JIN-154 -- Investors Not Impressed with Yahoo Japan Earnings

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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. 154
Wednesday, October 24, 2001
Tokyo

CONTENTS

++ Viewpoint: Investors Not Impressed with Yahoo Japan Earnings
++ Noteworthy news
- NEC Agrees to Outsource Work to Selectron
- Government Considers Bonds Convertible to NTT Shares
- Japan Telecom to Slash Telecommunications Network
- Memorial Service for GOL Founder Roger Boisvert
++ Events

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++ VIEWPOINT: Investors Not Impressed with Yahoo Japan Earnings

Despite the fanfare over the brisk advances Yahoo Japan has been
making with its asymmetric digital subscriber line (ADSL) service,
the company's share price plunged on Tuesday by more than 9 percent
to JPY3.63 million as investors reacted negatively to its second
quarter (July-September) earnings report released on Monday
afternoon.

What triggered selling seemed to be a sense of disappointment over
declining advertising sales. Despite the splendid debut of Yahoo!
BB's ADSL service in September, and its rapid growth since then (with
132,167 subscribers as of October 5th), many analysts say that
Yahoo's main business still is advertising; and a decline in that
business is crucial. Sorry, Yahoo, it's too early to count on ADSLs.

Yahoo Japan sold JPY3.020 billion worth of advertising during the
quarter, down 18.3 percent from the previous quarter and down 5.3
percent from the same quarter last year. It earned about the same
amount (JPY 3.027 billion) from Yahoo! BB. Yahoo now generates 43.2
percent of its revenues from ad sales and 43.2 percent from the ADSL
business.

Analysts are puzzled by the ADSL figures. In Yahoo Japan's analysts
conference following the release of its earnings, the company failed
to provide a breakdown of the 3.027 billion that Yahoo BB! was
supposed to have generated. "This is an incredible figure, yet we
don't know what's in it," says Ortwin Gierhake, an analyst at West LB
Securities. Yahoo claims that part of that revenue comes from sales
of modems, which Yahoo Japan buys from its parent company Softbank
and sells to B.B. Technology, also a subsidiary of SoftBank Group.
B.B. technology either sells or rents these modems to end users. But
since Yahoo Japan hasn't explained how many modems it has sold, or
how many modems B.B. Technology has, "It is so hard to evaluate the
business," says Gierhake.

In order to break even, Yahoo Japan is said to need 1 million ADSL
subscribers. But it's questionable when Yahoo BB! can reach that
figure. From the very beginning, Yahoo Japan had repeatedly boasted
that it would achieve this target by the end of this year. "But this
doesn't seem possible now," says senior Internet analyst Masato Araki
of Kokusai Securities. In the analysts conference, Yahoo's management
team did not mention the 1 million target. The fact that they didn't
mention anything "was a bad sign," says Araki. "I'm sure the company
will eventually reach 1 million, but I had to postpone my forecast
one quarter" from the Jan-March 2003 quarter to April-June 2003.

In the meanwhile, ad sales were very weak during the July-Sept
quarter. Although Yahoo Japan is making efforts to reach out to
big-name national clients, "there is no sign of short-term momentum"
for an early recovery of advertisement sales, Araki adds. Araki gives
Yahoo Japan shares a "sell" rating, while Gierhake is sticking to a
rating of "hold."

-- Sumie Kawakami

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++ NOTEWORTHY NEWS
(Long URLs may break across two lines.)

** NEC Agrees to Outsource Work to Selectron

Extract: Selectron announced a deal with NEC on October 23 that would
have the American electronics maker building computer servers and
work stations for the leading Japanese PC and server maker.
Selectron, based in Milpitas, California, will take over production
at NEC's Ibaraki plant, the company said. Terms of the deal have yet
to be disclosed, but both companies said the deal will be finalized
by March.

Commentary: Japan's electronics sector, pressured by slumping sales
worldwide, is beginning to turn to foreign manufacturers to outsource
work. Selectron already has a deal with Sony to take over
manufacturing of consumer electronics products in Taiwan and Japan,
and more such deals are likely to follow as Japanese manufacturers
search for ways to cut costs.

Also on October 23, Selectron said it would buy the manufacturing
part of NEC's large-scale server and workstation business. Shares of
both companies' stock rose slightly in Tuesday trading. Could this be
the start of a trend? NEC has to do something to cut costs, and
outsourcing to companies like Selectron sounds like a much better
option than closing down divisions for a day, as it is doing today
with its semiconductor-related division, NEC Electron Devices.

- Bruce Rutledge

Reuters report on NEC-Selectron agreement:
http://sg.news.yahoo.com/reuters/asia-76795.html

Reuters report on Selectron buying unit of NEC:
http://sg.news.yahoo.com/reuters/asia-76713.html

** Government Considers Bonds Convertible to NTT Shares

Extract: Economic and Fiscal Policy Minister Heizo Takenaka said on a
Sunday morning TV show that the government would consider issuing
government bonds that are convertible with shares of Nippon Telegraph
& Telephone (NTT).

Commentary: The government needs funds and has to come up with
creative ways to raise them or risk just piling on more government
debt. Prime Minister Junichiro Koizumi has said repeatedly that he
won't just rely on the old stimulus favorite -- massive issuance of
new bonds. So Takenaka might be on to something here. The government
still owns close to 46 percent of NTT, and reducing its share would
be a smart move. Plus, there are plenty more companies in Japan that
the government could sell down its shares in.

But the government's track record has not been good on this front.
When it privatized or partially privatized several railway companies
several years ago, it demanded that the companies boost their
obligation for pre-privatization pension liabilities. That sets a bad
precedent for any future privatization plans.

In related news, the government announced this week that it would
sell off its holdings in Greenpia leisure resorts. The 13 resorts,
run by the Government Pension Investment Fund, are about JPY2.2
billion in debt, and municipalities where the resorts are located are
said to not be interested in buying them.

News story from AFP:
http://sg.news.yahoo.com/011023/1/1l01a.html

Story on privatization from Euromoney:
http://www.cic.sfu.ca/horvat/JapanesePrivatizations.html

On Greenpia:
http://www.yomiuri.co.jp/newse/20011024wo01.htm

** Japan Telecom to Slash Telecommunications Network

Extract: Japan Telecom has decided to drastically reduce its
telecommunications network and rely more on the Nippon Telegraph &
Telephone grid in a bid to cut costs. A report in the Nihon Keizai
Shimbun's Wednesday morning edition says the company has plans to
reduce its interconnection points on NTT's network from 900 to 100.

Commentary: In 1995, NTT decided to open up local networks at 1,600
points, allowing competitors like Japan Telecom to set up their own
networks by using switching exchanges. In other words, the carriers
would have a little more independence and be less reliant on NTT
charges. This recent step by Japan Telecom is not a huge surprise,
considering its slow sales and disappointing market share in the
competition for Myline subscriptions (for local phone services). But
the move does indicate that reliance on NTT's grid will only increase
during these slow economic times as others are likely to follow Japan
Telecom's lead.

News on Japan Telecom:
http://sg.biz.yahoo.com/011023/15/1l0oz.html

** Memorial Service for GOL Founder Roger Boisvert

There will be a memorial service for Roger Boisvert at the Foreign
Correspondents' Club in Japan in Tokyo's Yurakucho district on
Saturday October 27th from 2pm. Boisvert, who was shot and killed in
Los Angeles on Sept. 30, was a Tokyo-based entrepreneur and a central
figure in Japan's venture economy. As many as 500 people are expected
at the service. For more information, click on the URL below.

Information on the memorial service:
http://www.boisvert.jp/reception.html

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STAFF
Written by Bruce Rutledge (bruce@japaninc.net) and Sumie Kawakami
(sumie@japaninc.com)

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