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December 1999 Volume 6 no.12

Net Year 1999: A time of change, challenge, and choice--
The Computing Japan 1999 year-end wrap-up

by John Boyd

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Broods of new Internet companies sprang up and proliferated in Japan throughout 1999, befitting their zodiac sign: The Year of the Rabbit. Established businesses, meanwhile--with Softbank being the outstanding example--burrowed ever deeper into the world of cybernetworked warrens, creating new e-commerce services--even an electronic stock exchange. It was also the year the Internet rocked to the sound of digital music. And the year the Net lost its innocence among ordinary Japanese folks, as citizens unreservedly exploited the Web's promiscuous reach to excoriate misbehaving corporations and public authorities, before the gawking eyeballs of a titillated nation.

The number of Internet users in Japan topped 15 million last February, a year-on-year growth rate of almost 50%, according to a survey by Tokyo-based market researcher Access Media International. This annual count projected the number of users would reach 18.5 million by the end of the year, and exceed 20 million in 2000.

Stellar growth
Such is the desire of newcomers to get on the Net that PC sales are once again on the rise, despite the best efforts of a recalcitrant economy to keep the breaks on shipments. IDC Japan reports that consumer PC shipments consistently beat quarterly estimates during 1999. And by mid-year the consumer segment accounted for roughly 40% of all PC shipments, a ratio unequalled anywhere else. The two major drivers of consumer demand? The Internet and e-mail.

With a respectable number of users and so many fine companies now active on the Net, why, many ask, is Japan lagging behind the US when it comes to shaping the Internet and the electronic economy that's springing forth from it? Guesstimates put the US three years ahead here, while a MITI (Ministry of International Trade and Industry) projection has the US e-commerce market generating around JPY180 trillion in revenues in 2003, verses some JPY71 trillion for Japan.

The answer to that question is complex and open to interpretation. Nevertheless, though producing the world's second largest economy, it is clear that Japan has several fundamental hurdles to clear first, before it can hope to assume a leadership role in the new Internet economy.

NTT fees
A favorite whipping boy of most is the high communications costs both business and consumers face. This is something most everyone complains about, says Noburu Kotani, a senior manager in NEC's e-commerce business division. "And the more users stay online, the more it costs. So of course it's a problem."

Such criticism is echoed by none less than MITI. Liberalization in the telecom industry has seen new competition force NTT and KDD to cut fees, agrees Kazuyuki Motohashi, director of MITI's information and public affairs. "But charges for local services remain high," he wrote in the Japan Times in October. "And NTT's dominance of this 'last one mile' of the market poses a serious obstacle to Internet use among Japanese consumers."

Yet given the rivalry between MITI and its arch foe, the Ministry of Posts and Telecommunications, which overseas NTT, is the criticism being exaggerated for political reasons? Koji Nagatsuna, an e-commerce analyst with the Gartner Group Japan, says, "High connection charges are used as an excuse. They are not the big issue everyone tries to make out. Ten yen for three minutes is not big money."

Perhaps, but like snowflakes such charges can quickly mount up. Tom Sato, cofounder of Bargain America, a purveyor of US catalogs and goods to Japanese Internet users, says, "When you spend some time on the Internet, and you get a bill for JPY10,000 or JPY20,000 a month, you quickly change your ways the next month."

Still, it's curious how the same high telecom fees are not preventing e-companies that have something special to offer achieve success, which suggests additional factors are at work.

A more fundamental problem, argues Nagatsuna, is that too many would-be e-companies lack vision. Major corporations have, he concedes, established online networks between themselves and suppliers to facilitate supply chain management. But he is critical when the same corporations refrain from moving to the next level of integration, and allow full information sharing between all the entities composing the supply chain.

Compare that cautious approach to Dell Computer, now the biggest PC vendor in the US and number two in the world. Dell is rapidly integrating the Internet into its internal and external operations, and sees the sharing of information as the key to a successful transition into the new economy.

"Information and intellectual assets are replacing physical assets," says Indraj Gill, marketing director for Dell Japan. "You get into a more collaborative mode with partners, buyers, and customers. We're aiming at a virtual integration model, where Internet links speed the information between one party and another."

By doing so, Dell is not only able to optimize the delivery of goods and services to its customers, but it has also slashed inventory to just six days' worth. This whole-hearted adoption of the Internet contrasts starkly with the narrow mindset of too many Japanese corporations, which still view the Net with suspicion. "A lot of our Japanese customers, for example, don't even have everyone having Internet access," says Gill. "Because they think everyone is going to get on the Internet and waste their time."

The same lack of vision may also be missing in the business-to- consumer sector. Gartner Group Japan's Nagatsuna is equally down on merchants who take a 'build it, and they will come' approach to e- commerce. "They put their products on the Web and hope everyone will visit," he chides. "But you need (to offer) interesting products you can't easily buy in the real world. And you need bulletin boards, chat services, and newsletters to keep bringing customers back."

He does have a point. Why bother ordering a popular book or music CD online, then wait for it to arrive, when you can pick up the same at several stores close to your neighborhood railway or subway station? Prices, too, will likely be the same, given the laws restricting the discounting of protected items like books.

Buying in cyberspace also remains a stretch for many Japanese consumers that are more comfortable living in what is still very much a cash-based society. While the use of store credit cards is on the rise, dealing in hard cash wins out easily over depending on invisible credit. And such reluctance is only heightened, when the Tanakas next door are convinced, through the purple prose of the press, that cyberspace is awash with hacker pirates looting lists of credit card numbers on a daily bases.

As a result, innovative Japanese companies (see "Out with the Old, in with the New," in the December 1999 issue of our sister publication, J@pan Inc., at http://www.japaninc.net--Ed.) are coming up with hybrid solutions that allow customers to order online, yet pay in traditional ways. One such pioneer in the convenience store business is Lawson, which installed proprietary online terminals in all its 7,200 outlets in 1998. Customers can freely browse an exclusive electronic catalog, placing orders for such items as sports and concert tickets, computer software, music CDs, and discount travel package tours--yet pay for them in the store.

Rival 7-Eleven, Japan's largest chain of convenience stores with 8,000 outlets, is hardly standing idle. It is forging a two-tiered strategy to exploit the growing interest in e-commerce. On the one hand, 7-Eleven has become an active investor in online startups, including e-Shopping Books (a joint venture along with Softbank and Tohan) and CarPoint, an online auto broker established in March by Yahoo! Japan, Softbank, and Microsoft.

 

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John Boyd is a freelance technology writer in Tokyo.
Contact him at boyd@gol.com.

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