Japan's Mixi Tops Facebook and MySpace

The fast-growing site is the king of social networking among Japanese users, and it really rakes in the online ads

Asuka Kosaka joined Facebook this year to connect with her English-speaking friends. But when the 29-year-old wants to share her thoughts and photos with 70 friends and family members in Japan, she heads straight for another site: Mixi.

Mixi (2121.T) may not have the global reach of social networking giants Facebook and MySpace, but in Japan it's king. The Tokyo company had 15 million users as of June, a 40% gain from 10.7 million a year earlier. No other social networking site even comes close, analysts say. Facebook and News Corp.'s (NWS) MySpace disclose only worldwide numbers. "Most of my friends don't know that Facebook and MySpace have Japanese-language sites," says Kosaka.

In June, Mixi accounted for 12.4 million, or 41%, of the 31 million unique visitors for all social networking sites in Japan, according to research firm comScore (SCOR). MySpace was a distant second, with 1.2 million visitors, followed by Google-owned (GOOG) Orkut's 638,000 and Facebook's 538,000. "Everything Mixi does is tailored for Japanese users," says Nomura Research Institute analyst Hideo Yamazaki, who wrote a book about Mixi. "So I think it's very unlikely that Facebook and MySpace can overtake Mixi here."

Clout with Advertisers

As Mixi draws more clicks, its clout with online advertisers grows. That's important for Mixi because online ads account for 85% of its $92 million in annual revenues. Japan's Internet ad spending is set to rise 20%, to $5 billion, this year, according to Dentsu Communications Institute, a unit of Japanese ad giant Dentsu. By 2011, the figure could top $6.9 billion. Many analysts expect Mixi to benefit. On Aug. 15, Morgan Stanley (MS) analyst Naoshi Nema raised his target price to 750,000 yen ($6,818) a share, from 600,000 yen ($5,454), and predicted that Mixi's earnings this fiscal year would beat its forecasts for a 1.4% gain in operating profits, to $34.5 million, and a 29% gain in sales, to $118 million. (Last year, profits were up 72%, and sales 92%.)

For MySpace and Facebook, it will probably be a hard slog in Japan. But MySpace Japan spokesman Daisuke Chikuda says MySpace and Mixi aren't direct competitors. MySpace aims to connect music fans and entertainment buffs, while Mixi is more about staying in touch with old schoolmates or friends, he says. Facebook has a different approach (BusinessWeek.com, 8/13/08). It doesn't have local staff, and relied instead on volunteers to translate the site before launching a Japanese-language service (BusinessWeek.com, 5/14/08) in May.

Mixi's biggest advantage comes from the network effect. As more people sign up for Mixi, its users benefit from an ever-expanding group. That also makes it more attractive to marketers, who want to target the college students, twentysomethings, and housewives who are Mixi's core users.

Keeping It Squeaky-Clean

What is Mixi's secret? CEO Kenji Kasahara figured out how to tap into his country's blogging craze before anyone else, says Waseda University professor Tatsuyuki Negoro, a Web services expert.

When the site launched as eMercury in 2004, many early users got hooked on Mixi's easy-to-use online diary and "footprint" feature, which tracks visitors. Kasahara also made the site cell-phone-friendly early on so users could send updates from anywhere.

Another reason for Mixi's popularity: its squeaky-clean image as an online hangout. To ensure that Mixi wouldn't be lumped in with the chat rooms and dating sites linked to killings in Japan, Kasahara pledged to keep out troublemakers and young kids who might be easy prey for online scams. Even now, new members must get invited by a Mixi insider, and nobody under the age of 18 can join.

And to assuage worries about personal data being leaked to the Net, Mixi let users hide behind a pseudonym or nickname. That appealed to Net-savvy Japanese, who were used to commenting anonymously on bulletin boards that act as rumor mill, news source, and insider-info clearinghouse. Soon many were flocking to Mixi for their daily online fix. By the time MySpace arrived in late 2006, Mixi already had 6 million users.

The Stock Plummets

Mixi is still adding about 1 million new users every three months. And it has plenty of cash left over from a $1.9 billion IPO on the Tokyo Stock Exchange's Mothers section for fast-growth startups in September 2006. But since January, Mixi's stock price has dropped 43%, wiping out nearly $1 billion of the company's worth. One concern is that a slowdown could hit Mixi's ad revenues. Another: Mixi-fatigue. Only 55% of users visit the site at least once every three days, compared with 70% in 2006. Analysts say Mixi users might be defecting to other sites. "Mixi's rivals aren't existing social networks but sites offering unique services, such as those using avatars," says NRI's Yamazaki.

That's why Kasahara is pouring money into upgrading the site. On Aug. 20, Mixi announced it would let developers of other Web sites use OpenID tools, so Mixi users only have to log in once to access their accounts with other Web sites and services. Mixi also plans to allow outside programmers to add software applications to the site, like Facebook does. Earlier this month, Kasahara & Co. began testing Mixi Echo, a micro-blogging service like Twitter that's similar to text-messaging except it's limited to 50 characters. Those services are free, but Mixi now charges if users customize their pages with Disney (DIS) and Hello Kitty characters, music-sharing services, or extra data-storage capacity. In the coming months the company will launch a Chinese-language service. "I want to speed things up and make this company better at creating innovative services," Kasahara says. "We still have a lot of gaps to fill."

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