Fast Country, Part II

Last December, we told you that South Korea was zooming ahead of Japan in all things Internet. Now its battle-tested broadband ventures are invading -- you guessed it -- Japan.

The impetus behind this technology emergence is the International Monetary Fund's $60 billion loan to South Korea in 1997. The money was to address the financial crisis that gripped many of the country's largest banks, and much of it filtered down to capital-hungry startups through the Korean government's pro-venture financial programs. "The Korean venture capital market has grown tremendously because of the support of the government," says K.K. Kang, general manager in Tokyo for KTB Network, Korea's largest VC firm. In contrast to the Japanese government's long-term "e-Japan" initiative, the Korean programs were intended to have immediate impact. For example, ventures deemed to have "competitive" technology by the Small and Medium Business Agency can receive up to $2.3 million, without collateral, for capital spending. Also, South Korea's central bank, the Bank of Korea, encourages commercial banks to lend to small and medium-sized enterprises (SMEs) through a rediscounting facility that financially rewards or penalizes banks depending on their SME lending ratios. It also gives preferential credit terms to SMEs aiming to export, which has likely contributed to the current trend of Korean ventures looking to Japan as the largest, closest, and most available market.

This incentive apparently meshes well with the needs of the country's IT businesses. South Korea's limited market size and highly competitive atmosphere makes exporting a means of survival for many ventures. "In the last year, we have seen a significant increase in Korea ventures coming to Japan to expand their market and make joint ventures," says Kang. "I'd say about 100 ventures have come in the last year and a half."

"Any independent Korean IT venture will have to come to terms with the fact that the market there is not a single unified market at all, but rather carved into smaller segments controlled by different chaebols (large conglomerates)," says Joseph Kim, president of Internet Capital Group Japan, an international technology operating company. "The main outcome of this is that Korean IT ventures have to look outside their domestic market if they have any real hope of reaching scale. As a result, Korean ventures are far more international in their perspective than Japanese ventures."

Meanwhile, the global slowdown in IT spending has adversely affected Korea's traditional export industries. According to the Ministry of Commerce, Industry, and Energy, Korea's exports decreased by 7.1 percent to $90.23 billion in the period from January through July. The report stated this is most attributable to a drop-off in the export of semiconductor chips and computer products, down 63 percent and 37 percent respectively. In contrast, the Information Ministry reports that software exports were up 150 percent for the same January to July period. Korea's new export niche is fast, knowledge-based technology ventures that leverage experience in a broadband Internet environment. "The competitive state of the telecom infrastructure in Korea has led to a much quicker and more extensive take-up of Internet-based technology and services in Korea than Japan," says Kim. Over 50 percent of Net users in South Korea are cruising at broadband speeds -- that's the highest penetration of broadband in the world, and well ahead of Japan, which is at less than 10 percent. "As a result, some interesting service models and some niche technologies have emerged in Korea. This includes rich media management and distribution, media streaming, media content delivery, and broadband-based services," says Kim.

It is also in the Korean character to do things quickly, which, though rather un-Japanese, fits well in the constantly changing technology business. "I think Korean people tend to work faster because their society allows them to make decisions independently," says Makoto Hashimoto, a Japanese at the Tokyo office of leading Korean Web design agency Fusion I Digital. "In Japan, we usually make decisions in groups. It's good for me to learn how Korean people work and think."

What some see as flexibility and speed, however, many Japanese see as something else. "Koreans tend to appear careless about their business, while Japanese companies are very careful," says Ryo Yamamoto, a Japanese sales manager at Bi-net, a Korea-Japan technology incubator. Yamamoto has worked in South Korea and values his personal relationships with Koreans -- but business in Japan, he says, is practically a religion, and not following the rituals can ignite the flames of distrust. "If Korean companies try to do business with Japanese companies, they should research the market in both countries and give a reliable guarantee to the Japanese side. But they normally don't do this because of their lazy business style. So, Koreans and Japanese don't suit each other so much in business," he says.

BROADBAND

Unless Korean ventures put their speed to good use, they may risk losing the current opportunities in Japan. Judging from recent DSL market activity, Japan appears to be rapidly closing the broadband gap. The number of DSL subscriptions reached 400,760 at the end of July, according to the Ministry of Public Management, Home Affairs, Posts, and Telecommunications. According to the report, the figure constitutes a jump of more than 100,000 from the previous month and a 250-fold increase from a year earlier. Such meteoric growth is similar to what happened in South Korea. Korea Telecom, the country's largest telecom carrier and the world's largest DSL provider with over 3 million subscribers, increased its DSL subscribers from 100,000 to 2 million during the 12 months prior to February.

Korea Telecom Japan (KTJ) recently entered the DSL contest in Japan through a strategic partnership with Tokyo-based venture eAccess, a wholesale DSL network provider. It's a rapidly consolidating market: Struggling DSL startup Tokyo Metallic was acquired by Softbank in June, and Yahoo Japan (50.8 percent owned by Softbank) plans to offer DSL services starting this fall; meanwhile, NTT, which entered the DSL business late, has quickly emerged as the market leader. "The biggest competition is NTT," says Eric Gan, COO at eAccess. "Nobody can sell cheaper than them without giving shareholder money away."

KTJ will use its DSL experience to combat NTT's control of the local telecom market. While it's hard to see how domestic competitors like Yahoo Japan will escape NTT's squeeze, KTJ has a potential ace up its sleeve: experience in dealing with apartment building owners. In Korea, consumer DSL exploded in residential apartment buildings. "KT was able to take copper line DSL service directly to apartment complexes, with the complexes hosting the equipment," says Gan. Of course, doing this is easier when you dominate access to local phone lines, but smaller Korean competitor Hanaro Telecom reacted to KT by utilizing the phone lines inside the compounds, an innovation borne out of a more competitive telecom environment -- and a concept that KTJ and eAccess are jointly researching for Japan's fledgling market. In Japan, however, bypassing the omnipresent NTT substation and local phone contracts, and thereby its equipment and service fees and delayed service, will likely require contracting directly with many NTT-loyal -- and often anti-foreigner -- real estate owners. "In co-locating within the building, the roll-out is slower and the initial start-up costs are higher, but we have to look at this," says Gan.

The eAccess-KT partnership also provides a means for Japanese content companies to access Korea's market, a reverse of the recent trend but something that could spark more partnership deals with Korea ventures. "We've spoken to Japanese content companies about serving Korea Telecom's DSL users in South Korea. We can provide the link, like a trading company," Gan says. Success in Japan's market would open up new avenues of growth for KTJ, and its combination of financial muscle, DSL experience, and local partnerships will likely change the face of the DSL market in Japan.

ENTERTAINMENT

Many South Korean ventures are finding the market very friendly in the broadband entertainment industry. This is especially true in network gaming, a Korean strength. At a July convention in Tokyo called "Korea-Japan: Net Connection," more than 30 Korean technology ventures, mostly game companies, set up displays in hopes of luring Japanese interest.

Many Korean game-makers see Japan as a vast, untapped market for their sophisticated titles. MJ Games, a startup Ma Jong (Chinese poker) game maker, is so convinced of Japan's potential that it doesn't even intend to sell in South Korea. "There's not as much market potential in Korea. Japan has 25 million potential users, and China has 300 to 400 million," says president Hyunkoo Hanks Lee.

Philon (www.philon.co.kr) is another snazzy South Korean venture with eyes for Japan. The company operates a consumer service where users take a digital photo of themselves and make a cartoon clone out of it. Then they can dress their character up, download the finished image to their personal Web-based email accounts, and send messages with the image attached. It's easy, fun, and cute -- a perfect fit, it would seem, for Japan's kawaii culture, except that there's no guarantee that cute in Korea equals cute in Japan.

"I picked up standard Korean faces and put them in my software engine. The faces are references that help the engine convert any new face to our proprietary vector image format," explains Philon's president J.C. Kwon. "After that, the engine searches the database to find appropriate face components and then composes a character face." The "Charicooker" then uploads the file to Philon's server, where users can log on to find their image file, or the file is zapped directly to the user's mobile phone through SK Telecom, Korea's largest wireless carrier. (In Korea, customers also use the company's Charicooker kiosks to take photos and create the cartoons. Some 300 such machines are placed in well-populated areas).

Only a small percentage of Korean cellphones can display simple graphic images. Japan's more advanced networks make Philon bullish on the opportunity presented by Tokyo's cellphone-toting teens -- so bullish it will focus exclusively on wireless services in Japan.

The two countries seem inversely aligned on wired and wireless infrastructure -- wireless gaming and graphics are widespread in Japan, whereas broadband, PC-based gaming is relatively new. The opposite is more the case in South Korea.

Philon is less concerned with technology infrastructure and more concerned with finding the right Japanese partner to localize and market its product. "My main concern is the cultural differences," says Kwon. "The favored character styles may be different between Koreans and Japanese, so we should redraw our clip art and character components in Japanese taste."

Game Venture, the maker of Korea's most popular multiplayer network game, Fortress2 blue (almost 10 million registered users), entered Japan by establishing a joint venture with Bandai (a major Japanese toy and video game company) in November 2000. This unifies Game Venture's superior network game with Bandai's solid reputation with Japanese consumers. A temporary roadblock is Japan's immature broadband infrastructure. "Lack of high-speed Internet access, immaturity of the online game business, and a different game culture are problems that have to be solved in Japan," says Michael Yoon, corporate communications manager at Game Venture. In Korea, network games catapulted to prominence via the country's PC bang (Internet cafe phenomenon. But PC bangs will probably never be as popular in Japan (see "PC Bang? More Like Poof," page 8, March 2001), so the joint venture relies greatly upon Bandai's ability to penetrate the home market.

The dodge of network games is that, to be fun, they need to continually draw new players in. South Korea's PC bangs, and their social atmosphere, are fertile ground for this growth. It remains to be seen whether Japan will have a similar catalyst, or a large appetite for this kind of entertainment. But if Bandai can leverage its position in Japan's game console market (it has an exclusive hardware agreement with Sony for its Gameboy-like handheld console, WonderSwan), then Fortress2 blue and other Korean titles have a shot at capturing a growing market that lacks strong Japanese competitors. "Japan has its edge in producing video and arcade games, but Korea seems to be securing its lead in online gaming technology. Japan is far from catching up with Koreans on developing network or online games," says Yoon. Bandai, a traditional toy maker and Japan's leading game company, has readily acknowledged this weakness, and its tie-up with a Korean venture reflects a growing trend.

KRG Soft, Wizgate, and Sonnori are Korean online game-makers helping Alpha Digital Online Systems (ADOS), a Japanese XML solution provider, develop XML-based network games. Games using broadband connections have brought XML, a type of programming language normally used in B2B e-commerce applications, into play. "XML is one of the common languages for exchanging data. So this business stands to benefit with Japan's Internet infrastructure improving," says Hoi-Joon Kwon, CTO for ADOS. The company, which currently derives most of its revenue from business solutions, originally entered into gaming by doing development for Sega's Dreamcast console. After contracting directly with Sega in August 1999, ADOS signed on the Korean game companies for joint development. Kwon explains that by using the expertise of Korean companies, ADOS can focus on its core XML business solutions while still exploring what he sees as big opportunities in Japan's growing online gaming market.

Kwon, who has over 15 years' experience in Korea and Japan, says he's fascinated by the relationship between the two countries. "I've worked with Japanese companies for a long time doing game translation work in Korea. But the relationships usually failed. I wanted to know why this happened."

ADOS's core solution is a software kit made for XML developers designing business or game applications. An open source offering, it aims to create a network of developer partners by distributing the source code to university programming students and other members of the XML development community. Kwon admits that the cautious Japanese nature is somewhat averse to the kind of openness this business model requires: "Japanese need a long time to make business relationships; they consider your history, background, and human relations first. Koreans will not wait like this. Moving rapidly and forgiving rapidly -- that's Korean style. Japanese move slowly, and don't forgive easily."

CONTENT DEVELOPMENT

South Korean ventures have also used their headstart in broadband to develop an expertise in online content creation. Naver, a Korean Internet portal (www.naver.co.kr), established Naver Japan in November 2000. In South Korea, its portal averages about 130 million page views per day, making it one of the 10 most visited sites in the country, according to NetValue. Japan's portal market is much less competitive -- in a much bigger market. Yahoo Japan is the leader with 150 million page views per day. Internet infrastructure obviously affects the emergence of more ventures in this field, and directly influences public Internet use. "The average Korean uses the Internet much more extensively than a Japanese person," says ICG's Kim.

Naver, which was originally part of Samsung's development team before being spun off in 1998, believes its technical competitiveness from its experience in the saturated Korean market makes Japan a good business target. "We have broadband experience and produce our contents in-house, unlike Yahoo, which uses Google and other engines," says Jin Kimura, a Japanese product manager at Naver Japan. "Google is a competitive portal, but we have a six-month headstart on them in Japan -- and knowledge of developing double-byte databases." Kimura explains that the structural difference between double-byte Asian language characters and the single-byte Latin characters used by US operating systems affects the portal business significantly.

Kimura believes that Japanese individuals are cautious about Korea but that on a business level this kind of mental block is much less significant. "The portal is a B2C-oriented service, so we don't go around announcing we're a Korean company," he says.

The company also offers email service, and home page and photo album building/storage solutions. Japanese consumers may be less broadband savvy, but like South Koreans they also live in a crowded country and are presumably no less interested in creating coveted personal space on the Net once they have high-speed Net access.

Naver Japan has also ventured into online B2B services such as catalog management, user pattern analysis, billing systems, and Web page development. The company, because of intense competition in Korea, has never offered this before. "We want to see if it can work here first, then take it back to Korea," says Kimura. Japan's market size and lack of competition makes this solution more scalable than it would be in Korea.

Naver targets wireless portals as a future revenue source in Japan. Of course, so do a lot of companies, and not only ones from South Korea. In January, Google announced an i-mode version of its search engine, and this summer, US portal Infoseek launched "i-seek," a portal and search engine specifically designed for DoCoMo's Java-enabled i-Appli handsets. But Naver says its online, double-byte expertise will help it grab a good portion of wireless portal development. "We're mostly targeting content providers and are not really focusing on the network operators," says Kimura. "We offer a portal site for mobile content providers, and building our own database is an advantage for this ASP model."

Kimura is himself an example of good localization strategy. Being Japanese, he already has a good network of contacts and an innate understanding of conservative Japanese business style and customs. "Small retail shop clusters, called shotengai, can all use the same template to build a Web site or can build one site for the whole shotengai. This makes it more of a group decision, reduces the risk, is a very small investment, and can increase the reach of their businesses," he says.

Fusion I Digital (FID), a Web design and e-business solution provider, is another good example of a content venture that flourished in South Korea's fast-changing, broadband environment and stands to grow quickly in the Japanese market due to its combination of technical expertise and connections. The president started his Web design business in his basement in July 1998, and shortly thereafter the company was awarded a "Venture Startup Fund" from the Small Business Corpor-ation, a government agency. Though it was only a few hundred thousand dollars of funding, the company started snatching business away from slow-moving design businesses like Samsung's in-house Web advertising agency. "At first, a large percentage of deals were contracted out from Samsung, then after a year or so, the majority of business was being contracted directly by FID," says Jae-ho Kang, director of FID's Tokyo office. The company had 178 employees as of June and now aims to penetrate the Japanese market through its office in Tokyo, opened in November 2000.

A small venture taking significant business from a bastion like Samsung is an example of where South Korea diverges from Japan. This still rarely happens in Japan, where corporate loyalty remains entrenched -- which is why, even though FID's business seems timely and well suited to Japan, its most important asset is a new joint venture agreement with I&S/BBDO (itself a joint venture between Japanese and American advertising agencies I&S and BBDO). I&S/BBDO is Japan's fifth-largest ad agency, and it provides FID with a trusted name in a protective industry and bright revenue prospects. "Since it's difficult culturally, it's very important to make a connection with an offline Japanese company, one that has established business," notes Kang.

Of course, things between these two countries have never been easy, but it's especially interesting when you mix the expressive personalities of Web design with conservative Japanese corporations. "The Japanese have a style in this industry; the client is the master, the Web designer is the servant. On the other hand, the American Web designer feels he's a specialized consultant," says Kang. "We prefer to mix the two. Recommend a better solution in a polite way."

In Japan, the manner in which you succeed can be just as important as whether you succeed, says Naver Japan's Kimura. "When you ask Koreans for a time estimate on finishing a project, they'll usually try to impress by giving a minimal amount of time. Most times, a Japanese company will give a later estimate and try to impress by finishing early." The sales tactic of exaggerating your capabilities, creating high expectations, and taking the challenge of delivering the promise is an aggressive Korean trait that can really rattle the Japanese -- especially when it fails.

IT WOULD BE NAIVE to overlook the hostility that remains between the two nations -- or to disregard how it could affect business tie-ups in Japan's relationship-based environment. Koreans have been fuming over Japanese history textbooks omitting information about the often brutal colonization of the Korean peninsula. And then there are the simple cultural differences, which can be strong enough at times to ruin a deal. "It's very impolite to be late for a business meeting in Japan; however, lateness is acceptable and almost expected in Korea," says Jesse Kwong, a Korean business development manager for LINC Media (the holding company of Japan Inc Communications, publisher of this magazine). Kwong also notes that Koreans often smoke and accept phone calls during a meeting -- a practice guaranteed to infuriate a Japanese -- and that a Korean company will usually tell you "No" directly if they're not interested, whereas Japanese are notorious for using a gracious "It's difficult" rather than a confrontational refusal.

Still, the countries' relationship has made tangible progress on many levels, even in previously impenetrable Japanese conglomerates. "Large Japanese companies have started outsourcing to foreign companies increasingly after structural reforms," says Bi-net's Yamamoto. "Therefore, Korean ventures have started focusing even more on the Japanese market." Furthermore, partnerships could now be at an all-time best: The countries are preparing to co-host the World Cup soccer tournament next year, an encouraging diplomatic sign that will create a commercial windfall and offer more evidence that both countries can profit from better relations.

Whether Korea's fast-moving tech ventures can capitalize on the goodwill created by such efforts -- and increase it more by creating business tie-ups -- remains to be seen. But if Japan truly wants to be e-Japan, Korea, it appears, has an "e" to share. @