E-Commerce Tsunami

Merrill Lynch calls Japan's entry into the e-commerce age the "Internet Tsunami," envisioning a tidal wave of dot-com opportunities and investments.
Written by Gail Nakada, Contributor

Merrill Lynch called Japan's entry into the e-commerce age the "Internet Tsunami," envisioning a tidal wave of dot-com opportunities and investments. Brick-and-mortar businesses are in no danger of getting swept away yet, but the possibilities of the Internet are inundating corporate and consumer consciousness in Japan. It's the one area of growth in an otherwise stagnant economy.

Japan's Electronic Commerce Promotion Council says its e-commerce market grew to about $2.4 billion last year. Rakuten Ichiba (www.rakuten.co.jp), the country's No. 1 online shopping mall, lists more than 2,100 shops and reported sales of $9.3 million during the December shopping season. Lehman Brothers estimates personal online spending will grow to more than $4 billion this year. Analysts are predicting a record number of Japanese IPOs this year --up to 300. Whether those IPOs soar or plummet matters less than what they represent: opportunities for high-tech entrepreneurs in what had been a closed corporate loop.

Advertising expenditures are fueling content development and improving the Japanese virtual world. Online ad spending grew by 111.4 percent last year to $228 million. Advertising giant Dentsu predicts spending will increase to $349 million this year. With 17 million people online, young users represent the fastest-growing demographic, particularly women aged 27 to 34 --they account for more than 40 percent of all newbies. Last winter, home access finally broke the 50 percent mark. Companies like Sony, 7-Eleven, NEC, and Japan Airlines have joined newspapers, magazines, TV stations, and department stores in finessing a multichannel combination of clicks and bricks that is transforming Japan's Web from boring to blockbuster. PC penetration is increasing (ownership is around 30 percent of Japanese households), but most analysts agree Net access is --and will continue to be --fueled by mobile computing.

Nothing but Net

"There will be no digital divide between Internet haves and have-nots," says Todd Newfield, CEO of FlyingColor Group, a Tokyo-based firm offering Internet marketing solutions. "Internet access via mobile phones is the great equalizer." Add Net-enabled game consoles like the Sony PlayStation 2, the Sega Dreamcast, and Nintendo's next-generation unit, the Dolphin, to get a real picture of what's driving mainstream Internet growth.

Right now, Tokyo is crowded with VCs looking to fund the Next Big Thing, and seed funding on both sides of the Pacific is easy to find. But Andrew Tow, CEO of Global Media Holdings, which packages She TV and SF Channel for Japanese satellite platforms, says it's important to note that in Japan, "it's not a question of raising money, it's raising strategic money." The source of the money is of vital import --the right source confers instant credibility, opening the way for important contacts in distribution, supply, advertising, and real estate.

It can even affect a company's market cap. As one anonymous American startup CEO observes, "Right now, involvement from Softbank in your venture can increase your capitalization 200 percent, just like that."

Japanese are embracing e-business at an exponential rate. Kumi Sato, president of Womenjapan.com, and her team pushed to roll out their women's portal site in September 1999. "There's tremendous value to be out first; we really forced ourselves to launch. Sure enough, by November we had four or five competitors coming online."

Whether it's B2B or B2C, foreign companies need to differentiate themselves by offering more of everything. Gateway Japan, for example, was the first foreign PC maker with client financing options, software peripherals, online training and education programs, Internet connections bundled with PCs, and a customer care program tailored to demanding Japa nese consumers (voice-mail jail is not a service option in Japan). Other companies, like new online grocery delivery start-up iGrocer (see "Tokyo Groceries," right), have identified a niche and moved in fast to fill it --adapting Western Net models to Japan's cultural landscape.

The window of opportunity, however, is closing. Lehman Brothers Tokyo analyst Tucker Highfield points out, "Japan's Internet space will be increasingly difficult to penetrate as more Japanese companies and Japanese entrepreneurs start developing viable business models, utilizing better Japanese content and Japanese market expertise." Joint ventures as a strategic alliance are making a comeback --witness eBay Japan–NEC, Softbank–Lehman Brothers, and Sony–Oracle. Japanese need the Internet marketing and sales expertise of foreign companies, and they in turn can hurry their business online with established local partners.

Japanese are studying the American market for online business models, pushing to adapt them to their country. For American Net developers and retailers, the clock is ticking.

Gail Nakada is an American journalist based in Tokyo, where she writes about e-commerce and the media.

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