Son was hyped at home and abroad as a visionary. It seemed more than deserved. After all, his sprawling venture-capital network scouted the world's hottest technologies, seeded them, and took them public at a huge profit. But the cratering of global high-tech stock prices has diminished Son's aura. In late November, Softbank reported a half-year net loss of $448 million, mostly because it was forced to mark down the value of its Internet portfolio. Softbank's market capitalization has plunged to about $27 billion, from roughly $200 billion back in 1999. Worse, Japan's recession is pounding the profitability of its core publishing and software retailing operations, and its fledgling online financial services.

DOT-BOMBS. Although Son has made some shrewd investments in Silicon Valley over the years, he and his team got badly burned at the tail end of the Net frenzy, when venture funds on the West Coast, Softbank's venture-capital arm included, bid up companies with unproven business models to ridiculous heights. Two of the most unfortunate choices: online retailer Buy.com Inc., which struggles on, and grocery delivery service Webvan Group Inc., which went bust. Says Gary E. Rieschel, president of Softbank Venture Capital in Mountain View, Calif.: "We have actively worked to shut down investments that we can't see a future in."

There may also be a bomb hidden deep inside Softbank: the $800 million or so it has invested in unlisted startups, primarily in the U.S. Rieschel says some of these companies, including e-business software maker Comergent Technologies Inc., are expected to break even next year. Still, debt pressures are mounting. Softbank owes $4 billion to creditors, $800 million of which is due in the next two years. True, it has $1.22 billion in cash and marketable securities. It also has a credit line of $700 million. But with unrealized gains on its portfolio down to $6 billion from $15 billion, analysts are starting to worry. "We're increasingly concerned about the company's ability to service its debt," says J.P. Morgan Chase & Co. analyst Noriko Manabe.

Son knows it's show time on the profits front. Manabe figures the company will lose $633 million for the fiscal year that ends next March, on about $3.3 billion in sales. Son concedes the write-downs on soured investments and Japan's recession likely will result in a big loss.

Some are saying Softbank should pull out of the venture-capital game, do triage on its portfolio, and get down to the nitty-gritty detail work of turning its subsidiaries--which in Japan span everything from digital TV to online retailing to Aozora Bank Ltd.--into lean, mean profit machines. Son has already shuttered a money-losing online Japanese bond-trading venture with Lehman Brothers Inc. and pledges to be ruthless in cleaning out the rest of his stable. "We're doing a lot of pruning," he says.

NO REST. For the moment, Son is also putting a freeze on fresh investments in Latin America and Europe, where Softbank has handed back $200 million to institutional investors who had partly bankrolled some Softbank VC funds. And he's being very selective about new and second-round financing in the U.S. and Asia. Still, he hasn't lost his taste for risk. Softbank and Cisco Systems Inc., the U.S. telecom networking giant, have together raised $1 billion to chase broadband ventures in the Pacific Rim. Meanwhile, Son is putting in 19-hour days getting Yahoo BB on track. "There have been no weekends or summer vacations for me," he says.

Now that the service is up and running, Son thinks he can get that critical subscriber base of 1.5 million or so by late next year. Softbank has offered free installation to early subscribers and charges a bargain monthly fee of $18. Son thinks his stable of e-commerce units will see a jump in sales by cross-promoting on a souped-up Yahoo that already reaches some 20 million Japanese Web surfers. Ditto for E*Trade Japan, as investors no longer get fleeced by the dial-up Net access charges commanded by fixed-line phone giant Nippon Telegraph & Telephone Corp.

Son still argues that the Internet will change everything. That may be true, but it doesn't take the pressure off Softbank. Son has to start proving he can make money on the hot technologies he has already backed. Otherwise, the Internet revolution may move on to its next phase without him.

By Brian Bremner in Tokyo

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