E-Commerce a la America Online Japan

by Forest Linton

Something to chat about
AOL Japan is a joint venture between AOL, Mitsui & Company and the Nihon Keizai Shimbun. AOL Japan was formed in mid '96 and was capitalized at over $60 million, joining an already over-crowded market. Although service started on April of '97, subscription figures were kept very quiet until a year later when AOL announced that it had reached the 100,000 mark. Japan's numbers may seem low (compared to 1.3 million members internationally), but customer retention in Japan is higher than any other country in which AOL operates. In addition, according to AOL, last December it signed on more new subscribers than rival Nifty-Serve. Finally, AOL Japan has been growing on average 70% from month-to-month since its launch and reached the 100,000 user mark faster than it did in the States.

Seventy-six percent of AOL Japan's users are males in their 30s. Slightly over half of its members are using the Internet for the first time, almost all (94%) are accessing the service from home, and on average sign on every two days. AOL Japan benefits from a lot of localized content, with about 20 content channels. Popular content in Japan include channels like Love Planet and AOL 1-chome. While content decisions are made exclusively in Japan, marketing tactics are almost entirely dictated from the US. AOL Japan employs the same home-grown US technique of carpet bombing the industry with CDs via magazines and direct mail.

Partners
The economic trickle-down effect of America Online's success to its business partners is becoming quite substantial. Simply announcing a deal with AOL is enough to send a partner company's stock skyward. This past spring, companies like Amazon.com, CDNow Market Guide, Preview Travel, N2K and all the major search engines announced tie-ups with AOL and have since doubled or even tripled in value on Wall Street. In Japan, AOL is now poised to start recruiting major content and commerce partners.

Competition in Japan
Although Nifty-Serve and NEC's BigGlobe are behemoth ISPs, they are struggling with the "migrating-to-the-Web" business model. They both enjoy an envious 2 million-plus registered users, but active Internet users only number in the 100,000 to 250,000 range. This is still larger than AOL, but not by much. And in both cases, the value add (other than access) that they are providing to the customer is negligible. The Microsoft [with whom this author is employed] Network has between 250,000 and 350,000 users in Japan but has undergone several tactical changes in direction (similar to MSN in the US) and is sending conflicting messages to its customers. The big challenger for AOL Japan may turn out to be Sony's up-and-coming So-Net. Sony understands the consumer segment very well, and is developing software and services to run on its core hardware devices like PCs, Net-TVs and Playstations. Sony can take advantage of this synergy to leverage its installed base of users.

It's the content, stupid
In addition to its access business, AOL is rapidly positioning its site as a portal. A portal is a site that aggregates a variety of content and services in order to function as the single best starting page for as many users as possible, and thereby attract more ad revenue. Many of the high-traffic sites on the web are redefining themselves as portal sites, including all the major search engines. Although AOL prefers not to be labeled a portal, they have all the markings, and along with content deals with companies like N2K and Amazon.com, they are launching services such as free e-mail and instant messaging. With a respectable 23% of its members female, AOL Japan hopes to grab a large slice of the e-commerce pie such as travel arrangements and other segments that especially fit the online model. Expect to see a deal with HIS announced sometime in the near future.

Sure, AOL Japan has posted respectable results in its first year, but what the numbers don't show is that there is significant momentum building for a strong push in year 2. Watch for advertising and transaction revenues to increase and for AOL Japan, along with sites like Yahoo Japan and Amazon.com, to lead an e-commerce charge in Japan in late '98 and early '99. AOL Japan's challenges include reducing churn (the amount of subscriber turnover) and more effective penetration of the business segment. Expect 300,000 AOL Japan members by April of '99. Now that would be something to chat about.

Forest Linton is IE Group Product Manager for Microsoft Japan. Forest says his main goal in life is to turn his stories in on time. You can reach out and touch him at forest@gol.com.

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