the digital forest

Money on the Net - Part I
The not-so-definitive series on Net Commerce in Japan

- by Forest Linton -

Softbank is at it again. In mid December it announced that it had invested $30 million in upstart online insurance agency InsWeb. InsWeb and Softbank plan a joint venture in early 1999 to offer online insurance services to Japanese online users. A few weeks before, E-Trade Japan (another Softbank joint venture) announced that it was buying Japanese brokerage house Osaka Securities (and in turn gaining a license to trade on the Tokyo Stock exchange) raising the stakes in the online brokerage race.

Softbank isn't the only company ready to invest in Japan. Other heavyweight Internet players eyeing the world¹s second largest Internet market include Charles Schwab and Amazon.com. The many players already here are sure to increase their Japanese investments.

Last year, I penned a few columns on Net shopping, portals, and the general increase of commerce on the Internet. A lot has happened since then, and the time is right to concentrate more on the state of online commerce in Japan. For the next few months, I will do a multi-part series on the various hot Internet categories, and their business models in Japan. I happen to be writing this column on Christmas day, 1998, and forefront on my mind is the craze on the US stock market over Internet stocks. Journalists are calling it the Santa Clause Rally and it is creating its fair share of commotion. I can practically feel the dollars and yen crackling back and forth across the Net. I've got a feeling about 1999. I think that it is going to be the first big year of Internet shopping for Japan.

Revenue streams on the Internet can be broken into two simple categories: advertising and transactions. Advertising includes not only ad banners but also other promotions such as linking deals, preferred placements, and the like. Online ad spending in Japan was around „10 billion in 1998 and is projected to grow to „14-18 billion in 1999 - it could easily double. To attract ad dollars an Internet company needs to build a site that attracts a lot of traffic. These are often called "portals" and they function as the entrance point, the front door, the start of an online session. Transactions are made at the other end - at a specific destination. These sites are often the ultimate goal, as a place to buy something, or find information. The biggest US portals are already here in Japan. Included in the players' list are Yahoo, MSN, Infoseek, Excite, Lycos, and Netcenter. The local players are NTT, Recruit, NEC and Fujitsu.

The business model behind a portal is not rocket science

  1. Gather eyeballs from link distribution, browser distribution, word of mouth (branding).

  2. Keep users on the site (make it a sticky site) by offering a wide range of free services: news, weather, e-mail accounts, on-line address books, portfolio tracker, etc.

  3. Generate revenue by driving users to destinations.

  4. Make even more money if portal owns the destination or shares in revenue with an exclusive partner.

Hot Internet-ready categories

(Destinations)

Services: Recruiting, banking, investing, real estate, insurance, health, and gaming (networks) Products: Computing H/W & S/W, books, music, travel, cars, and auctions (person-to-person)

Content: News, weather, sports, financial, technology, and entertainment (including adult). Content is a tricky category with advertising as the primary revenue stream and few transactions (except for financial data and adult). And of course, big content sites can also be portals in and of themselves.

Several sure-fired standouts

Investing: Recent deregulation is leading to a wave of personal investing in Japan, look for movement in this segment.

Travel: The world's largest industry, and a hot favorite in Japan too, thank you very much. Computing products: Should fare well as Japan's computer boom continues.

Music: Japan's music industry is led by SME (largest music label worldwide), and Japan's amazing gadget industry fuels the drive to portable digital recording devices, which will in turn encourage the labels to undertake digital music trials.

Books: Japan has the world's largest publishing industry, and the Japanese are voracious readers. Look for solid movement here.

Japan's computer segments have shown resiliency throughout the recession of the last few years, with steady Internet growth. Japanese users are getting more comfortable with the Web and are spending more and more money online. Women (big shoppers) make up nearly 50% of the Japanese Internet population, and the credit card companies are starting to get the picture. Whatever happens in 1999, one thing is for sure: it's going to be a big e-commerce year. Next month I'll have more on these trends.

Forest Linton has been writing for Computing Japan since 1994. He currently works for Microsoft Japan as IE Group Product Manager. His views are his own and do not necessarily reflect those of his employer. You can reach him at forest@gol.com.



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