WW-154 -- Japanese Content Provider Bubble Is Over

=======================================================

J@pan Inc presents

W I R E L E S S W A T C H

Commentary on Japan's Wireless World

=======================================================

Wireless Watch Newsletter

Issue No. 154

Friday July 14, 2006

TOKYO

CONTENTS

++ Viewpoint: Japanese Content Provider Bubble Is Over

When the mobile Internet in Japan took off in 1999, new companies

emerged to distribute such content as wallpaper, ring-tones and games

to mobile subscribers. The carriers introduced an attractive business

model that allowed these content providers to keep about 90% of the

price paid by the end user. Companies like Cybird, Index, Bandai

Networks and For-side.com set up dozens of mobile sites in the carrier

portals -- a lucrative business.

After their initial successes, Japanese mobile content providers went

public, and the markets drove up their share prices to enormous heights.

Companies were profitable and with the growing mobile phone

penetration the sky was the limit. Unfortunately for shareholders, the

mobile bubble burst. Most of the large mobile content providers share

prices are now between 25 and 40% of their peak value. For-side.com

got the largest hit - its shares were at their top, around 200,000 yen,

in 2004 and are now traded for 10,100 yen. The end to the downward

trend is not in sight. What happened?

Distributing ring-tones through carrier portals was a good business.

Music rights could be obtained through JASRAC, who handled payments

to artists. When real music was introduced, the model changed - the

rights had to be obtained from the record labels, who were much tougher

to deal with as they wanted to distribute their own music, bypassing

the mobile content providers. Royalty payments for real music are also

much higher than for ring-tones, putting the mobile content provider

margins under pressure.

The portals of the carriers became very crowded, and there are currently

so many sites it is difficult to find your way. Nowadays, new sites are

regarded as very successful if they gather more than ten thousand

subscribers. It is difficult to be profitable with such numbers.

Today lots of free content is available outside the carrier portals.

Since the carriers introduced ‘flat fee data’ subscriptions, users do not

mind to browse through the public mobile Internet for content.

With their pockets loaded with money, Japanese mobile content

providers went shopping for overseas companies. For-side.com

bought many companies in the US and Europe. They sometimes

bought companies that were even competing with each other in their

own markets. Earlier this year it became clear that For-side.com was

reconsidering its global strategy and looking for buyers for its overseas

assets.

A final downward push was given when the Livedoor scandal broke out

in January. The markets had doubts regarding the aggressive M&A strategies

of the mobile Internet providers in the period 2003 and 2004, and investors

sold their mobile content provider portfolios.

Will there be a revival of the mobile content industry? We are not sure there

will be. If share prices continue to drop, we expect a consolidation to take

place where media companies acquire stakes in content providers to obtain

their mobile market know-how. The precursors are visible. Earlier this year,

Japanese record label AVEX bought part of mobile content provider Dwango.

Expect more to happen in the months ahead.

=======================================================

SUBSCRIBERS: 23,025

STAFF

Written by Arjen van Blokland; Edited by Burritt Sabin

(editors@japaninc.com)

(C) Copyright 2006 Japan Inc Communications KK. All Rights Reserved.

business