Online Extra: Yahoo! Japan: King of the Hill

Thanks to CEO Inoue's innovations, it's now the country's premier Net destination. And early broadband moves may help keep it that way

By Irene Kunii

Back in 1999, no one was placing bets on the future of e-auctions in Japan. With their disdain of second-hand goods, Japanese consumers would never take to online trading -- or so the common thinking went. But CEO Masahiro Inoue of Yahoo! Japan figured that after years of recession, consumers were ready for a change. At the same time, they were spending more of their leisure time online. So, in the fall of 1999, Inoue took the plunge and launched Yahoo Auction in Japan. He hasn't looked back since: Today, some 11 million people trade goods worth $300 million on the site each month.

That's just one feather in Inoue's hat. By spearheading a strategy to deliver new services ahead of the competition, Inoue has succeeded in positioning Yahoo Japan as the premiere destination on the Japanese Internet -- and earning his company a No. 11 ranking in the 2003 BusinessWeek Info Tech 100.

No one can approach Yahoo Japan in terms of traffic: It boasts 20 million unique monthly visitors, compared to 12 million for Nifty and 11 million for Biglobe, the two biggest Japanese-language Internet service providers and its nearest rivals.

JAPAN'S No. 1.

  The company, a joint venture between America's Yahoo! (YHOO ) and Japanese investment group Softbank (SFTBF ), is also charging into broadband services, with the aim of taking the lead in delivering music, video, and other services over high-speed networks. Already, Yahoo BB, as the broadband business is known, generates $190 million, or 38% of annual sales.

It's no surprise that Yahoo Japan is the highest-ranking Japanese company on the Info Tech 100 list. Check out these numbers: In the business year ending Mar. 31, Yahoo Japan saw operating profits jump 131%, to $203 million (net profits rose 106% to $102 million), on sales of $500 million, up 88% over the previous year.

Though wary of the dot-com sector, investors are cautiously optimistic about Yahoo Japan. "The auction business is doing very well, and no other portal is as popular as Yahoo," says Ben Wedmore, an analyst who covers the software and game industry for HSBC Securities Japan. He, for one, would like to see Yahoo Japan improve its transparency. Luigi Limentani, Internet analyst at Nikko Citigroup in Tokyo, rates the stock as a market underperformer. "I don't expect the stock to outperform the market for awhile," he explains, "but I think the company has done well." (The shares trade on the JASDAQ, Japan's small-cap exchange.)


  Credit for these results goes to CEO Inoue, who has built Yahoo Japan into an Internet powerhouse in just a few years. His biggest accomplishment is Yahoo Auction, which in the first quarter of 2003 generated $24 million in operating profit on sales of $32 million. Last year, turnover reached $3 billion -- accounting for more than 80% of the Japanese online-auction market.

"Yahoo Japan is synonymous with e-auctions," says Masashi Hagihara, president of NetRatings Japan. "No one can approach it." Just Ask eBay (EBAY ), which was forced to shutter its Japanese operations last year after failing to make a mark (it still placed at No. 38 on the latest Info Tech 100).

Inoue also gets kudos for restoring the lackluster online-advertising business. He increased the number of large corporate clients for Yahoo Japan and developed new products that reach more viewers. As a result, sales grew 11% in fiscal 2002, to a record high of $115 million.


  Another big cash cow is broadband, but investors are less sanguine about it. That's because Yahoo Japan, along with Softbank, is competing head-on with a real telecom Godzilla -- Nippon Telegraph & Telephone Corp., the former state monopoly.

Though Yahoo ranks just behind the NTT Group in terms of overall subscribers, analysts question whether the risk is warranted. "This is a big risk because of the increased competition," points out Nikko Citigroups's Limentani. "And what will happen if broadband take-up slows down in two years?"

Inoue is confident he's on the right track, however. As he sees it, by being the first to roll out early broadband services, Yahoo Japan will be the ISP of choice to deliver paid video and other entertainment and content services in the future. Judging by his track record, he may just pull it off.

Kunii covers technology for BusinessWeek from Tokyo

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