Gulfnet Goes Nose-To-Nose With NTT

Its VPN business exists due to NTT's exorbitant telecom fees. Will the telco monolith let this startup survive?

CEO Junichi Ishikawa

The core of Gulfnet's offerings is the Gulf-Japan-Wide flat-rate VPN (virtual private network) service aimed at large retail chains. One VPN networking equipment manufacturer here estimates the domestic VPN market will reach ¥50 billion in 2001, and like so many other Internet-related business opportunities in Japan, Gulfnet's VPN business exists due to NTT's exorbitantly high telecom fees. Retail chain stores usually have to report POS (point of sale), inventory, and sales data to a central headquarters server at the close of each day. Traditionally, NTT Data would offer network access to such clients via NTT's ISDN (Integrated Services Digital Network) network, where usage is billed on a time and distance basis. The cost is quite steep, and that's where Ishikawa saw an opportunity. "I noticed that 7-Eleven was gaining market share by using PCs, and so all chains would have to use them. Each of 7-Eleven Japan's 7,000-odd branches connects to the headquarters each day." Gulfnet leases bandwidth from NTT on a bulk discount basis, and then resells it to the chains much cheaper than ISDN; in fact, some 77 percent cheaper. "There is no problem with sales," Ishikawa adds.

This steep discount combined with a large number of dial-up access points nationwide have allowed Gulfnet to win a significant share of the VPN market, and Ishikawa's client list includes Shimaura (Japan's top-grossing retail clothing chain with some 600 shops), Daiei, 7-Eleven, and other convenience store chains. Gulf-Japan-Wide has been expanded to include mobile access services under the Gulf-Mobile-Wide brandname, so that retail store buyers can connect remotely to central management. The eclectic Ishikawa, however, hasn't been content to stop there (his firm owns more than 20 patents), and Gulfnet has expanded its services to include groupware and retail store management application development; systems integration for Web, Java, and intranet; and outsourcing for client/ server network operation and hosting. Gulfnet's sales force to date consists of 10 staff, remarkably few for a company providing such diverse services.

Ishikawa's latest venture is directed towards the B2B distribution market, and he has set up a new company, e-Finance.com Co., Ltd., to offer clients (including newly opened chain stores) complete network installation and inventory management services for a low monthly leasing fee (the PCs are free to the customer), thus reducing capital investment required at store launch. Further, retail operators will be able to place inventory orders via the Web and make payment by debit and CQ card. e-Finance.com (which resides at www.e-finance.co.jp and has no relation to US online financing company www.e-finance.com) started service in July last year, and is now tied up with several financial institutions, allowing it to support liquidation of receivables and other excess goods. e-Finance.com shares Gulfnet's 350-odd distribution company and chain store customers, and the service will expand to provide CRM and database management services.

Don't underestimate the value of the excess goods market in Japan. Patrick Toolis, founder of J-Surplus.com, estimates that Japanese companies presently have some ¥4 trillion of excess merchandise on hand -- anything that helps reduce storage and removal costs could be big. In addition, the past few years have not been kind to retail chains in Japan. In FY 1999, for example, Japan's 11 major menswear retail chains listed on the TSE suffered a third straight year of falling turnover and profits. Clearly any low-cost service that will help reduce the cost of inventory management, equipment leasing, or sales data management, and help with inventory reduction will be eagerly sought by retail operators.

But Gulfnet's decision to go head-to-head with industry giant NTT raises red flags for some industry watchers. David Russell, senior partner at Japan Consulting Group, explains what might happen when NTT decides that a competitor has become big enough to take seriously. "As long as you don't take any significant piece of their business, NTT will let you live. But when you start to eat into their profits, something has to be done." Russell surmises that in the case of a small player like Gulfnet, it seems only too simple for NTT to up the technological ante using technology that has extremely high entry costs, like optical fiber, and then lower prices sufficiently to purge the market of upstart challengers. "I would not bet on Gulfnet's success unless I saw some clear business plan that showed how the company would stay ahead of a competitor that can afford to price its services at zero yen if necessary in order to 'cleanse' the market," he says. His concern may not be too far off the mark, as NTT East was investigated late last year by Japan's Fair Trade Commission for squeezing Tokyo Metallic Tsushin (a DSL supplier)'s access to NTT's local exchanges.

Ishikawa is pressing ahead, and, with an eye to a future IPO, he's been watching the new Japanese venture markets, Nasdaq and Mothers. Ishikawa has concluded that it may be better to consider launching on Nasdaq US, explaining: "I don't like the Japanese markets. I think about Nasdaq US a lot. If we do launch in Japan first, we'll try to move onto a US market afterwards."

One thing's for sure: companies like Gulfnet can count on inertia and short-sightedness at behemoths like NTT to continue providing lucrative market opportunities for a long time yet. Let's hope many more independent spirits like Ishikawa have the courage to abandon stultifying corporate existence to take advantage of those opportunities.