 Free ISPs in Japan have never really been free. Even when there's no charge for the ISP portion of a dial-up connection -- a free ISP -- there's still the amount NTT charges for the phone call, usually about ¥10 every three minutes. So users are not only bombarded with the ads needed to support the free ISP company, but they're also nickle-and-dimed by NTT.
Being "free" isn't so great for the ISP, either. Its primary source of revenue comes from advertisements, and that revenue is barely enough to support the huge system costs. Many free ISPs in this country are in trouble; some have disappeared already, some have started charging customers.
FreeBit.Com has come up with a new approach. Users, instead of calling a local number for which they're charged ¥10 per every three minutes by NTT, call a toll-free number -- and are charged about the same amount by FreeBit.com. So ... what's the savings? There isn't any. At least not for the user, for whom the "free ISP" service still charges by the minute. There is, however, a savings for FreeBit.Com, and that's the trick. The company has to pay NTT to keep the toll-free (0120, in Japan) number running, but the amount it's charged is below market rate. FreeBit.Com's primary source of revenue, then, is not advertising, but the difference between the market rate and the discount rate for every three minutes of connection time. It's a new business model, and FreeBit.Com is trying to patent the related technology. The other angles to this model are that 1) FreeBit.com isn't actually a free ISP itself; it offers its system to free ISPs; 2) It's developed a way to use less NTT circuitry (for a savings); and 3) It handles the billing itself.
The man behind the plan is founder and CEO Atsuki Ishida, who's been around the ISP block before. Earlier he was CSO of the dial-up ISP Dream Train Internet (DTI), where he helped earn it the top customer satisfaction ranking several times. Associate editor Kyoko Fujimoto met with Ishida in his office in Shibuya and asked about his childhood influences, how he became involved in the DTI project, how he made DTI tops in customer satisfaction, and how his new free ISP can survive.
The first company you established was Reset, an Internet consulting company, which you founded when you were still a student at Keio University's Shonan Fujisawa campus. Did attending that university spark your entrepreneur spirit?
Not exactly. I had wanted to do something with computer networks since I was a child -- right after I saw the movie War Games in the early '80s, to be exact. I was still an elementary school student at that time, but the idea that computers could be connected to the world seemed so incredible. There was no concept of a "network" in Japan at that time, but someday I thought I'd like to do it. When I was about 12 years old, I got my first computer, and I gathered some of my friends to organize a team to develop computer games. The one who liked writing made the story, the one who was playing music made the background music, and I was doing programming. It was fun organizing a team, and fun to complete a whole project. Then we contributed some articles to magazines and got some contribution fees. It wasn't big money, but for small kids like us, it was still an exciting amount. Then the PTA complained that making money is a bad thing and they prohibited us from doing it. I really wanted to do it, but they said it wasn't appropriate for young children. I was just an innocent boy, and thought what they claimed was bad must be really bad, so I stopped. But think about it -- Bill Gates got a computer from the PTA when he was a high school kid. The environment in Japan is so different.
So you actually gave up on it?
Yes, and I didn't use a computer for a while. Then, when I was in high school, I happened to write a letter to Mr. Akio Morita, the founder of Sony. It was just a letter of complaint -- I was unhappy that the salesperson at the Sony shop didn't tell me a new model of camcorder would be coming out a few weeks later, and I was led to buy the old model. I thought Morita-san was a great guy after reading his book, Made in Japan, so I thought he would understand how I felt. I sent a letter to the address that was on the camcorder, addressing it directly to Morita-san. Then, somebody from Sony visited me with Morita-san's reply in hand! In that message, Morita-san was saying, "The network [communication] era will be here soon." I was so impressed, and I remembered the movie War Games, and that made me decide to go to Keio SFC. I entered in 1993 and experienced the Internet for the first time. At that time there was no Netscape or Mosaic, and what we did was send email based on commands or get files from somewhere. But I thought this had a lot of potential, and I decided that this is what I wanted to do for the rest of my life. I organized a student group called "Know Well," and started doing some consulting for companies trying to use the Internet, but since it was just an organization among students, it was tough to do any kind of business with corporations. So I established a company in 1995 and named it "Reset."
How did you become involved in DTI?
Reset got a lot of attention at that time, and Mitsubishi Electric, the parent company of DTI, was just about to go into the Internet business for consumers. They found us and asked us to help them out. Actually we wanted to do our own business, not theirs, but we figured we didn't have the funds, and Mitsubishi said we could do things our own way, so we decided to join their project. In the mid '90s, there were only two extreme types of ISPs in Japan -- one that offered high quality service with a very expensive monthly fee, and the other that offered plans with a low monthly fee but with a bad connection. ISPs thought of themselves as telecom companies, not service companies, which meant that they didn't have good customer service. Also at that time, Internet users were thought to be experts on computers, and if something happened, people were expected to read the manual and solve the problems themselves -- the trend was "if you can't read it, then don't use the Internet." So, DTI was the first ISP that took the position of being a service company. We offered a reasonable price with good quality and complete support.
So, that led DTI to be the ISP with the highest customer satisfaction (voted Best ISP in Japan by Yahoo Japan, for example). What exactly did you do to be in that position?
First, we told our users everything, including problems. We had a support BBS on the Web site in addition to regular phone, fax, and email support systems. That was for everyone, so everybody could see other people's problems. I was taking care of this site myself, and if I found a message at 2 in the morning, I would respond to it right away. Also, when users requested something, we, the management team, told them if it was possible or not. If we said it was possible, we definitely did it. Regarding the quality, we really focused on a good connection -- if you pay for the ISP and never get connected, many people get frustrated. There was a time when we couldn't catch up with the growing number of users and were worried about poor connections. At that time, we decided not to accept new users until we upgraded our system; instead, we knew that the bad connection happened only at nighttime, so we just let those who applied for our service use it for free in the daytime.
Then you left DTI in March 2000 and established FreeBit.Com last May. I read somewhere that you left there because your contract with DTI was finished. What was that contract about?
That contract was between Reset and DTI. Even though my title in DTI was CSO at the end, I was never an employee of DTI. The whole thing was between Reset and DTI. The reason why we did it that way was because if Reset was to become a subsidiary of Mitsubishi, Mitsubishi was so strong that I don't think we could have done whatever we wanted to do, like we did as a separate company. I would've had to pay more attention to what the top would say, then wait for their OK sign. That would have slowed down everything. DTI went in the black in two years -- that's rare for an ISP. We were rated the best in customer satisfaction in the third year (1998), then went IPO last year. DTI started with an investment of ¥300 million from Mitsubishi, and we raised its value to ¥60 billion. We were supposed to help "start up DTI," so we figured then that the startup period was over. Now it has become like a direct subsidiary of Mitsubishi, which means they'll have more control, and the way big corporations do things will be different from ours, so I thought it was a good time to return DTI to Mitsubishi.
I'm sure your business model -- breaking into NTT's ¥10/3min. -- got a lot of attention.
Yes. That was tough. But I usually don't give up on things, and if there is something that I don't understand, I won't rest until I find the answer for it. For telecom carriers like NTT, ISPs are their great source of income. You may only use the phone for 10 minutes of phone conversation a day, but if you are an Internet user, you use the phone for hours on top of that. In a way, we are helping them, so we should be able to get cash back. Economists and politicians all say NTT's fee is too expensive and it should be lowered, but people just complain about it and don't offer any solution. So we told them what we could do, showed them how it could be good for them as well, and then we got the deal.
So, your solution for them was to charge the phone costs to individual users yourself instead of NTT charging them?
That's one thing, but the main thing was our system. Usually when we use the phone, we have to go through two local circuits, which means we are paying access charges twice. So we developed a network to skip one circuit to reduce costs. And then, as you mentioned, there comes the fee collection system. We've used NTT's "Free Dial" (toll-free) system to allow users to call us directly, and later we charge the individual users by recognizing the numbers that they made the call from. So NTT can charge us for the Free Dial as a whole, and we can charge each user. In order to charge them individually, we developed software that recognizes where the call is made from and for how long, and automatically calculates the bill. This system is the first in the world, and we have applied for a patent for it.
To be exact, we are not getting actual cash back, but we get a lower per-minute rate from NTT and sell the connection at the regular rate. This is how we make money. From my previous experience, I knew how much the network system would cost to run an ISP, so I didn't think free ISPs that depend only on ad revenue could survive.
You get ad revenue as well, right?
Yes. It's better to have various sources of income, so we do make advertising revenue, but basically, we can go on only with the phone charge part.
You've also started a regular ISP service. What's the purpose for that?
A free ISP was just a part of what we wanted to do, which was to get non-Internet users to experience the Internet for specific purposes. But as users experience it for some time, they start to think about using it more and want to have flat rate phone service. So we thought about an affordable flat rate service using ADSL's technology, under our own brand name ReSET.JP. In the US, people already have flat rate service, and ADSL is for people who want more speed. But in Japan, ADSL can be a way to get both the flat rate service and the speed. In other words, some people may want just the flat-rate service with a more affordable rate than the high-speed ADSL rate. That's why NTT's "Tele-Hodai (all you can call)" service is popular (Note: The service allows you to call two local numbers as much as you like from 11pm to 8am for ¥1,800/month). So we've come up with a new ADSL service. The regular ADSL providers offer about 512-Kbps to 1.5-Mbps speed services for around ¥5,000 to ¥8,000, but we first focused on the flat rate part, and our ADSL service offers 256 Kbps of speed for ¥3,950. If the user wants more speed, when downloading big files, for example, he/she can switch to 1.5 Mbps of speed on demand for an additional ¥5/min. But the maximum for that kind of use is a total of ¥5,500/month, so it's no more expensive than using a regular ADSL service. We have special software that allows users to switch the speed.
What's your strength?
We offer not only a network but many different areas of service -- contents, server, software, charging system, and support -- that are needed for being an ISP. And we offer a specific type of service based on each brand. The Nikko Securities brand, for example, may have elderly users who want to use online trading, so we have a bigger support team for that brand. We try to offer everything, so we can be in charge of our service as a whole. If the support, the network, and the server are handled by different companies, we can't tell where the problem occurred. If we can't be in charge, that's not "service." That's what I learned while I was at DTI. I am proud of the best customer satisfaction ranking that I got at DTI, so I don't want to ruin my reputation.
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