JDEX

An Index for Japan's New Economy

From an investor's standpoint, 1999 was the Year of Japan, during which Japan funds returned on average 114 percent. While a lot of that wind was knocked out during the market corrections this past April (after all, past performance is no indicator of future performance), 2000 has arguably been a more significant year for Japan's New Economy. It was in December 1999 and July 2000 that two new competing stock markets for emerging ventures, the Tokyo Stock Exchange's Mothers (Market of the High-Growth and Emerging Stocks) and Nasdaq Japan, respectively, commenced operations.

While we have been talking breathlessly about the New Economy in Japan, we have not yet tried to quantify it. It is thus now that we introduce our very own J@pan Inc Index, or JDEX, to measure the development of key players in Japan's New Economy.

From January 2001, the JDEX will track the composite share price performance of 20 companies that we believe are innovative or leading representatives of Japan's New Economy. But before we can do that, we'll need to clarify what we mean by the oft-used but illusive term "New Economy."

Long before there was mention of the New Economy in Japan, there was discussion of the New Japan versus the Old Japan. The New Japan represented a deregulated, laissez-faire capitalist society compared with the highly regulated, bureaucrat-steered socialist economy that pulled Japan out of the ashes of World War II. The bursting of the 1980's bubble economy a decade ago was a catalyst for this transformation.

In the US, the only thing new about the New Economy could be said to be the Internet. Others argue more cynically that there is nothing new about it at all.

In Japan, however, the New Economy really is new. It coincides with the forging of a New Japan, which began long before dot-co-dot-jp's appeared on the scene.

However, the anachronistic "IT revolution," as it is described in the Japanese media, in and of itself won't pull Japan out of its economic doldrums. For this to happen, investment in IT has to be coupled with plain old reform and restructuring both on the government and corporate levels.

The Japanese stock market itself is a good example of an area transformed by the meshing of technology and deregulation. As part of the government's ongoing "Big Bang" financial deregulation efforts, brokerage commissions were finally liberalized in October 1999. This paved the way for the introduction of new online brokers in Japan. Brokerage commissions on average dropped to 10 percent of their pre-deregulation levels! Yet, despite the price competition, even the big traditional brokers saw their bottom lines boosted by the boom in trading activity by retail investors.

As of June 2000, there were over one million online trading accounts in Japan (although investors often hold several accounts), a five-fold increase from the previous nine months. While pachinko players still far outnumber online investors, retail investors are beginning to play a bigger role in the Japanese stock markets.

Other areas of the financial sector such as investment trusts, insurance, and banking are also undergoing deregulation, and we can expect the Internet and technology to play a hand in the transformation of those industries.

INTERNET GROWTH IN JAPAN
Internet use and PC penetration in Japan continue to climb. As of July 2000, there were 21.9 million Internet users (or 18.3 percent of the population), according to a survey by AC Nielsen Japan and NetRatings Japan. The same survey also found that 38.2 percent of households owned a PC and that 15 percent of home Internet users had experience with online shopping for personal use. Popular online purchases are not much different from those in the US: computer goods, software, books, stationery, hotel and tour reservations. Internet advertising still represents less than 1 percent of total advertising expenditures in Japan but is expected to double to some ¥50 billion this year, according to major ad agencies Dentsu and Hakuhodo.

Of course, the biggest growth story has been the greater-than-expected success of mobile Internet access. As of July 2000, there were 15 million Internet-enabled mobile phone subscribers, according to the Telecommunications Carriers Association. Although voice and email remain, respectively, the number one and number two killer apps of the Internet-enabled mobile phone, the world looks to Japan for successful m-commerce business models and wonders if they can be replicated elsewhere.

Ex-monopoly telco NTT has single-handedly stunted growth of this nation's New Economy by refusing to offer less expensive local connection charges. This has created a breed of Japanese Internet user characterized by a penchant for mobile phones (cheaper than the ¥70,000 cost to acquire a fixed line), email newsletters (can be read offline), and utilitarian Web sites (each minute is a tick on the phone bill meter).

However, deregulation of the telecom and broadcasting industries will gradually eat away at NTT's grip. Broadband alternatives such as ADSL, cable Internet, and fixed wireless have been slow to roll out and have fallen behind Asian neighbors such as Singapore, Hong Kong, Taiwan, and Korea, but NTT is already dropping prices for some services in the face of competition. Now if only it would stop pushing ISDN.

While consumers have embraced the Internet, adoption by businesses has been more conservative. The impact that the Internet has on the Japanese economy will be felt strongly in the B2B ecommerce area. The Japanese economy is still highly based on manufacturing. Initiatives to webify old proprietary EDI (electronic data interchange) systems should reduce costs and improve efficiency, as well as provide business to systems integrators and developers.

THE JDEX
The JDEX is a market capitalization-weighted stock average index showing the composite share price performance of 20 bellwether stocks representing Japan's New Economy. These companies are what we deem to be either innovators or leaders in using information technology to transform the old ways of doing things in Japan. The criteria used for deciding the components of the index are admittedly subjective.

The JDEX can be used as a measure of how Japan's New Economy is growing vis-a-vis the broader economy. It does not necessarily represent a portfolio of recommended stocks.

Unlike other Internet or tech sector indexes, the JDEX takes a comprehensive, cross-sector perspective on the New Economy in Japan. The JDEX may also be the only index of its kind available to the English-speaking general public.

The JDEX includes an eclectic mix of large caps and small caps, Internet pure-plays and hybrid-plays, B2B and B2C.

As Mothers and Nasdaq Japan are both less than a year old, it seems new Internet-related ventures are listing almost every week. There are several promising private companies that we are watching and will consider for inclusion in the JDEX when they become public.

We will evaluate index changes twice a year, occasionally replacing old components with new components that we believe are better representatives of Japan's New Economy. In the event of a component being deleted from the index due to a merger or delisting, a new company will be selected and will replace the outgoing company at the same weight.

HONORABLE MENTION
Perhaps just as telling as what we included in the JDEX is what we didn't.

We have not included many stocks from popular investment "themes" such as fiber-optics and genome research. While Japanese stocks fitting these themes have certainly enjoyed good run-ups, they are not what we consider pure-plays within these themes. For example, Furukawa Electric may own part of JDS Uniphase, and Takeda Chemical may have a strategic alliance with Celera Genomics, but Furukawa is not a Japanese JDS, and Takeda is not a Japanese Celera. Not yet, anyhow.

As with other Asian countries, Japan's economy is characterized by being dominated by diversified conglomerates producing everything under the sun rather than niche firms specializing in innovative products. It is thus much more difficult to identify the Ciscos and Microsofts of Japan (unless you include Cisco Systems KK and Microsoft Japan).

Having said this, there are many Japanese semiconductor and electronic component manufacturers who operate comfortably within their niches and have benefited from a rise in IT-related capital expenditures. However, these manufacturers did not make it into the JDEX, because they are largely riding the wave rather than leading it.

Although ISPs are the very umbilical cord between users and the Internet, there are no independent ISPs that have become a dominant player. The top two ISPs remain the properties of giants Fujitsu and NEC, both in the index. Dial-up Internet access is becoming a commodity, as the introduction of free ISP services may attest, and there will be more consolidation in this area. ISPs are searching for new streams of revenue including Web hosting, ecommerce, and advertising -- the stuff of portals.

Under financial services, we have not included any banks, a major sector of the Tokyo stock market. While several banks have started offering online banking through PCs and mobile phones, and some are planning to launch separate Internet banks, it may be the non-banks offering financial services that cause a bang. Japanese banks have been saddled with their own bad loan problems, and it remains to be seen how well they can adapt to the New Economy.

For many outsiders, Japan equals automobiles. The auto industry is also experimenting with the Internet and trying to figure out how to sell online without cannibalizing its other sales channels. Companies like Aucnet have been successful in using technology (satellite networks) to modernize the auctioning of used cars and are now making moves to the Web. Automakers have gone online themselves and are finding that perhaps more important than selling cars is selling car accessories. Entertainment is a key factor in successful ecommerce ventures in Japan. While automakers did not make our index this time, we wouldn't be surprised if they became serious ecommerce players in the near future. Wasn't it the Japanese auto industry that invented Just-In-Time?

Without further ado, we present profiles of 20 companies that we believe represent a leading cross-section of Japan's New Economy ...

Bandai is particularly strong in the character merchandising business. Ninety percent of its toy products are character-based, 70 percent of which is based on licensed characters such as Nintendo's Pokemon and 30 percent on original characters such as Digimon.

Bandai is in a good position to leverage its character content as it moves towards digital content development for networked devices. The best example of how it already has is its successful ¥300/month character download service for NTT DoCoMo's i-mode, "Charappa." Entertainment-related sites account for 59 percent of i-mode's content usage.

Bandai has also launched its own handheld black-and-white LCD game machine, Wonder Swan, to compete with Nintendo. Wonder Swan connectors will allow it to be linked to mobile phones, the Internet, and even Sony's PlayStation.

Sales and operating profits have fluctuated in the past few years. However, Bandai has recently restructured its subsidiaries and reduced unprofitable merchandise, including the disposal of tamagotchi inventory. It has also liquidated its loss-making Bandai Music Entertainment subsidiary. Wonder Swan game machines and digital content distribution may therefore begin to show contribution.

Children are fickle, making them a tough audience to please. But those innocuous-looking cuddly cartoon creatures adored by the Japanese and children worldwide are valuable assets in an age where content is king.

CYBER AGENT
Cyber Agent's Susumu Fujita is seen as a classic example of Japan's new breed of young Netpreneurs. One year out of university, the twenty-something Fujita started up in March 1998 what would become one of Japan's leading Internet advertising service firms. Former employer Intelligence was a major investor, along with Usen, Hikari Tsushin, Mitsubishi Trust, and Softbank.

The company's other major product is its advertising services for its network of 2,500 email newsletters (or meru maga). This service is similar to interQ's MagClick, which services leading email magazine publisher MagMag.

New businesses that Cyber Agent is developing include affiliate programs, a free homepage service, and ads for mobile phones.

Although Cyber Agent was an early mover, competition is heating up. ValueClick Japan offers a similar cost-per-clickthrough model and has already moved into the black. Other agencies with heavyweight backers include Dentsu and Softbank's joint venture Cyber Communications and Trans Cosmos-funded DoubleClick Japan.

Cyber Agent hopes to turn its first-ever pre-tax profit in the first quarter of the fiscal year ending September 2001. Despite a 250 percent rise in August revenue from the previous year, costs associated with tripling its workforce in FY2000 kept the company deep in the red.

FUJITSU
Will Japan's electronics giants prove to be Godzillas or dinosaurs in the New Economy? Companies like Fujitsu are swinging their might towards the Internet.

Through its Fujitsu-AMD joint venture, the company is the world's largest producer of flash memory. Fujitsu is withdrawing from the loss-making DRAM business, and flash memory should be the growth driver for profits in its semiconductor business. Fujitsu is the second largest producer of telecommunications equipment (primarily transmission equipment) in Japan after NEC, and the eighth largest in the world.

However, the company is placing less emphasis on low-margin hardware and more on software and services. Computer software and services (a third of revenues) already generate the lion's share of its consolidated operating profits. The company owns ICL, a leading IT service provider in Europe, and Amdahl/DMR, a leading IT consultancy in the US. Fujitsu affiliate FSAS is also strong in Web computing. Fujitsu ranks third among global solution companies, behind IBM and EDS.

Of Japan's electronics giants, Fujitsu is perhaps the most progressive in embracing the Internet. Fujitsu operates Japan's largest ISP, @nifty (excluding NTT DoCoMo), formed through the merger of Nifty Serve and InfoWeb. Originally an online service, similar to Compuserve and AOL in the early days, Nifty Serve made the successful transition to become the number one ISP. As with other ISPs, @nifty will try to rely less on access fees, which are coming down under price competition, and more on advertising and ecommerce.

Fujitsu has ties with Sakura Bank for online banking and Nikko Securities for online trading. It plans to team up with Asahi Mutual Life Insurance for online insurance sales. It is also establishing data centers to provide ISP, ASP, hosting, management, and ecommerce services.

JAPAN TELECOM
Deregulation of the telecom industry and the growing importance of data traffic are giving monopoly NTT a run for its money. Japan Telecom, the nation's third largest telephone company behind NTT and KDDI, is poised to be a major global player in data communications.

Japan Telecom also plans to compete head-to-head in the local phone business, charging ¥8 per minute versus NTT's current standard ¥10 per minute. Although these charges are still high from the consumer's perspective, margins for local calls are low compared with long-distance calls. Japan Telecom's entrance into the local phone business will likely have a negligible effect on either its or NTT's bottom line. Carriers must still rely on NTT's local phone network, whose connection charges represent a major cost.

The growth potential lies in data and wireless communications. Japan Telecom has a nationwide optical fiber network set along JR railway lines and is busy laying more fiber-optic cable in metropolitan areas to service corporate users.

British Telecommunications (UK) and AT&T (US) have undertaken investments in Japan Telecom as part of their Japan strategies, and conversely Japan Telecom's own global ambitions stand to benefit from their worldwide telecom services.

Japan Telecom made its wireless J-Phone affiliates into a subsidiary holding company with Vodafone AirTouch (UK) owning 26 percent and BT 20 percent. Three quarters of Japan Telecom's capital expenditures are earmarked for building next-generation mobile communication networks. In order to catch up to i-mode, it seeks to outpace DoCoMo in completing the infrastructure for its 3G services.

JUSTSYSTEM
Whether out of national pride or just good ol' anti-Microsoft sentiment, many secretly rooted for Justsystem in its battle to stave off the foreign barbarian from attacking its popular word-processing software Ichitaro. Eventually Microsoft would have the last Word, and Justsytem would be relegated to a wandering ronin in search of a new business model.

Justsystem has licked its wounds and succeeded in pursuing its post-Ichitaro strategy from several prongs. The drop in Ichitaro sales has been offset by sales of other products, including graphics and multimedia software.

The company is opening source code for its Ichitaro Ark, network-based word-processing software for the Java environment, while retaining rights to the software.

It has even co-developed with former enemy Microsoft a natural-language document retrieval system called ConceptBase, which is fully compatible with Microsoft's Exchange Server.

On home-use computers, Justsytem has alliances with PC makers to pre-install its JustHome software suite with the aim of locking in customers for paid upgrades.

One of the key technologies that the company can continue to exploit is its Japanese-language input method software ATOK. ATOK is being incorporated into a wide variety of systems for Windows, Windows CE, MacIntosh, and Linux platforms. Intel is to embed ATOK in its StrongARM microprocessor chip for mobile phones.

Justsystem is also contributing its ATOK technology in an ASP joint venture with Access, Met's and Plaza Create to sell and lease software online through mobile phones, game consoles, PDAs, and other Internet-enabled non-PC devices.

Justsystem has already made forays into the Internet arena through its ISP JustNet. It is increasing the number of subscribers through efforts such as bundling trial access software with Sotec PCs.

In terms of content, it has launched a music entertainment Web site with publisher NeoPlaton and a personal finance Web site through its group company To-shin Ichiba.

Justsystem's FY1999 loss of ¥370 million is its third consecutive year of net loss although much less than the previous year's loss of ¥5.25 billion. For FY2000, the company expects to move back into the black with consolidated net profits of ¥100 million.

KYOCERA
Given Japan's leadership in the wireless arena, comprehensive ceramics maker Kyocera has become a favorite wireless play for investors.

In February 2000, Kyocera purchased Qualcomm's money-losing wireless CDMA handset business and made it profitable within half a year. While other Japanese companies are strong in the domestic market, Kyocera has strengthened its position as an international wireless CDMA handset player. It is also attempting to export PHS mobile phones to the rest of Asia, although the profitability of this business remains uncertain.

Optical communications-related products are another growth area for the company, given the rise in data communications attributable to the Internet. Kyocera enjoys an 80 percent global market share of DWDM module ceramic packages, whose demand has been surging.

Kyocera recently revised upward its forecasts for FY2000 consolidated sales to ¥1.27 trillion and pretax profit to ¥200 billion.

MOBILEPHONE TELECOMMUNICATIONS INTERNATIONAL
Founded in 1996, MTI handles subscriptions primarily for DDI-affiliated companies. But its real goal is to be a leading mobile content provider. It already offers some 170 sites for the small screen, including music, games, weather, auctions, stock quotes, and horse racing results.

Unlike Hikari Tsushin, MTI does not have franchises and sells through direct marketing. Currently, mobile phone sales and marketing represent 90 percent of revenues. Mobile content creation and distribution make up only 10 percent, but Maeta hopes to increase this to 50 percent within five years.

MTI's main weakness is that it has not been a major partner with NTT DoCoMo, as rival mobile contents provider Cybird has been. However, as the company is looking to expand overseas, it believes this will not be an issue. MTI has a consolidated subsidiary in China and content sites in Korea and Europe, and is looking into the Hong Kong and Singapore markets.

MTI's share price was also hit by its close ties with Hikari Tsushin, which sold off its stake.

MONEX
Monex was the first online broker in Japan to conduct an IPO. With one of the lowest commissions in the industry at a minimum ¥1,000 per trade, Monex is helping to democratize Japan's plutocratic world of investing.

As of July 2000, Monex had around 76,000 of the one million online accounts in Japan. In the last fiscal year, commissions represented 87% of revenue, investment trust sales 12%, and banner advertising 3%. Monex aims to move into the black in FY2000.

Competition in retail brokering has become fierce, with over 50 online brokers in Japan. As a pure online broker with no branches nor salespeople and outsourced back-office operations, Monex targets small retail investors looking for cheap trade executions. The traditional Big Three securities brokers (Nomura, Daiwa, and Nikko) have lowered commissions but try to avoid a price war by focusing on offering "advice" to the large number of Japanese investors who still need handholding.

Whereas the few shares issued by many Japanese companies going public are typically reserved for favored institutional investors, Monex sold almost all of its 90,000 new shares online to retail investors, creating around 18,000 individual shareholders. With proceeds from its own IPO, Monex plans to increase its efforts in the more profitable underwriting business. In doing so, it will also be competing with Softbank-funded E*Trade Japan, which went public on Nasdaq Japan.

NEC
Although a hundred years old, NEC is far from extinct.

Unlike its rival Fujitsu, NEC's strength is more in infrastructure equipment than software. It has set its strategic focus on mobile and broadband networking.

On the networking side, NEC is Japan's leading supplier of major communications infrastructure products. It has top world market share for wireless transmission equipment, and has allied with Siemens in the cellular phone business in order to expand its overseas reach. It is strengthening its optical network business by focusing on WDM systems. The company has also received large orders for the laying of submarine fiber-optic cables.

On the electronic device side, NEC is focusing on developing W-CDMA related devices for third-generation mobile communications and system LSI devices for second-generation broadband set top boxes.

On the solutions side, NEC is focusing on developing ecommerce systems for the distribution and financial markets, and large-scale mission-critical systems. For example, it has developed the BankingWeb21 payment system for financial institutions and 7dream.com's convenience store multimedia terminals.

NEC's ISP, Biglobe, is second in Japan only to Fujitsu's @nifty. It hopes to increase the number of subscribers with services such as email distribution and Web site management for SOHO and small to medium-sized companies, and content services.

NEC's share price has not performed as well as that of peer Fujitsu, but the company seems to have a clearer strategy now that it is switching from reorganization to an eye on profitability.

NTT DoCoMo
The Japanese stock with the largest market capitalization, NTT DoCoMo has led the world in wireless Internet operations with its i-mode service.

i-mode's runaway success surprised everyone including DoCoMo itself. DoCoMo has had several outages and transmission problems because its server capacity could not keep up with usage. i-mode's success stemmed partly from DoCoMo's own marketing prowess and partly from the high fixed-line charges of its parent NTT.

Mobile phone services account for 96 percent of revenues, PHS (personal handyphone system) services 3 percent, and pager services 1 percent. Average monthly revenues from i-mode users are 24 percent higher than from ordinary cellular users. Although a good portion of these data transmission fees are for email, data rather than voice remains the growth opportunity. Cellular operators will be rolling out their own flavors of third-generation wireless services in 2001, promising higher speeds and multimedia functionality. Revenues from content subscriptions, from which DoCoMo takes a 9 percent slice, as well as advertising may increase the revenue contribution of data.

DoCoMo's i-mode enjoys a 70 percent market share of the 15 million mobile Internet users (one-fifth of total mobile phone users) in Japan, but competitors KDDI (the new three-way merger of DDI, IDO, and KDD) and Japan Telecom's J-Phone are hot on its heels with their respective 'au' and J-SkyWeb services.

With a leveling off of the growth in new cellular subscribers, some wonder if DoCoMo will be able to continue such rapid expansion. But DoCoMo has global ambitions to replicate overseas its success in Japan. It purchased stakes in KPN Mobile (Europe) and Hutchison Group (Hong Kong), and is considering making investments in SK Telecom (Korea) and VoiceStream Wireless (US). Overseas it will face more formidable rivals with competing technologies already entrenched.

ORIX
With deregulation in the financial sector, New Economy hopefuls lie not in the cloddish banks but in the non-bank financial institutions. Japan's first and largest general leasing company, Orix, stands to be a top beneficiary.

Chairman Yoshihiko Miyauchi, who joined Orix when it was founded, has transformed Orix from a mere leasing company to a leading comprehensive financial services firm in Japan and 22 other countries. He is one of Japan's most vocal proponents for deregulation and chairs a government-advisory panel, the Regulatory Reform Committee, which reports directly to the Prime Minister.

Orix holds a 15 percent stake in the new Aozora Bank (the former failed Nippon Credit Bank) purchased by Softbank. Once the bank is rejuvenated, Orix will be able to access its customer base as well as its expertise in real estate. And once the bank is relisted, Orix may make a significant capital gain. Softbank has made well-known its plans to set up Aozora Bank as an Internet-related bank. Through a joint venture with Softbank and Fuji Bank, Orix plans to offer Internet leasing services.

Orix is also leveraging its corporate finance and leasing experience to participate in ventures such as the vertical B2B exchange MetalSite Japan and a joint venture with Enron (US) to offer power at lower rates under deregulation of power utilities.

Although still a small percentage of its profits, Orix is turning more attention to individuals, primarily through direct marketing using advertisements, mail, telephone, and the Internet. Its tie-up with Credit Saison should help. To compete in the retail space, it will have to create a strong brand image.

RAKUTEN
"Shopping is Entertainment" reads Rakuten's Web site. The motto sums up ecommerce in Japan perfectly, and perhaps it is because of this understanding that Rakuten has become Japan's number one online shopping mall.

Where other corporate-backed online shopping malls failed, Rakuten succeeded in becoming Japan's top B2C and C2C ecommerce site. Rakuten's revenues derive largely from fixed monthly tenant fees charged to merchants in exchange for an online storefront within the mall. Rakuten provides merchants with Web hosting, transaction processing, and marketing reports. Rakuten counts well-known corporations such as Japan Airlines, Seiko, and Yamaha among its over 4,000 tenants. Rakuten was internally funded and has been profitable from the outset.

While its ¥50,000 monthly tenant fees are a fraction of what early competitors tried to charge, many smaller merchants are not breaking even, and cancellation charges are high. Some wonder if Rakuten can continue to increase significantly the number of merchants, especially as more and more merchants end up competing directly with each other in the mall.

Rakuten is moving away from fixed monthly fees towards transaction commissions, similar to competitor Yahoo Japan's shopping mall model. Rakuten's auction service collects transaction commissions (¥100 plus 5 percent of sales), whereas Yahoo Japan's auctions rely solely on advertising. Rakuten will also face increasing competition from other auction sites such as eBay and DeNA.

Rakuten has launched a mobile version of its shopping mall for wireless phones. It is also hoping to expand its ecommerce services to other Asian countries and the US.

SOFTBANK
While an engineering student at the age of 19, entrepreneur Masayoshi Son developed a Japanese-English electronic dictionary, the patent for which he sold to Sharp. With the approximately US$1 million proceeds from the sale, Son went ahead and founded Softbank in 1981 to become Japan's largest software and hardware distributor.

With equity stakes in over 400 companies around the world, Softbank has become a global portfolio of New Economy stocks in its own right. Some of these include Yahoo Japan, Softbank Technology, and Pasona Softbank. Other holdings have gone public only within this year, including Morningstar Japan, E*Trade Japan, Sky Perfect TV, and Cyber Communications. And many more have yet to list.

When he first started Softbank, Son couldn't get a loan from the bank. Was it discrimination against the ethnic Korean or was it just financial conservatism? Who knows? But maybe it is because of that experience that Son is bent on giving entrepreneurs today access to the capital that he couldn't get by helping launch Nasdaq Japan and by creating a Netpreneur-friendly bank (Aozora Bank) out of the failed Nippon Credit Bank.

Some critics worry that Nasdaq Japan and Aozora Bank will be used preferentially by Softbank to finance and realize gains on its own investments. Son is reticent about his plans, and investors have also criticized his lack of transparency in financial reporting and business strategy.

This uncertainty, coupled with the crash of Internet stocks worldwide in April, has contributed to a drop in Softbank's share price to the extent that it is trading at less than the sum of the valuations of its holdings. But because so much of Softbank's value depends on the value of its holdings, its greatest risk is a weak stock market itself. On the other hand, its operating revenue and profit margins are much higher than those of comparable Internet funds such as US-based CMGI.

SONY
A household name in electronic gadgets, Sony is moving aggressively into the network age. Its goal is to become a leading broadband network entertainment company.

Chairman and former president Nobuyuki Idei has steered the company away from reliance on its mainstay electronics business towards entertainment content in a networked environment. The Sony Vaio computer line and Playstation game consoles are products of this shift in strategy.

The Playstation2 is at the heart of its vision for a networked digital home entertainment system. Sony has been selling its new Playstation2 console at a loss in the hopes of cashing in later on game software licenses. Games have the highest profit margins of all its businesses.

With both hardware and entertainment content in its inventory, broadband is the key link for Sony to connect the two. Sony already operates its own ISP, So-net. It has also launched Playstation.com, a game portal site, and Sonystyle.com, an ecommerce site selling its own products direct. The company has recently taken stakes in Tokyu Cable and Fuji Television to take advantage of the advent of cable broadband and digital TV broadcasting.

Digitization is a double-edged sword, as it allows for easier piracy. But Sony appears to be a company that "gets it" -- that satisfying rather than fighting consumer wants usually translates into better business. The controversy surrounding copyright protection is nothing new for Sony, which won the 1984 Supreme Court case against Universal Studios in defending the right to market its BetaMax VCR.

Earnings performance has been weak in recent quarters because of the strong yen (Japan only represents one-third of revenues) and a dip in game sales related to the transition from PlayStation to PlayStation2.

Sony's broadband network entertainment strategy is a long-term one. Broadband infrastructure in Japan has been slow to happen, and it is unclear how long it will take for this infrastructure to be widespread enough that music and game distribution add to profits. Perhaps for this reason, it has also hedged itself on wireless narrowband and partnered with NTT DoCoMo to supply content to i-mode users.

SOTEC
A cheap PC usually meant a no-frills beige box. But in the Japanese market, where fashion is just as, if not more, important than function, Sotec has brought to the masses PCs that are inexpensive AND stylish.

In the spring quarter of 2000, total PC shipments in Japan rose 42.4 percent from the previous year, led by sales to individuals, which accounted for almost 50 percent, up from the usual 30 percent. During that period, Sotec shipped 182,000 units, a fourteen-fold surge from the previous year. Out of nowhere, Sotec has joined the ranks of Japan's top ten PC makers.

Although it cannot brag of a business model patent for selling direct on the Internet, Sotec has managed to ring up a monthly ¥2 billion of direct PC sales through the Net. This represents the largest sales registered by a Japanese Web site for direct sale of products to consumers. Direct Internet and telephone sales account for 21 percent of sales, with the remaining 79 percent through traditional retailers.

A subsidiary of printed-circuit board maker Kyoden, Sotec keeps costs down by outsourcing production to Trigem (South Korea) and contracts displays made by Korea Data Systems, who are both also major shareholders. Despite the low retail price of its models, Sotec has a high gross profit margin for a PC maker of 16.4 percent.

Sotec, who handles the design of the PCs, was forced by a court injunction filed by Apple to alter the design of its eOne machines, which had imitated the wearied iMac look.

Although Sotec's PCs do not skimp on features, there are complaints of defective parts and poor quality. Among Japanese PC makers, Sotec also scored one of the lowest in customer service satisfaction. In a competitive environment where the hardware and even design become commodities, service remains the differentiating factor. To remain a major player, Sotec will need to focus on improving its reputation for quality and service.

TOYO INFORMATION SYSTEM
Originally established in 1971 as a Sanwa Bank-affiliated mainframe data-processing company, Toyo Information Systems (TIS) has evolved into one of Japan's leading systems integrators, with an emphasis on the sale of hardware systems. Software development accounts for 40 percent of parent revenues, solution services 36 percent, and outsourcing 25 percent. Approximately half of its clients are financial institutions, but top customers Sanwa Bank, JCB, Orix, and Aplus represent only 38 percent of revenues.

The company first entered the Internet space when it launched its ISP, Info Globe, in 1995. It has since created alliances with a host of blue-chip ecommerce partners. Some of the ventures in which TIS participates are Mixcube (ecommerce terminals), EC Factory (ecommerce ASP), Internet GIS (geographic information systems for Internet and mobile terminals), Dot Mobi (mobile contents), Digital Garage (Web consultancy), and Skysoft (online imported-books store).

In spring 2001 TIS will set up three data centers to provide integrated service packages ranging from hosting, co-location, Internet connections, and ecommerce Web site development to operation, monitoring, settlement, and help desk.

The company's outsourcing business depends heavily on the IT investment mood of large corporations. However, with Y2K issues out of the way, banks and corporations appear to be refocusing on developing their information systems. TIS expects consolidated net profit to rise 20 percent to ¥4.2 billion in FY2000.

TREND MICRO
The more connected we are through email and the Internet, the more vulnerable we become to computer viruses. Recent high-profile cases of ever-more malicious viruses have given a boost to computer security companies. Japanese corporations are now starting to take these threats seriously. Anti-virus software maker Trend Micro is taking its arsenal upstream from the desktop towards the Internet backbone.

Trend Micro holds a 60 percent market share of packaged anti-virus software in Japan. However, as email and the Internet replace floppy disks as the main carriers of viruses, the company is shifting away from PC-based software towards server-based software. Its business model likewise is shifting away from stand-alone packaged software sales towards Internet server software licenses. Chang compares this strategy to filtering water not at the faucet but at the reservoir. Previously 80 percent of revenues came from the PC level, but now 80 percent come from the gateway level.

Trend Micro has partnered with a major ISP but is moving even higher upstream to the telephone and cable operator level. The company provides anti-virus services on the Internet backbone level to about 50 customers, including Sprint and British Telecommunications.

Rivals Computer Associates and Symantec offer all-inclusive security suite solutions, but Trend Micro pursues a best-of-breed strategy by allying with other providers such as Checkpoint for firewalls and Verisign for authentication to provide integrated solutions.

As next-generation mobile phones offer more functionality and memory, security for wireless mobile devices is another potential market growth area that the company is exploring.

Trend Micro has development operations in Japan, Taiwan, and the US. Although its main market is in Japan, it is actively expanding into the US and Europe, which is easier to do with its switch in business focus from desktop software to server licenses.

SEVEN-ELEVEN JAPAN
Japan is the land of convenience. And convenience stores such as Seven-Eleven Japan are promising to offer a uniquely Japanese-style brand of ecommerce.

With a glut of convenience stores in Japan, the company is looking at ecommerce as the area for growth. Seven-Eleven's ecommerce subsidiary, e-Shopping Books, sells books and magazines online using its chain of stores for pick-up and payment settlement. It has discontinued the ¥100-¥200 commission it used to charge for this service.

The company has also formed a joint venture with major partners to launch its ecommerce site 7dream.com. The portal offers about 100,000 items in six categories: music, travel and leisure, merchandise, photography, computers, and auto accessories. Other investors in the joint venture include NEC, Nomura Research Institute, Sony, Mitsui, and Japan Travel Bureau. Except for large items, customers can pick up the items 24 hours a day at any one of the Seven-Eleven stores nationwide or have them delivered. Payment can be made online by credit card, or by cash at the store or to the delivery person.

Seven-Eleven also plans to begin installing multimedia terminals for ticket purchases and music distribution at all of its stores. Furthermore, parent Ito-Yokado plans to install ATMs for Internet banking at Seven-Eleven stores.

However, there are many skeptics. It remains to be seen whether consumers want this service. Consumer spending in Japan is still generally sluggish. Supermarkets are also extending hours and competing with convenience stores.

It is too early to estimate what impact ecommerce sales will have on the profits of Seven-Eleven and other convenience store chains with similar plans. But even if the efforts serve only to boost physical traffic to the store, sales should benefit.

YAHOO JAPAN
The undisputed leader in eyeball retention, Yahoo Japan has remained Japan's number one trafficked Web site every year. With around 10 million unique visits per month, Yahoo Japan has a 75 percent audience reach versus Yahoo in the US with a 50 percent audience reach.

Advertising accounts for three-quarters of Yahoo Japan's revenues. Online advertising expenditures are projected to continue surging over the next few years. In the face of soaring demand, major portals have been raising their fees for advertising. A one-week ad placement on Yahoo Japan will set an advertiser back ¥4 million, 21 percent higher than the previous year. Pretax profit margins run a healthy 41 percent. The company forecasts FY2000 pretax profit to jump 160 percent due to growth in advertising revenue.

However, in a sign that advertisers are also demanding better results, Yahoo Japan began offering demographic-based banner ad targeting, whereby ad content would automatically change according to users' age and gender.

Besides the normal portal fare, Yahoo Japan has also moved into the ecommerce space with auction and shopping sites to provide streams of revenue other than advertising. Yahoo Japan will be able to leverage off of Softbank's other Internet properties as well as its own increasing acquisitions. Not surprisingly, it has already set up a cellular portal for the phenomenal number of mobile Internet users.

YAMATO TRANSPORT
Although shopping can be done online, someone still has to deliver the goods.

Yamato Transport, better known by its emblematic kuroneko (black cat) logo, is Japan's first and largest door-to-door parcel delivery service company, with a 36 percent market share. Established in 1929 as a freight carrier, it started home express delivery services in 1976 after the oil crises as a way to differentiate itself from other trucking companies. Domestic transport accounts for 95 percent of revenues, information communication 2 percent, international transport 2 percent, and other 1 percent.

Not content with just riding the ecommerce wave, Yamato seeks to be an active participant. It has launched Web sites advertising merchandise that need home delivery.

Yamato's subsidiary Book Service jointly launched with book distributor Kurita Shuppan Hanbai a quick delivery system to deliver books that are ordered from participating bookstores and received from the publishers.

Recognizing the popularity of online auctions, Yamato plans to offer a bill collection service to registered customers for making deliveries and collecting payment of auctioned items. On top of delivery charges, the company will receive a commission ranging from ¥300-¥1,000 per payment collected. Investing ¥6 billion a year in IT, such as its parcel-sorting technology and portable communication terminals, Yamato has gained technical expertise in streamlining logistic operations. It plans to enter the ASP (application service provider) business by leasing various types of distribution management system software over the Internet, primarily to smaller firms.

Although rivals Sagawa Express and Nippon Express have less extensive networks and have focused on large parcel deliveries for corporate clients, they are now looking towards individuals and have started to eat away at Yamato's market share. Yamato has consistently innovated with specialized services such as time-specific delivery and refrigerated delivery services, which the rivals eventually copycat. For the moment, in its ecommerce efforts Yamato seems to be again (to borrow its slogan) "a step ahead."