TT-504 -- Online Ad Spending Trend, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, February 08, 2009 Issue No. 504


- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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Several weeks ago we spoke about Internet Social Network
Service (SNS) company GREE as being a value leader for
consumers. We should have added that since their IPO in
December, GREE has also become a significant profit leader,
announcing mid-January that their parent-only net profit
will probably hit JPY3.5bn on sales of JPY11.2bn for the
financial year ending June 30th. If their forecast is
correct, then this will represent a profit increase of a
massive 500% over the previous year -- a spectacular jump.

So spectacular, in fact, that GREE currently has a higher
market cap than the biggest social media player in Japan,
Mixi. This is somewhat surprising because Mixi has far more
"assets" at work, such as 15m users, versus GREE's 8m; both
PC and Mobile coverage, versus GREE being almost 99%
Mobile; and a long-term proven profit/growth model.
Nonetheless, on Friday GREE was worth JPY126bn in market
capitalization while Mixi was worth about half that, at

Is the market just focusing on GREE's current profitability
alone, or is there something more to their high valuation?
GREE's IPO in December was notable in that it was extremely
popular with individual investors, one of the few IPO's
last year to so excite people. Concurring with James
Surowiecki's "The Wisdom of Crowds," we think that the
continuing high valuation of GREE is more than just a
single profit number. Instead, investors believe that there
is a ground shift going on in the economics of running a
website and GREE is better attuned to how to take advantage
of that.

[Continued below...]

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[...Article continues]

For the last 15 years, the primary driver for websites has
been paid ads from (mainly) corporate advertisers. The
increase of web spend has come at the cost of advertising
in the traditional media: TV, radio, and paper. Certainly
Japan has been no exception to this, and as recently as
December, advertising prices for TV and newspapers had
dropped another 4.6% year-on-year. Further, 43% of Japan's
127 TV broadcast stations reported a loss for the first
half of the fiscal year, due to a combination of digital
broadcasting investment costs but more importantly because
of a significant drop off in ad revenues.

The biggest beneficiaries of this paradigm shift have been
the major Internet web portal operators, such as content
portal Yahoo, search portal Google, and shopping portal
Rakuten. Smaller website operators have also done well, and
thus we have had a proliferation of new companies running
web sites. Such is the phenomenon of media ad spend

But now that the recession is starting to bite, even within
the online sector, there appears to be a redistribution of
income. The big guns and SNS players are still doing well
-- Yahoo Japan recently announced that its group net profit
rose 11% to JPY19.1bn (US$207m) for Q4 of last year.
However, the second-tier and smaller players appear to be
having an increasingly tough time getting ads. Although
there are few statistics because most of these companies
are still privately owned, a hint of what is going on can
be gained from the online advertising agencies which have
grown up to place ads with the mid- to smaller-sized

In late January, advertising agency Dentsu announced that
it would takeover its online ad affiliate, Cyber
Communications (otherwise known as cci) so as to "strengthen
its Internet and digital ad business". Dentsu paid around
JPY10bn (US$108m) for the remaining 52.5% of cci's shares
after cci declared that it is expecting a net loss for the
fiscal year ending March 2009. Cci has been hurting over
decreased business from advertisers wanting access to its
internet media portfolio.

Then early this month, second-placed ad agency Hakuhodo
announced that it was taking over a majority stake in
Internet ad company D.A. Consortium (DAC). The move was
reportedly made to try to increase Hakuhodo's revenues from
the Internet, as conventional ad income dries up. While a
brave face was put on the deal, we don't believe in
coincidences, and wonder if DAC's uneven profit history
over the last two years (a big loss in FY2006) is being

The online ad spending market does seem to be polarizing,
and under such trends only the biggest online brands will
get real attention and fees. The best smaller players, as
GREE is proving, are moving away from online ads and
instead are finding their revenues direct from the source
-- the consumers. Although its avatar-based games are free,
GREE makes about 70% of its income from selling
enhancements to those games, such as avatar clothing,
special powers, etc., and as such has been able to divorce
itself from the vagaries of corporate advertising budgets
and pesky recessions.

This is an important factor as we move deeper into the
the economic downturn, because consumers, while
economically sensitive, nonetheless make their online
content decisions based on personal feelings and the fact
that the financial cost of such decisions is cheap. The
simple fact is that with so many consumers -- such as
GREE's 8 million users, the actual value of each sale can
be small enough to be almost painless. And since GREE's
content is served up on Mobile platforms, these numerous
small transactions can happen all the time, not just when
the consumer is in front of a PC.

Hence the perception by individual shareholders in the stock
market that GREE is "out-valuing" Mixi and that the GREE
business model has longer legs to it.

We think that going forward, ad spending will dry up even
more, and only those companies who can sell things directly
to consumers will have a strong enough business model to
survive and thrive. Obviously if those "things" are digital
in content and delivery, then the cost of logistics is
almost zero and profits sky high. This bodes well for Yahoo
with its auctions and Rakuten with its online stores (although
not necessarily for its store owners), but maybe not so well
for Google and Mixi unless they can move more quickly away
from ads and to a consumer-direct sales model.

For traditional media, this shift in income sends a clear
signal that two moves are urgently required. Not only do
they have to move their content to the web, preferably
to portable devices such as cell phones, but also that they
have to move to a cheaper, more scalable software-driven
business model for their content. This may be SNS,
serialization, games, or something else not invented yet,
but what ever it is, it should be digital and appeal
directly to consumers.


Looking to start a company? Then you'll be happy to know
that our quarterly Japan Inc. Entrepreneur Handbook Seminar
will be back on February 14th. The time, location (Shibuya)
and other details can be found at:

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+++ NEWS

- Mitsui sued for employee discrimination
- Virtual bank has record profit for 2nd half
- Government may back down on online OTC drugs ban
- Yen to fall further after U.S. stimulus
- Kuwait property fund buys JPY13bn apartment building

-> Mitsui sued for employee discrimination

Trading company giant Mitsui & Co., is being sued by one of
its ex-senior directors, an American who was employed by
the company in the U.S. for 18 years until his firing in
2006. The ex-employee claims that he was dismissed because
of both his nationality, his age, and because he started
questioning the company's alleged discriminatory practices
towards non-Japanese. On the record he was fired for
"irregularities" in his expense reports, but as his lawyer
pointed out, the discrepancies in question occurred a full
five years before the dismissal, and in between time, he
had been acknowledged for his outstanding work for the
firm. ***Ed: It will be interesting to see where this
lawsuit goes. The complainant has pursued Mitsui for two
years now and we can imagine that he is seeking substantial
damages. 18 years doesn't make him a simple dismissal. If
he is successful, this will set an example for other
ex-workers in the U.S. currently being fired to go after
their former Japanese bosses with more vigor.** (Source:
TT commentary from, Feb 6, 2009)

-> Virtual bank has record profit for 2nd half

Subprime-free "virtual" bank, Seven Bank, owned by Ito
Yokado (now Seven & i Holdings), announced this week that
their non-consolidated net profit for the second half of
2008, April thru' December, was up 32% over the same period
last year, to JPY13.6bn (US$147.8m). The company attributes
its success to its focus on ATM services through its
widespread 7-11 convenience store network of 130,000
machines. ***Ed: You have to admire the business model for
Seven Bank -- very low costs, machine-only services,
guaranteed foot traffic, and 24x7 security in their stores
in the form of in-store employees...** (Source: TT
commentary from, Feb 7, 2009)

-> Government may back down on online OTC drugs ban

The Minister of Health has said that the government will
reconsider measures it was planning to ban the sale of
Over-the-Counter (OTC) drugs, such as common cold medicines
and headache remedies, by Internet and direct mail order.
Only vitamins and other relatively harmless products were
to be exempted from the ban, but even these would have
required their sellers to register with the Health
Ministry. The back down is unusual and highlights the
effective lobbying efforts of the online retail sector in
competition to the pharmacy companies, who want the
business to themselves. Online OTC drug sales were around
JPY6.1bn in 2004 (obviously a lot more now) and JPY26bn
for mail order firms. (Source: TT commentary from, Feb 7, 2009)

-> Yen to fall further after U.S. stimulus

A Bloomberg article posits that the yen will fall further
against the Euro and the dollar as a result of the upcoming
Obama government's fiscal stimulus package. Already this
week the yen fell 3.1% against the Euro and 2.1% against
the dollar, and at one point was at 92.25 to the US dollar
last Thursday. The high yen coupled with precipitous falls
in foreign consumer demand is crippling Japanese industry
and has put the country into a deep recession. Analysts
are saying that the yen may fall to around 95 to the dollar
within the current cycle of movement. (Source: TT
commentary from, Feb 7, 2009)

-> Kuwait property fund buys JPY13bn apartment building

Although there is still a lot of fear in the markets, some
buyers are picking now to be the bottom of the property
market in Japan. Kuwait's UK-based property fund, St
Martins, has just purchased a 27-story apartment building
in Tokyo for JPY13bn (US$144m). The company bought the
281-serviced apartment complex from KK daVinci Advisors.
***Ed: No word on what they paid for the building.**
(Source: TT commentary from, Feb 6, 2009)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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