No Boo-Hoos for Yahoo! Here

As the U.S. portal slips, the Japanese version conquers all

When Yahoo! Japan Corp. made its debut in 1996, analysts doubted the Internet portal would match its phenomenal success in the U.S. At the time, only 3% of Japanese households were online. And few businesses even had computer networks. Yet while the American Yahoo has since lost much of its luster, its Japanese counterpart is charging ahead. Yahoo Japan is the dominant portal in a country that now boasts 56 million Web users, 61% of all households. Net profits doubled in the fiscal year ending Mar. 31, to $49 million, on a 132% boost in sales, to $242 million. And this despite a crushing Japanese recession and the global tech-stock crash. In the U.S., Yahoo! Inc. (YHOO ), lost $93 million in 2001 on sales that slid 35%, to $717 million, and racked up another big loss in the first quarter.

The credit for Yahoo Japan's success goes to CEO Masahiro Inoue, who recognized early on that the portal had to diversify its revenue base in order to make money. Co-founded by Yahoo and Tokyo investment giant Softbank Corp., the Japanese portal initially relied on advertising for revenue. In 1999, Inoue introduced online auctions and blew away the Japanese affiliate of eBay Inc., which dominates in the U.S. and Europe.

To keep up the momentum, Yahoo Japan has embarked on a more daring gambit. Together with Softbank, it has started an asymmetric digital subscriber line (ADSL) broadband service called Yahoo BB, which uses enhanced copper lines rather than optical fiber. By charging $18 a month, half the price of a slower service then offered by Nippon Telegraph & Telephone Corp. (NTT ), it sparked a price war--and a twentyfold increase in Japan's ADSL market, to 2.4 million users. "Our aim was to boost Japan's broadband penetration rate, and this is happening," says Inoue, 45. Yahoo has 600,000 broadband subscribers.

In the go-go '90s, such a track record would have triggered an investor stampede. But not in these Net-wary times. Yahoo Japan's stock has dropped by nearly half, to $23,000 a share, since December. After watching so many other dot-com crashes, industry analysts worry that a plunge into broadband is dangerous. "Why take such a risk?" asks Nikko Salomon Smith Barney Ltd. research director Thomas Rodes. "If you look at the U.S., the early providers of broadband services have all failed." Analysts also fault Yahoo for poor execution: Because it fell behind with installation work, it's well short of its goal of 1 million subscribers.

Inoue doesn't seem fazed. As he sees it, Yahoo will benefit regardless of who controls broadband service because of its hold on the Japanese-language Net market. Some 87% of Web users frequent the free site each month, compared with 57% for the second-most popular destination, online shopping mall Rakuten Inc., according to Nippon Research Center. And no other site in Japan comes close to Yahoo's repeat visitor rate of 78%. The next closest portal is Goo, operated by NTT, with a 14% repeat user rate. Inoue hopes this dominance will enable Yahoo to market high-speed services, from movies and online games to videoconferencing.

One reason for confidence is Inoue's success in e-auctions, which account for 8% of sales. Three years after launching the site, the service has1.7 million paying members and 7.3 million users. It commands more than 70% of the market, says Nikkei NetBusiness, which surveys e-commerce sites. In April, Yahoo Japan began charging 10 cents for every item it lists, on top of a 3% sale commission. The number of listings dropped from more than 500,000 to 200,000. But the value of transactions on the site is holding up at between $6 billion and $10 billion per month because a higher percentage of deals are closed. Meanwhile, Inoue expects paying memberships, costing $2.25 a month, will reach 7 million in a few years. "This is still a small business, but it's going to be big," he says.

Even so, many analysts think Yahoo Japan shares are still overvalued. "The auction business is very promising and will no doubt grow," says HSBC Securities analyst Benjamin Wedmore. "But the stock is way overpriced." One reason is that Softbank and Yahoo Inc. still control 83% of the shares, so few are traded. Rumors swirl that Yahoo wants Softbank to reduce its stake to boost liquidity. Yahoo denies this, and Softbank founder Masayoshi Son says no sale is imminent. That could make Yahoo Japan a real rarity in today's blasted-out tech market: a dot-com good enough to keep.

By Irene M. Kunii in Tokyo, with Ben Elgin in San Mateo, Calif.

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