Back to Contents of Issue: September 2001

A fresh look at some of the ventures we've covered in the past -- where are they today?

by Michael Thuresson

JAPAN' LACK OF NET infrastructure has helped lead to an exploding wireless Web market and steady domestic PC sales at a time when the US economy is reeling from a dramatic slowdown in IT spending. Financial warnings from PC manufacturers were a major factor in the Nasdaq fallout last spring, as PC shipments declined over 8 percent in 2000 and about 1 percent in the second quarter of this year, according to International Data Corp. Meanwhile, Japan's PC shipments shot up 30 percent in 2000 before flattening to near zero growth over the second quarter. A report from the Japan Electronics & Information Technology Industries Association, though, predicts domestic PC shipments will rise 12 percent this year.

Macroeconomic problems, combined with this spring's global IT slowdown, have dogged some domestic B2B players. "I didn't foresee the downturn in the Japanese economy. That's been disappointing because it worsened the small to medium-sized business (SMB) spending environment," says Mahendri Negi, COO/CFO of SMB Net solution provider ipTrend, a venture we profiled in April.

While ipTrend waits for Net infrastructure to develop, Japan's B2C-oriented wireless Web has zoomed ahead of the world. There's a unique relationship between Japanese consumers and their cellphones, and foreign companies continue to watch this romance closely. eMuse Technologies, an Irish digital media services provider, merely watched Japan's i-mode phenomenon until July, when it acquired I-Chara, a provider of intelligent agents for the mobile Web (see "Social Engineering," November 2000). Helped by the technology and industry connections of I-Chara, eMuse now aims to offer content for Japan's current 2.5G and upcoming 3G networks.

Keeping with the mobility theme, Technoweb is a venture that swiftly moved from the educational ASP business to developing content. The venture firmly believes content is king -- and this clichŽ rings especially true in Japan's low-bandwidth Net scene.

Most large enterprises in Japan are wired for e-commerce along the lines of their US counterparts. Softbank and US B2B e-commerce software maker Ariba partnered last year to serve this market. However, statistics show SMBs lagging far behind (see "Bento Box InfoTech," April 2001). ipTrend was poised to jump on this opportunity with its turnkey Net solution that includes server, security, and network services for a low monthly fee (starting at ¥28,000).

However, independently entrenching itself in Japan's IT channel was too difficult a challenge for the startup. ipTrend will in the next few months become the Broadband Security Business division of parent Trend Micro (Nasdaq: TMIC), a leading security solutions provider.

This is a good place to be and a sensible move, though admittedly this magazine didn't foresee such a scenario unfolding. Trend Micro is a household name in IT business, and the company enjoys firm relationships with major channel distributors and dealers. The channel holds the key to SMB relationships, and ipTrend found it very difficult to convince major players like Fujitsu/Xerox to sell its solution. "Penetrating the channel in Japan has a lot to do with credibility. Trend Micro has been here since 1993, and for us to wait for Fujitsu to be comfortable enough to dedicate enough sales people for ipTrend, that's like reinventing the wheel," says COO/CEO Negi, who is also CFO at Trend Micro.

ipTrend tried to sell distributors on the potential for add-on services and the cost savings of getting SMBs online. The savings generated by utilizing ipTrend's proprietary technology, a real-time remote network monitoring tool, seems obvious enough -- this directly translates into time saved from visiting customer sites. Then, according to Negi, there's the possibility for consulting services after the ipTrend product is installed.

The short-term thinking, revenue-minded distributors had a tough time realizing this, and Negi says he also discovered that SMB owners were very cautious about getting online. Without the handholding of the trusted distributors leading them into e-commerce, he says, most SMBs won't make the jump.

One only has to look at US-based Ingram Micro, the world's largest IT products distributor, to witness the realized potential of B2B e-commerce in the SMB channel. The distributor did over $6 billion in revenue via its Web-based ordering system last year, not a small portion of which was in the SMB market. "In Japan, that's zero. It's a relationship-driven business, and B2B e-commerce doesn't exist. The infrastructure isn't there," says Negi. He says a push from above will be necessary for SMBs to get online, making the move to Trend Micro all the more natural.

While ipTrend is a cautionary tale for B2B startups in Japan's channel, Negi doesn't rule out an eventual spin-off of this business. To be sure, as Japan's Net infrastructure continues to mature, the future looks bright for selling SMB solutions.

Technoweb wanted to avoid having its educational ASP business replicated by a larger competitor and then watching itself get sqeezed out because of market share. Indeed, we overlooked the consolidation trend of the ASP industry in our initial coverage. Worldcom, for example, acquired controlling interest in ASP Digex last year for $3 billion. Technoweb managed to avoid this fate by cautiously shifting its business toward content development.

The company figured it's harder to copy a writer's thoughts than a programmer's code. "With a software system, it's difficult to differentiate yourself from others," says president Tetsushi Tokunaga. "We must focus on being unique and interesting, and content is the best way to do that."

Staying off the radar screen of competing technology companies was one motivation, but the main factor is that Tokunaga is a unique and interesting businessman. Soft-spoken, well-educated (Wharton MBA), and fluently bilingual, the entrepreneur realized his own expertise was his business's greatest asset.

Major problems with the ASP product weren't a reason for the change of focus, either. The company achieved its stated revenue goal for the fiscal year that ended in March. It did this partly by achieving its other stated goal of getting 430 rental subscribers for its e-courseware solution from vocational schools, English language institutions, and company training programs.

The main revenue generator, though, has been ESL content development (accounting for some 80 percent of revenue for fiscal 2000; the remainder was ASP and consulting business), and the company has become profitable. Due to his background, Tokunaga has found great demand for his perspective on demystifying the English language. "Most Japanese are not satisfied with their English conversation schools and their language development. They're frustrated because they don't feel any improvement," he says.

It's hard to argue with him. For a country that seems to have an English conversation school on every other street corner, there's a striking lack of English-speaking Japanese. The reason is that most Japanese studying English are very shy about speaking it in public. They almost never speak it outside the classroom and therefore don't improve much. The consequence is that there's an almost unquenchable thirst for ESL learning in this country.

Prudently, Technoweb's contents are entirely focused on ESL training, with the company offering its nine-course curriculum at ¥50,000 per course. Each course is Web-based and supplemented by newsletters, personalized Q&A's, and videotapes, all of which are produced in-house (mostly by Tokunaga himself). The company draws traffic to its site largely through Tokunaga's vast network of contacts and sales of his new English education book, which hit the shelves in May at major bookstores in Japan. The retailing of his book, the title of which can be roughly translated as "There's a Reason You Don't Improve Your English," has been a key promotional tool. Over 20,000 copies had been sold as of early July.

The book, with its great marketing value, will probably play a big role in Technoweb's maintaining profitability and avoiding the need for venture financing. Tokunaga cites the need for complete editorial independence and the comfort of having complete ownership as the biggest reasons for his decision not to seek funding. In the future, he plans to expand into other English content offerings by partnering with more Western providers. Japan market entry, corporate marketing, and CD-based multimedia are all planned activities that will necessitate more partnerships. That being said, if Technoweb wants to grow, how deep can the company pockets go to finance it, and how much networking and bookmaking can one person do? After our previous article ("Technoweb Targets Education Providers," May 2000), several VCs approached Tokunaga with likely the same questions.

Foreign investors must have great scouting abilities to unearth good ventures in Japan. While significant foreign VC money has been pulling out of Japan recently (see J@pan Inc Newsletter, No. 137), the need for foreign investment remains strong. Dublin-based eMuse, after scouting the Japanese mobile Web market for some time, took a good look at Tokyo-based I-Chara's character-based, intelligent Web agent technology (as featured in this very magazine) and decided it was a good find. I-Chara was still at a pre-revenue development stage as of eMuse's July acquisition, and its service still targets NTT DoCoMo's i-mode content offerings. The company has conducted a beta test of its product with the network operator since we last spoke in October 2000. eMuse now aims to launch a non-Java version of the service later this year before launching a Java handset version.

eMuse brings I-Chara into its extensive portfolio of content offerings for the mobile Web, which can be assumed to have not found a very good home on Europe's consumer-unfriendly WAP networks. Their contents include characterizations such as weathermen, cartoons that provide personalized ESL lessons, fortune-tellers, and other characters that fit the profile of I-Chara and Japan's fun mobile Web. According to I-Chara, eMuse's interest follows a trend of European wireless content companies looking to Japan for business. "After the failure of WAP, we've had a lot of contact with European companies," says Kim Binsted, former CEO of I-Chara and now CTO at eMuse K.K.

In general, the Japanese have been very touchy with anything revealing personal information on the Web. "DoCoMo has a policy against P2P sites, though that's breaking down somewhat with other P2P sites coming into i-mode," says Binsted. This and DoCoMo's current price-per-data-packet rates, which make I-Chara's animated agent service a pricey download, are two significant problems facing eMuse.

The business ultimately relies on the proliferation of Java handsets, which possess greater onboard processing capabilities and will reduce the need for the network to transmit these larger bits of data. This happening with the Java-based 2.5G and eventually 3G handsets would be a major catalyst for eMuse, offering more proof of DoCoMo's vast influence over the fortunes of would-be content providers.

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