JIN-137 -- Japan VC Scene: Foreign Money Pulls Out

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J@pan Inc Magazine Presents:
T H E J @ P A N I N C N E W S L E T T E R
Commentary on the week's business and technology news
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Issue No. 137
Wednesday, June 20, 2001
Tokyo

CONTENTS

+++ Viewpoint: Japan VC Scene: Foreign Money Pulls Out
+++ Noteworthy news
- Tokyo Metallic to Sell Shares to Softbank
- Japan ADSL Cheaper than in US
- Omron and Cellport Tie-up for Telematics
- More on Broadband in Japan
- Oki Electric and Symetrix Announce Licensing and
Commercialization Agreement
+++ Worth a read

<---------------------------ANNOUNCEMENT----------------------------

BBC World's Click Online recently interviewed J@pan Inc editors:

Watch Editor at Large Daniel Scuka discuss 3G at:
http://www.bbcworld.com/Content/clickonline/click_one.asp

See Editor in Chief Steve Mollman address broadband at:
http://www.bbcworld.com/Content/clickonline/click_four.asp

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+++ VIEWPOINT

Japan VC Scene: Foreign Money Pulls Out

It was bound to happen. With the bursting of the US-inspired dot-com
bubble, Japan's venture community has seen its first casualties
amongst the foreign VCs. Boutique technology investor Yazam,
headquartered in Tel Aviv, pulled out at the start of the year. Yazam
had been quite active throughout 2000 (and helped sponsor J@pan Inc's
Fusion 2000 venture business contest) and was certainly bullish on
Japan.

But today, the yazam.co.jp domain is listed as "suspended" in the
JPNIC database, and the phone number forwards to a new company
called Island Six. We rang up to see who answered and were surprised
to get none other than Todd Walzer, the now ex-president of Yazam
Japan. Walzer confirmed that Yazam Japan's demise was not unrelated
to parent company Yazam (Israel) being taken over by Washington,
DC-based U.S. Technologies, an Internet enterprise developer of
early-stage startups and emerging companies and a B2B technology
integrator (which itself is running at a loss, according to Yahoo
Company Profiles).

Walzer's voice was a little weary. He claims all the VCs are finding
that "there just isn't much to invest in." Ironically, he says 2001
so far has seen an increasing number of IPOs in Japan. Many of these
companies, however, just aren't attractive to venture-based risk
capital. "They don't have their own technology, and that's what the
foreign VCs want," says Walzer. While we're not certain how true that
justification is -- lots of other investors of all stripes are
finding plenty to invest in -- at least Walzer isn't letting Yazam's
failure get him down. He has relaunched his old consulting practice
based on matching Japanese capital with Israeli tech ventures, and he
sounds upbeat on the future.

While it would be tempting to write off Yazam's pull-out as an
isolated case of home office restructuring having a whip-saw effect
on the local Japan effort, it may not be the only one. For some time,
rumors have circulated that long-time Tokyo VC booster Whitney & Co.
(an investor in J@pan Inc parent LINC Media) might significantly
reduce its activity here. Word has it that the move would at least be
partly related to a ressassment of all of Whitney's overseas
operations. Nonetheless, Whitney Tokyo principal Paul Slawson firmly
denies that there's been any change, and states that it's "business
as usual," despite the fact that listings for Whitney's Tokyo, London,
Singapore, and Hong Kong office addresses and telephone numbers have
been pulled from the US Web site. Obviously, return on investment in
those overseas markets would be a not insignificant factor in any
decision to maintain the offices.

So does this mean that Japan is a bad place to invest?

Absolutely not. In fact, we think Japan is an even better place to
invest than it was 18 months ago. But it's clear that the end of the
bubble here has meant that early-stage, pure startup venture
investing has largely disappeared -- because it was the foreign VCs
who largely supported that model.

We haven't seen any Japanese VCs announce that they're pulling out
of early-stage, high-risk investing -- for the simple reason that
they never embraced that strategy in the first place (other than
certain exceptions like Softbank, which is showing serious signs
of floundering). The two-kids-and-a-Powerpoint-slideshow type of
venture no longer has a chance, and the venture capital community
will require investee companies to have several years of revenues
and significant expertise in their areas.

A quick glance at tokyoipo.com shows 11 IPOs scheduled for July. It's
interesting to note that most of the pre-IPO companies listed are
solid, mainline manufacturing and general engineering companies (like
Tosei, Mani, and Santec), IT service firms (like Matsushita Electric
Works Information Systems and Solxyz), or traditional retailers
(Tully's Coffee and Can Do).

None of these are pure, high-risk startups, and all have presidents
and founders, we guess, who wear suits and ties -- they have to.
That's one of the ways to impress their **Japanese** venture capital
patrons. Most of these startups, we think, will do quite nicely.
They've been vetted by the community, they've impressed their VCs,
and they've got revenues, positive cash flows, and sellable products
and services.

We won't be surprised if more foreign funds dry up, and we think the
Japanese venture scene will continue to flourish despite the loss.
And that's a good thing.

-- Daniel Scuka

<--------------------------ADVERTISEMENT----------------------------

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------------------------------------------------------------------->

+++ NOTEWORTHY NEWS

** Tokyo Metallic to Sell Shares to Softbank

EXTRACT: Financially squeezed Japanese ADSL service operator Tokyo
Metallic Communications said on Thursday it was in talks with
Softbank on sales of its own shares. No other details were released.
The Nikkei reported on Thursday that Softbank had decided to buy
all shares in Tokyo Metallic by the end of this month for about
JPY4.5 billion.

COMMENTARY: Still a developing story as of JIN press time. If this
deal happens as described above, two things are notable. First, that
Tokyo Metallic, a telecoms startup formally less than two years old
could be valued at JPY4.5 billion. Who says telecoms in Japan isn't
competitive? Second, and whatever becomes of the TM brand, the
company will always be remembered for being a pioneer that helped
force NTT to open up its network to resellers. In the J@pan Inc story,
(see link below) we asked if any of the ADSL upstart challengers
stood a chance against NTT. It's good to see that TM, while possibly
under new ownership, may not disappear.

"Tokyo Metallic in Talks to Sell Shares to Softbank," Forbes, June 21
http://www.forbes.com/newswire/2001/06/20/rtr286469.html

"Mission Impossible For Broadband Providers?" J@pan Inc, June 2001
http://www.japaninc.com/mag/sub/2001/06/jun01_mission.html
(subscribers only for now)

** Japan ADSL Cheaper than in US

EXTRACT: Monthly charges for asymmetric digital subscriber line
(ADSL) services in Japan are JPY505 less than in the US. This finding
is from a report entitled "Survey Results on Broadband Internet
Charges," published by InfoCom Research on June 13.

COMMENTARY: According to the report, any difference between ADSL
costs in Japan and the United States has virtually disappeared. The
primary factor appears to be that while ADSL providers in Japan are
cutting their rates under fairly stiff price competition, similar
providers in the US are **raising** theirs.

In Japan, the top providers are NTT (East and West), Tokyo Metallic
Communications, and eAccess (there are many more second-tier
resellers, and Yahoo Japan has announced plans to start an ADSL
service). The survey found the average monthly cost of ADSL in
Japan was JPY6,760 in August 2000, compared with JPY5,429 in July
this year (estimated).

The difference in average prices between the two countries in August
2000 was JPY1,618 in America's favor, but this had swung the other
way to a difference of JPY505 in Japan's favor by July 2001.

Commenting on the upward price trend in the US, InfoCom's survey
report says: "Many American families are quite happy with an analog
line, so ADSL uptake has been slower than providers predicted." We're
not certain how accurate this statement is.

We think that in the US, like in Japan, people will enthusiastically
switch to broadband services (ADSL, cable, fiber) when these are
offered cheaply and reliably -- something that US providers are
having a tough time doing.

Copy N'Paste Quick Facts:
Average ADSL Fees
Japan//US
August 2000: JPY6,760//JPY5,142
July 2001: JPY5,429//JPY5,934
Difference: -19.7%//+15.4%
(Based on $US1.00 = JPY118.80)

See J@pan Inc's interview with Tokyo Metallic CEO Kobayashi at:
http://www.japaninc.com/mag/comp/2000/05/may00_interview_kobayashi.html

SOURCE: "ADSL Service Less Expensive in Japan than in US"
Nikkei AsiaBizTech, June 18,
http://www.nikkeibp.asiabiztech.com/wcs/leaf?CID=
onair/asabt/news/133097

** Omron (Japan) and Cellport (US) Tie-up for Telematics

EXTRACT: Kyoto-based Omron and Colorado-based Cellport Systems have
agreed to cooperate in a wide range of activities, including the
establishment of a new joint venture. The partnership will target
telematics in general and will specifically develop products that
integrate Cellport's vehicle-based mobile network technology with
Omron's M2M (machine to machine), sensing, and voice/face recognition
technologies.

COMMENTARY: Telematics will become a $5 billion industry by 2005,
according to the Strategis Group. In Japan, everyone is already
carrying their celly into cars and trucks. It makes sense to bring
these phones out of purses and pockets and plug them into some sort
of onboard network, which is precisely what Cellport's product
allows.

The new Omron-Cellport JV is interesting from a number of angles.
Some have criticized Japanese tech companies for following narrow,
"buy-and-take" investment agendas, limiting their interest in foreign
tech players to specific technologies and specific companies.

But this deal looks like a sensible strategic move, and will see
Omron, a major Japanese technology corporation, pumping $10 million
into a tiny, not-yet-profitable US startup, giving it the
second-largest stake in Cellport after Cisco (equal to that of AT&T
Wireless) in the hopes of capitalizing on existing and yet-to-be
developed telematics technologies.

Further, Omron will join Cellport's Global Partner Program, and help
promote open standards for telematics platforms. We think Omron will
also significantly boost Cellport's chances of scoring its first
Japanese automaker customer for its in-vehicle cellphone
cradle/adapter and mobile server -- something the company desperately
needs if it is to succeed here.

J@pan Inc coverage of Omron face-recognition software:
http://www.japaninc.com/mag/comp/2000/12/dec00_filter_face.html
(Could Omron's face-sensing system be used in cars? If a PC or a
cellphone can be made to operate only after "recognizing" its owner,
why not a vehicle? See Gadget Watch No. 16.)

An in-depth backgrounder on the potential of telematics:
http://www.computingjapan.com/features/features11.html

Also, see our Cellport profile ("US Telematics Player Braves Japan")
in the July issue, page 58.

SOURCE: "Omron and Cellport Form Alliance"
Omron Press release, June 18

<---------------------------ANNOUNCEMENT----------------------------

From the June issue of J@pan Inc:

"The Other i-modes: Fifteen million happy non-DoCoMo users can't all
be wrong."
http://www.japaninc.net/mag/sub/2001/06/jun01_investor_imode.html

Top Java Downloads on Cellphones: Which i-Appli apps are popular?
http://www.japaninc.net/mag/sub/2001/06/jun01_filter_java.html

See the full table of contents at:
http://www.japaninc.net/mag/current.html

To subscribe to the magazine, click here:
http://www.japaninc.net/mag/subs.html

------------------------------------------------------------------->

** More on Broadband in Japan

EXTRACT: Internet-via-cable is expected to become the dominant form
of Net access among Japan's rising broadband population over the next
few years. The rise of cable is bolstered by NTT's virtual monopoly
on the local access lines, limited roll-out of DSL services, and
competitive pricing for cable access. eMarketer cites a **February
2001** survey by My Voice Communications (8,114 participants) that
queried respondents' preferred form of broadband access. These were:

ADSL 32%
Cable 25%
ISDN 16%
Fiber 3%
Dedicated line 4%
Telephone line 3%
PHS (Wireless) 1%
Don't know 16%
Won't use 1%

The survey also found that respondents complained about the high cost
of ADSL, and that part of the problem with ADSL rollout is NTT's
continued promotion of decades-old ISDN technology as a valid
broadband option.

COMMENTARY: My, how quickly things change! We don't think eMarketer
is keeping up with developments in ADSL rollout. By relying on
4-month-old data, this report gives the impression that cable is
catching up, when in fact, it's falling further behind. The Ministry
of Public Management, Home Affairs, Posts, and Telecommunications
says that, as of May, there were 178,737 DSL subscribers in Japan, an
eleven-fold increase over February's 16,194.

As we mentioned in the item above, ADSL is booming, and cable hasn't
a hope in hell of catching up. The cable market is highly fragmented,
coverage areas are deeply affected by municipal and corporate
boundaries, and the agreement of all apartment dwellers is generally
required before an apartment owner can have the building wired --
which is tough to get. ADSL operators, on the other hand, are cutting
prices, mailing out free sign-up CDs, and basically generating a lot
of buzz.

The survey also found that Japanese surfers tend to use broadband
access for entertainment. 40% of respondents cited movie and music
downloads as their favorite broadband activity, with online gaming
also ranking fairly high.

Note that these activities are precisely the ones that mobile surfers
use their cellys for -- leading us to conclude that NTT DoCoMo need
not worry about revenues and amortization of its 3G wireless network,
now in its trial phase. Build it, and the gamers and MP3 aficionados
will come.

SOURCE: "Broadband in Japan," eMarketer, June 19
http://www.emarketer.com/analysis/easia/20010619_asia.html

Ministry of Public Management, Home Affairs, Posts, and
Telecommunications DSL stats:
http://info.mpt.go.jp/whatsnew/dsl/

** Oki Electric (Japan) and Symetrix (US) Announce Licensing and
Commercialization Agreement

EXTRACT: Oki and US-based Symetrix will cooperate to produce FeRAM
(ferroelectric random access memory) chips based on fast, low-power
semiconductor materials developed by Symetrix. The chips will attain
speeds close to those of current DRAM and SDRAM memory chips used in
high-end desktops, and will store up to 1 MB of data per square
millimeter while consuming a fraction of the power.

COMMENTARY: Not just another boring techie thingy -- this is
extraordinarily significant.

FeRAM chips are smaller, cheaper, faster, and consume less power than
anything else now available. Want to download and store a couple of
dozen MP3s to your cellphone? You can't! First, the networks are too
slow (DoCoMo's W-CDMA and KDDI's cdma2000 1XEV 3G systems will solve
that problem, however).

Second, top-of-the line cellphones today only have about a half an
MP3's worth of (slow, bulky, battery-burning) RAM. Sony already
markets a cellphone with a Memory Stick slot, but there's no way to
write data to the memory stick from the phone. Even the highly
popular Flash memory cards are far too s-l-o-w for storing
and accessing video or audio.

In April 2000, J@pan Inc covered the fascinating story of how the
entirely unlikely collaboration between US inventor and entrepreneur
Carlos A. Paz de Araujo (Chairman and CEO of Symetrix) and a maverick
R&D manager from Matsushita led to the creation of ferroelectric
random access memory.

Symetrix and Matsushita already produce millions of contactless
FeRAM-based smart cards for the prepaid card market. Symetrix,
however, has an open policy of licensing its patents to all and
sundry, so it's no surprise to see another giant Japanese denki
manufacturer getting involved with FeRAM. Once again, technology
invented in the US comes to Japan for development and
commercialization into the coolest and highest-tech gadgets
imaginable.

Source: "Symetrix and Oki Electric Announce Broad Alliance"
Symetrix press release, June 18

"Small Money Chips In," J@pan Inc, April 2000
http://www.japaninc.com/mag/comp/2000/04/apr00_chips.html

+++ EVENTS (ADVERTISEMENT)

** iLocus Show, the Biggest IP Telephony Trade Show, Hong Kong

Scheduled to be held on 31 July - 3 Aug 2001, iLocus Show (Asia 2001)
which is the biggest IP telephony trade show in Asia, will build
on the success of the previous year's event. The show will be a mixed
exhibition and conference and will be devoted entirely to the IP
telephony industry, offering the best opportunities to network with
the right people in the industry in Asia. There will be some 30
exhibitors and over 100 speakers at the event.

For further information, access http://www.ilocus.com/asia2001.htm,
email asia2001@ilocus.com, or call +852-2413-0918.

** Carriers World JAPAN 2001 takes off from 11-12 July at
Royal Park Hotel in Tokyo.

Everything you need to know about telecoms in Japan, in 2001 and
beyond. This conference features presentations by 23 industry
leaders who will share their vision for Japan carriers in the New
Economy -- at a time when nothing is for certain except the need for
innovation, extensive contacts, and rich, up-to-date information.
* Keynote addresses by Alistair Grieve, CEO of Reach, and Tsunekazu
Matsudaira, Managing Director at KDDI
* High-Level presentations and panel discussions by 23 industry
leaders including NTT, J-Phone, Crosswave, France Telecom, US
Embassy Tokyo, Level 3, Nomura Research Institute, Exodus, Concert,
ADC, Ovum, RateXchange, and many more.
http://www.carriersworld.com/carriersworldjapan2001/
Contact us at +65-322-2700, or email: fiona.chiew@terrapinn.com

** Mobile Telecoms Japan

Presented by Strategic Research Institute
July 11-13 Sheraton-Fisherman's Wharf, San Francisco, CA

At this event, you'll hear first-hand from Japan's three major
wireless carriers: NTT DoCoMo, KDDI, and J-Phone. This is the first
American conference to focus on the wireless revolution in Japan. It
will provide in-depth information about i-Mode, as well as its
important Japanese competitors, EZweb and J-Sky.

For more information, contact Ron Berg at rberg@srinstitute.com or
visit the conference Web site at www.srinstitute.com/ck101.
Please mention keycode "DWSH000264" when registering.

+++ WORTH A READ

"50 Ways to Create a Recovery in Japan" Daily Yomiuri, June 21,
http://www.yomiuri.co.jp/newse/20010621wo11.htm

Sophia University professor Richard Werner offers some
straightforward ways to spark a turnaround in the economy. His
favorite method -- depositing JPY1 million into the bank accounts of
every taxpaying Japanese -- may appear a little wacky. But consider
that two years ago the government conducted a much-debated but
ultimately futile coupon program that saw some JPY20,000 worth of
coupons (good for merchandise or services at local shops) handed over
to taxpayers. Failure was blamed on how the program was conducted --
not on the concept of handing money (or money-equivalent coupons)
directly to citizens itself.

===============================================================
Note: JIN is one day late this week. Our apologies for any
inconvenience this may have caused.

STAFF
Written by Daniel Scuka (daniel@japaninc.net)
Assistance with news compilation:
Richard Ochero (richard@japaninc.com)

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