Voice: livedoor CEO Takafumi Horie

Back to Contents of Issue: June 2004

Is livedoor Japan's Next Softbank?

by John Dodd

In the first three months of 2004, a company that few people have heard of went on a spending spree, buying up the controlling shares in four companies for more than JPY10 billion, effectively doubling its revenues.

The company plans to buy at least as many more companies in the next quarter as well -- thus building their revenues from JPY32 billion currently to over JPY50 billion in fiscal 2004. The company is livedoor, and we spoke to its CEO and founder, Takafumi Horie.

Your company first came to prominence in the foreign market when you bought out livedoor, the free ISP service, from NewBridge Capital in 2002. Why did you buy a business that couldn't create revenue?

On the Internet, brand recognition means everything, and frankly, the name we had before, "Edge," was weak. Japanese people couldn't spell it, and for foreign investors the name is so common that it didn't stand out.

But what about the livedoor business model?

It was a dying company, so we didn't pay any particular premium for the business. However, given that our direction was to create a massive content portal, the over 700,000 subscribers to the service were definitely an attraction.

Can you explain the livedoor strategy?

We are working flat out to build the livedoor brand. We are doing this by rolling out massive amounts of content in every area relevant to online users. There are four layers of business on the Internet: Infrastructure, Applications, E-Commerce and Content. Well, we live in the content space -- with some overlap, such as our online Microsoft software store -- when it makes sense.

You sell Microsoft software online?

Yes, the site is called ASCII-store, and perhaps surprisingly is the biggest online seller of Microsoft titles -- sometimes even rivaling Microsoft's own online store for volume of sales.

You said you live in the content space. Is there really money to be made in Internet content?

Never underestimate the power of media. Right now, TV is on top. During prime viewing time, the ratio of people watching TV in Japan is around 50 percent, and another 15 percent use the Internet. However, it may surprise you to know that after midnight, the share of audience using the Internet versus TV rises to 50 percent. Personally I think that the Internet will dominate TV within three years. For this reason we are focusing on developing our Internet content offerings -- particularly by building out our livedoor portal.

That means a lot of software development and functionality.

Yes. For example, the hot thing right now is blogging. Like most people, you probably think that blogging is just a means of maintaining an online diary. However, the software functionality is much deeper than that, and blogging software can be used as a replacement of a much more expensive CMS in maintaining Web sites, for example. RSS files and XML make it easy to create portable and easily modified content. You simply have to decide whether to make the resulting page public or not.

Let's talk about portals again. I thought they had become passe.

The power of a portal is that the sheer volume of traffic flowing through it ensures that your in-house advertising and promotions are cost-effective. They're great for creating downstream business. It helps, too, if you can make them pay for themselves with an advertiser base.

However, there is a threshold to cross, after which the traffic produces real and undeniable results to advertisers. I would say that Yahoo Japan has already passed this threshold point, and so our job is to catch up and eventually overtake them. I want livedoor to be the no. 1 portal in world.

But Yahoo Japan has significant momentum.

Indeed. They are so big and so compelling that they are even starting to subsume the brands of major companies. This is an exciting development for Web companies. Take the deal that they did with Recruit -- Japan's biggest recruiter. Here you have Recruit handling at least 70 percent [possibly up to 90 percent] of Japan's fresh college graduates and a lot more business besides. How is it possible, then, that they agreed to set up a joint venture where they supply most of the people and know-how and yet only own 40 percent of the business? All Yahoo Japan did was supply some capital. I thought this was a very stupid deal for Recruit, diluting their brand. But it was a great deal for Yahoo Japan, and it demonstrates the power of a portal.

This trend is happening abroad as well. For example: the affiliation between Toyota and eBay. Since eBay will soon become Toyota's top dealer for both new and used cars, Toyota sought to formalize the relationship. What has happened, though, is that the business is being done under eBay's brand. It's not hard to imagine a point at which eBay demands that Toyota make them cars under an OEM relationship. If Toyota refuses, then eBay can easily go to another maker. The power of the media, especially an emerging one such as the Internet, is clear to see when the gush of customers allows the Web-based business to control a real company with real factories and real products. There is no TV network with the same audience pulling power and ability to convert leads into sales.

Now that you point it out, we see many other similar opportunities.

Right. For example: All Nippon Airways. Already many people buy their tickets online. It's not hard to imagine ANA forming a joint venture with Rakuten -- and in a squeeze play, you eventually will only be able to buy your tickets online through Rakuten. This is going to happen over and over. And we intend for livedoor to be one of the major players.

And that's why you are embarking on an M&A campaign? Why buy ValueClick Japan?

Buy-outs are an important tool in our strategy to increase traffic to livedoor. ValueClick was a fantastic opportunity for us. This is a site with millions of page views a day, thanks to its huge online ad network -- this kind of asset is hard to find in Japan.

But ValueClick made very little money.

Last year was the bottom of the advertising cycle. My view is that if more than 50 percent of the population is going to be on the Internet, it only follows that Internet advertising will recover. ValueClick let us double our page views in one month, so we are now up around 100 million page views a day.

We thought you paid a lot for ValueClick. For a company with only JPY1.5 billion yen of sales, a purchase price of JPY4.2 billion yen appears to be a high premium.

Ah, but you're forgetting the JPY3 billion cash they had in the bank. In fact that deal only cost us JPY600 million.

So you're buying your way into the market. How are you financing your acquisitions?

In various ways -- but mainly from our operating profits. Closing the books for fiscal year 2003, we had sales of JPY20.7 billion yen and profits of JPY3 billion yen. Our sales are double that for fiscal year 2002, when we had revenue of JPY10.8 billion.

We understand that a number of your earlier investments, made three to five years ago, have gone public. How much of your profits come from capital gains?

About 10 percent -- not a significant amount. Most of our results are genuine operating profits.

Let's look at the competition. Apart from Yahoo, who else is on your radar screen? What about Softbank?

Softbank started out with a great strategy and assets, however, Masayoshi's Son's obsession with building out broadband infrastructure has taken his attention away from his core businesses, such as media. This obsession has caused him to pull any remaining spare cash out of the overall business and has left the company vulnerable and unable to make quick strategic investments.

For example, Softbank should have been able to control its relationship with Yahoo Japan better, especially since they owned more than 50 percent of the company. However, a lack of management interest and oversight, then the selling down of Yahoo Japan stock in order to raise cash for the broadband operation, has left Softbank with an asset that they can't do anything with.

Softbank now owns 34 percent of Yahoo Japan. As your readers will realize, this is the minimum level for them to retain veto capability at the board of directors. If they go below this figure, then Yahoo's directors are free to compete as they like. Furthermore, now that Yahoo Japan is independently listed on the first section of the Tokyo Stock Exchange, Yahoo management will have to be very careful to be seen as independent -- thus if Son decides that he has enough infrastructure and again turns his attention to content to deliver over that infrastructure, he may have to compete against Yahoo Japan.

Both we and Rakuten have realized that online finance is a key part of being a portal. I personally feel that banks will not be able to compete online. Son knows this too, but has been unable to follow through on the vision that started with e-Trade and Aozora. Son is now hemmed in as far as online financial services go. On one side there is the slightly antagonistic affiliate and indepen- dently listed Softbank Investment, whose CEO and ex-Nomura man Horie Kitao has a mind of his own and doesn't have any particular allegiance to Son. On the other side is Yahoo Finance, which runs the largest finance portal on the Japanese Web -- and as I said, they are beyond control as well. So really Son has just e-Trade left as an independently controlled asset in the finance space.

You mentioned before that the banks will not succeed online. Can you expand on that?

Most of the big banks are online already, either with banking or stock trading operations. But unlike the real world, where real estate and prestige matters, in the cyber world people are motivated by ease of use, the best deals and better functionality. For conservative financial institutions, these service levels are quite hard to meet. Also, even if a bank does get people to go to its site, all they really want to do is transfer money, as cheaply and quickly as possible. What else can a bank offer, without compromising their risk controls? I don't see the banks being willing to venture out of their traditional business space and become a shopping mall for instance, and thus their impact on the Web will be minimal.

What lies in the future for livedoor?

We will continue with our build out of content, and eventually will have an offering in every sector -- from banking to blogs. We plan to do this by acquisitions, internal development, and assertive marketing.

Our marketing plans will be quite aggressive. Three to four years ago, during the Internet bubble, everyone was advertising to the public, and thus the impact of those ads was not particularly great. But nowadays very few companies are engaging in broad-based marketing. We're working to finish off our content lineup, and when that is done, we plan to really focus on reaching the broader general population and drawing them in to livedoor.

Any ideas for global expansion?

We have some early plans in the works. The business model will be similar to Japan -- starting with developing a lineup of content deliverable over broadband and mobile.     @

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