Hooking Up the Boxes

Japan's economic miracle in the last half of the 20th century was predicated largely on the efficient creation of electronic devices: TVs, refrigerators, watches, microwaves, game consoles, stereos, PCs, VCRs. In essence, boxes. But as we begin the new century, the hot companies aren't makers of electronics devices, but providers of services that run over the Internet. Examples include etailers like Amazon.com, online brokers like E*Trade, portals like Yahoo, b2b and b2c auctioneers like FreeMarkets and eBay, and ISPs like AOL. Internet companies like these have helped propel the US economy to surreal heights, while Japan's economy has been mired in a recession for years. So how are Japan's electronics giants -- the boxmakers, as we'll call them -- responding? With cleverness, as you might expect. They're plugging in to the Network Economy, but not just figuratively. They're literally hooking up the boxes they already make to the Internet and to other boxes, using fiber, cable, infrared, microwave, satellite -- whatever makes sense. We asked writer Yaeko Mitsumori to provide some examples of this happening. -- Editors

The Walkman
The Sony Walkman hit the streets some two decades ago, and the company has been successfully advancing it to fit the latest media ever since -- from analog tape to CDs to MDs to the Internet. The Memory Stick Walkman, which hit the Japanese market last December, can play music stored on the chewing-gum-sized Memory Stick. Downloading is done via PC, and the Memory Stick is switched between the two.

The big picture: The Walkman is being hooked up to the Net in a rather clunky way. It's inconvenient to have to switch the Memory Stick between it and the PC. And in Japan, the Walkman-killer may be the cell phone. Still, Sony gets credit for walking in the right direction.

The Car
Matsushita has released a car navigation system that provides Net access via an i-mode phone. Drivers and passengers can do everything they would normally do through their i-mode browser, except they can enjoy it through a much bigger dashboard-mounted screen. Matsushita has also released a navigation system that helps drivers determine the best way to get to a caller's location. Again, the driver just needs a cell phone. Matsushita seems to have a good sense of direction.

The big picture: Automakers can use Matsushita's new products to Net-enable their vehicles. No need to reinvent the wheel here. Just attach a few more components to the cars you already make and then benefit from the communication that takes place as a result.

The Vending Machine
There is one vending machine for every 22 people in Japan, the world's leader in this arena. But with 5.5 million units already out there, the market has matured. Did someone say "connectivity"?

Coca-Cola Japan intends to interconnect all of its 350,000 machines, affixing a PHS device, cell phone, or fixed microwave station to each unit. By doing this and then controlling all the units from a central hub, the company can reduce transportation costs, route trucks more efficiently, and easily detect out-of-order machines.

This works especially well in closed environments like malls and skyscrapers. "The staff can refill machines very efficiently if they know the consumption rate of each one in advance through the online system," says company spokesperson Kota Takasugi.

Each of the 15 Coca-Cola bottling firms in Japan has adopted this online model -- and been rewarded. The bottler in Chukyo won an order to run the vending machines at the recently opened JR Central Towers (twin buildings attached to the bustling Nagoya station.) And by the time you read this, the same bottler will have hooked up all 4,500 units in the Nagoya area. The Kinki Coca-Cola Bottling Company, for its part, has won an order for controlling all the vending machines in the built-on-the-ocean Kansai International Airport near Osaka. And the Tokyo Coca-Cola Bottling Company won an order for controlling the vending machines at Haneda International Airport in Tokyo.

The big picture: By hooking up its vending machines, Coca-Cola has improved control and efficiency, leading to greater sales. What's increasing profits here is the information flowing among the boxes, not the hardware itself. That's what plugging in to the Network Economy is all about.

The Microwave
In 1961, Sharp marketed Japan's first microwave oven. In September last year, it rolled out the world's first Internet microwave oven, the RE-M210.

Users of the RE-M210 can choose from among 400 recipes listed on Sharp's homepage and let the microwave cook the ingredients automatically. Company spokesperson Ema Tanaka says the oven is selling well, especially among working women in their 20s and 30s. Tanaka says the oven is a particularly good solution for a tanshin-funin husband (one who works separate from his family because of a job assignment): his wife emails the recipe for his favorite meal, and then he transfers that from his laptop to the oven. He still has to collect the ingredients and put them in the oven, poor fella.

The RE-M210 leaves a lot to be desired: it's too big for most Japanese households, the recipes on the Sharp site are for four people, and the general process is too complicated (setting up the PC is too hard, and transferring from PC to oven is a drag). But Sharp is aware of these problems and has its reasons for making this clunky beta oven: 95 percent of Japanese households already have a microwave, and sales have peaked at 3.5 million units a year. As the pioneer microwave firm, Sharp needs a new killer app. It sees the new possibilities created by the Internet and has responded accordingly. The company says it aims to get 10 to 15 percent of all microwave users hooked on Internet microwaves.

The big picture: Sharp already makes microwaves, but growth has been stagnant. By hooking up these boxes to the Net, the company aims to drive new sales. Banner ads on its recipe homepage could be another source of fresh revenue. This boxmaker is plugging in to the Network Economy, taking advantage of the information flow made possible by the Web.

The Arcade Game Machine

Sega is getting trounced by Sony in the game console arena, but it's remaking itself into a "Network Entertainment Kingdom." Not only has it Net-enabled its DreamCast console -- through which 1 million surfers already get online -- but it's also in the process of interconnecting its 700 arcades in Japan with fiber optics. Company president Shoichiro Irimajiri says that by doing so, Sega will offer visitors "unthinkably" interesting games: "Players can fight with aliens on an unknown planet, either by driving a tank or piloting a fighter." And instead of paying 100 yen for a 3-minute game, an arcade visitor pays 1,000 yen to join 100 players anytime, and leave anytime. Bet players would get thirsty playing for that long, too ...

Sega knows it has to move quickly. As game consoles in the home become more graphically and functionally advanced, players have less reason to go visit game centers. And with Sony gobbling up the home console market, it could otherwise be "Game Over" for Sega.

The big picture: Sega has 700 arcades in Japan already. Why not hook 'em up and profit from the interaction between players? There are other benefits, too, such as players stay longer, and consume more snacks. Ah, the exponential returns of networking.

The Game Console
In early March, tens of thousands of consumers lined up in Tokyo's Akihabara electronics district to buy the new PlayStation2 home game console. Nearly a million units were sold in the first three days. The PS2 definitely has some strong selling points: it displays graphics at the speed of a supercomputer, for example, and is geared to play both CDs and DVDs. More significantly, though, the PS2 hooks up to the Net, and Sony aims to offer networked games, e-commerce, email, and music/software/video download.

One hundred million PS2 units will be sold around the world, predicts Mitsunobu Tsuruo, an analyst of Nomura Securities. (More than 70 million original PlayStations have already been shipped.) In contrast, about 200 million PCs worldwide are connected to the Internet now. That means Sony, assuming Tsuruo's prediction is right, will have a PS2-based online market that's at least half the size of the PC-based one. Let the games begin!

The big picture: Sony has the right idea. Why just make stand-alone game consoles when there's even more money to be made by hooking them up? Millions of consumers worldwide will now access the Internet through Sony game consoles.

The Cell Phone
Matsushita has released a PHS cell phone that downloads music from the Net. You listen to tunes through a set of earphones and store them on an SD Memory Card.

NTT DoCoMo, the largest mobile carrier in Japan, started experimental music distribution via the phones in May and plans to launch services this fall. Since demand for voice is expected to reach its ceiling soon, DoCoMo is putting an emphasis on nonvoice services, with digital music distribution being one of the most promising offerings. How so? The music market in Japan will reach ´850 billion in 2003, and digital distribution like this will occupy 10 percent of it, says market researcher Seed Planning. And Japan has one of the world's highest mobile telephony penetration rates: the MPT estimates that the number of users in Japan will reach 80 million by 2010. (See "Unwired".)

The big picture: The cell phone is already a "hooked up box," but offering music through it makes it twice as cool. The idea is to profit from the commerce and communication that takes place once you hook up your devices in new ways.

The Fridge
If you visit the Matsushita HII (Home Information Infrastructure) house in Tokyo's Shinagawa-ku, you'll see how easily everyday household devices can be connected to the Net and to one another via microwave, optical fiber, and cable. One of the most remarkable examples is the intelligent refrigerator. After you use the LCD panel to figure out which foods are inside, you can search for a recipe that matches the ingredients available, provided you've hooked your PC up to the icebox.

Matsushita is also developing an Internet refrigerator in cooperation with V-sync, an Okayama-based venture firm that will provide the computer and network functions. This Net refrigerator, with an LCD panel, a voice-recognition system, and a camera, allows users to, among other things, chat with friends.

V-sync president Katsuma Fujii says he developed the fridge as an easy-to-use Net terminal for anyone in the family, including young children.

The big picture: Matsushita makes fridges -- a perfectly respectable, solidly profitable endeavor. But why not hook them up to the PC and to the Net and profit even more from the communication thus enabled? The Net fridge should really take off in Japan after the fiber optics era arrives.

The TV
Five years ago, Japanese TV makers tried to sell the world on the Net TV. Didn't work. Sharp, Sanyo, Mitsubishi, Sony, Matsushita -- they all gave it a shot. Market watchers attribute the failure to differences in how customers use televisions and computers. TV viewers sit 2 to 3 meters away in a living room while PC users sit 20 to 30 centimeters away. And at that point the Net was geared toward a limited audience. Times have changed, however, and now the Internet has something for everyone. So -- positions everyone -- take two: in December, digital broadcasting services will be launched in Japan, and all the TV makers plan to roll out modem-equipped digital TVs this summer. The dream lives on.

The big picture: The idea of hooking up this box is nothing new. The benefits are obvious and companies have been experimenting with interactive TV since before the Net took off. But whereas before it was the box, now the television is just one of dozens of boxes getting hooked up.

The Watch
Even watches are getting hooked up. Last June Casio rolled out its Satellite Navi, which has GPS functions. With it, a mountaineer can pinpoint his exact location on the map displayed on the screen, a fisherman can mark a good fishing spot, and a sailor can identify his location at sea. The watch is becoming popular despite the fact that it weighs 148 grams. Casio also recently released a camera watch that hooks up to PCs and other watches using infrared, so users can take photos and send them to their friends. You can also make phone directory entries with pictures attached.

Japan's watchmakers appear to be running out of time. According to industry association data, last year the number of watches made by Japanese firms fell 25 percent. This might explain Casio's interest in turning the everyday watch into a "wrist-based information device." Dick Tracy would've loved this stuff.

The big picture: Casio is making more money, or planning to, by connecting its watches to other devices. Users can send pictures and figure out where they are. Either way, it comes down to enabling communication and then profiting from it. Hooking up the boxes.

These manufacturers are not exactly Internet pure plays. In all these cases the boxmakers still make boxes, which entails all sorts of expenses. A company like Yahoo has relatively insignificant expenses, so as its profits increase it doesn't follow that its expenses are close behind. This is what investors are looking at when they give a Net outfit like that an obscene market valuation. But there are some who argue that it is still the companies that make "things" that will prevail in the long run. (Read In Praise of Hard Industries for starters.) Add Net connectivity to those things, and the boxmakers described above are in good shape.