TT-418 -- Take a walk on the For-side

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, April 22, 2007 Issue No. 418


- What's new
- News
- Candidate roundup/Vacancies
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In a move reminiscent of Livedoor's Horiemon, at 04:00 am
on March 1st this year, mobile content company
announced that it would downgrade its earnings for FY2006
(ending Dec. 31, 2006) to a massive JPY60.6bn (US$51.4m)
loss. The company blamed the result mostly on an
extraordinary JPY71.3bn (US$60.4m) loss on its sale of UK
subsidiary iTouch. For-side's stock price as of last Friday
(April 20th) was just JPY3,780, about 85% lower than a year
ago, and less than 2% of the company's peak back in October

So what went wrong with this once high-flying firm?

Most analysts agree that at the heart of For-Side's
problems have been the twin evils of over-expansion
generally and in particular losing control of their
international assets -- both typical challenges for
Japanese start-ups.

For-side had a great business back in the early 2000's,
while it was still concentrating on its core competency of
creating and selling "chakumero" ring tones and
character-based wallpaper for cell phones. In the financial
statements at the end of 2003, the company reported an
Operating Profit of approximately JPY1bn (US$8.47m) on
sales of JPY5bn (US$42.37m). This was a golden period for
For-side, and the 96.5% year-on-year growth in sales and
123% growth in profits led investors to bid up the stock
price to a market cap in August of 2004 of about JPY200bn
(US$1.7bn). This is when the company acquired Zingy and
Vindigo of the USA for US$80m and US$36.5m respectively,
and iTouch in 2005 for around US$330m.

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[...Article continues]

We can't blame the For-side management for going on their
2003-2005 spending spree -- leading to the firm eventually
having more than 70 domestic and foreign subsidiaries. With
its stock at such high prices compared to earnings, it must
have been a huge temptation for management to buy outside
assets. And while investors may be really sore about it
today, management cleverly raised JPY50bn by issuing
moving-strike convertible bonds (MSCBs), meaning that they
were borrowing money against a future stock value -- which
of course has since dropped through the floor.

The reason for going overseas at that time seemed clear.
The Japanese market was already starting to mature, and
even back in 2003, management could no doubt see that the
evolution of cell phone content was rapidly changing from
ringtones to full music downloads and video. They must have
thought that in going to Europe and the USA, whose markets
are technologically 24-36 months behind, they would be able
to take advantage of the technology lag. Indeed, a news
item in the UK at the time of the iTouch purchase said that
"at a 27% percent premium, [the purchase] will allow to roll out its database of more than 20,000
colour and animated backgrounds, ringtones, Java games and
music and video content for advanced 3G handsets in

While on paper this strategy made sense, things went awry
for at least 3 practical reasons. [Ed: Now, we're
speculating here -- we don't have a hotline to For-side's
management -- but believe we can reasonably draw the
following conclusions:]

Firstly, For-side discovered somewhat belatedly that the
hoped-for technology lag in Europe in the USA also meant
different infrastructure and delivery systems to those in
Japan -- thus requiring a massive re-tooling of their
systems. It is hard to believe that they could have made
this technology blunder, but in their hurry to make the
iTouch bid in competition to fellow Japanese firm Index,
For-side's management is now saying that this was the main
reason for selling off iTouch.

The problem is, given For-side's technical resources here
in Japan, analysts and shareholders are angrily saying
they don't buy this excuse. They think there is a deeper
reason why the company has pulled out of its international

That second reason is probably that the business in Japan
is in serious trouble, and that management decided to
sacrifice a business segment they don't have the resources
to handle is better than losing everything. Credence for
this argument can be found in the fact that the firm's
content revenues have dropped precipitously due to the
changeover by users from Chakumero to full music downloads,
and has been much quicker than imagined.

For-side's management, to their credit, appear to have met
this challenge by creating/acquiring a new financial
business which now accounts for quarter of the revenues and
most of the profits. So, while bloody, management can argue
that their pull-back is rational, and so long as the
domestic business recovers, the anger of investors will be

However, there could be a third and less acceptable reason
for the pull-back -- one which could have been avoided with
a bit of management experience and forethought. From what
we can see of online postings of current and ex-staff at
Zingy/Vindingo, and presumably the same problems existed at
iTouch as well, there was a huge level of frustration by
the overseas non-Japanese management over the lack of
direction and leadership shown by the Japanese head office.
It isn't hard to imagine that this boiled over into
confrontation and threats that head office feared might
spiral out of control.

You can just see the scenario: For-side head office
managers being confronted by their unhappy iTouch senior
staff and being told that if things didn't improve soon,
there would have to be either a favorable (for the foreign
managers) Management Buy-Out (MBO) or the foreign managers
would walk out. Without sufficient bilingual management
resources back at head office, this must have been a scary
prospect for Far-side.

This third possible reason would certainly answer a lot of
questions that analysts and shareholders have been asking
since last year's management bombshell about pending
losses. They have been asking why For-side dropped iTouch
like a hot potato, despite the fact that the UK company
made JPY2.6bn in EBITDA profit on sales of JPY28.6bn in
fiscal 2006, up 63% and 81%, respectively, from FY2004.
They are also no doubt asking why the management of iTouch
were allowed to do their MBO so cheaply, considering the
performance metrics. They got the company for just

So you might think that this proves once again that
Japanese start-ups can't manage their overseas
subsidiaries properly. And we'd agree that there are few
successful examples. Some executive level education on
successful business models is badly needed. All too
often, the tendency for aggressive young Internet CEOs is
to ramp up quickly and worry about the consequences later
-- much like they do in Japan. The problem is that overseas
managers are not Japanese and don't have the same value or
respect systems. This may seem obvious to our readers, but
in practice, many Japanese firms have problems dealing with
such business culture issues.

We'd also point out that the failure of not being able to
run an international business is not just a trait of
Japanese start-ups. We have seen a number of foreign firms
doing business in Japan get held over the same barrel, by
local managers demanding their own terms. Indeed, a mutiny
and the lack of local resources by head office to confront
it is a common reason for foreign firms to call in their
lawyers in this country.

The answer therefore, is for both Japanese start-ups and
foreign market entrants alike to hire local directors or
advisors who are outside the executive team and who are
paid to oversight the local staff. It always surprises us
how foreign firms (Japanese overseas, or foreigners in
Japan) are willing to hand over huge leverage to their
local management teams and skimp on the oversight

Getting back to For-side. Now that they have been burned so
badly, it will probably be years before they venture
overseas again. This is a shame, because the management
appear to understand consumer market trends and we believe
that in the long term they'll emerge from their current
tribulations both stronger and smarter. Witness Hikari
Tsushin and their near melt-down then spectacular recovery.
We think they provide a likely recovery model for For-side
as well. Furthermore, For-side have the added advantage
of ongoing income thanks to their new financial services

When For-side does recover, and if they attempt to once
again go overseas, we hope that they will have learned the
lesson that next time they need to either bring in partners
who can make most of the local investment and take on a
management role, or they need to bring in better quality
local directors to keep everyone honest, communicating,
and headed in the same direction.

Lastly, we'll close with an observation that a Fujitsu
think-tank made about Japanese start-ups and their ability
to operate overseas. They said that because most Japanese
Internet firms are funded by large domestic firms rather
than professional VCs or foreign firms, they lack the
resources and expertise in-house to operate abroad. Thus,
when they expand, they either have to hire people in who
are unknown quantities and who don't necessarily have the
same level of loyalty or commitment, or they make do with
inexperienced internal staff.

Thus, if you plan to invest in the future in a fast-growing
Internet firm with international ambitions, check first to
see who their major shareholder(s) are. If they're
domestic, tread with caution.

...The information janitors/


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+++ NEWS

- Blogging as therapy
- wins Japan Post contract
- Goldman diversifies
- Kyocera ups solar cells by 180%
- Gardens for building rooftops

-> Blogging as therapy

According to the Japan Times, a recent survey has found
that out of all the blog content in the world, the most
blogs are published in Japanese -- not English or
Chinese. Apparently about 30% of all blogs are in
Japanese. ***Ed: The JT article opines that the
reasons for the popularity of blogs here include the
highly literate population, a fascination with gadgets, and
the ability of the blogger to stay anonymous and yet still
speak out and get things of their chest. We'd say that in
the absence of a "counselling culture" in Japan, this last
point will remain a major motivation for blogging for some
time to come.** (Source: TT commentary from, Apr 22, 2007)

-> wins Japan Post contract

If anyone needed convincing of the coming of age of
Software-as-a-Service (SaaS), look no further than the news
that has just won a monster 5,000-seat
contract with Japan Post. This is the largest deal so far
for in Japan, and will be watched with interest by
many other companies looking at the space but who have hung
back because it all looked too hard. ***Ed: We imagine that
this "wait-and-see" attitude will evaporate in the wake of
this deal.** (Source: TT commentary from,
Apr 20, 2007)

-> Goldman diversifies

After impressive successes in early technology investments,
real estate, golf course and hospitality management,
Goldman Sachs is now branching out into less-distressed
firms in the IT space. The company has decided to invest
it's own funds into a 18% share of Usen, the major cable
music and broadband infrastructure company. The stake is
reportedly worth JPY25bn (US$211m). ***Ed: Usen has seen
its share price plummet by almost 70% over the last year,
and this vote of confidence by a proven player should lead
to a recovery of the stock over the next year.** (Source:
TT commentary form, Apr 20, 2007),

-> Kyocera ups solar cells by 180%

Kyocera has said that it will significantly increase its
production of solar cells in response to soarng demand in
Europe and elsewhere overseas. The company said it will
spend an extra JPY5bn a year to increase production by
around 180% to 500MW by fiscal 2010. (Source: TT commentary
from, Apr 18, 2007)

-> Gardens for building rooftops

Real estate developer Tosei has said that it plans to
convert the rooftops of all 50 of its office buildings to
soil-based gardens by the end of 2007. The gardens are
achieved through the use of 1m2 pallets containing
20cm-30cm of soil and only weigh 60kg each. Tosei
reckons that while having a garden on the rooftop
increases building maintenance costs by around 10%, it
also reduces building temperatures by 10 degrees C - 15
degrees C. ***Ed: We calculate that this means that for an
average 30-50-person office, the added cost of a garden
will be approximately a net JPY50,000 a month above the
energy savings. However, we think you can also presume that
the garden costs will come down the longer a garden has
been operated.** (Source: TT commentary from,
Apr 21, 2007)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

-> TT415 -- Dankai retirements. We told how 6.8m people
retiring between this year and 2010 will create some
profound changes in Japan.

*** Our reader says: I enjoy reading your take on the
realities of life in Japan. Picking up on the recent, and I
guess, ongoing reports about the retirement of baby boomers
en masse, I have personally observed a very visible and
presumably significant change to people's daily routine
here in Kyushu. I refer to the traffic patterns on the
expressways, which I travel on a regular basis.

Before April 1st this year, there used to be long queues of
commuters between 08:00 and 08:30am most days at certain
bottlenecks on the expressway. But on not one day in the
last 2-3 weeks have we seen anything like a traffic jam.
Indeed, from our casual observance, it looks like the
expressway heading into Fukuoka city is carrying about
half the traffic it did pre-April.

Curious as to the reason, I asked our daughter to spot
drivers for a little while each morning, and see what
types of people are driving. She came back with the
surprising (or perhaps not?) report that hardly any of
the motorists were 50+ drivers. Is this to do with greyfall
dawning (a la global warming?!) or are we missing something

*** Our response: Have your daughter do the spotting on the
last couple of business days in the month, when traffic all
over Japan is heavy with company workers delivering goods
and invoices before the month closes out. If the trend you
saw persists, then it's probably safe to say that you have
a lot of Dankai generation people in your neighborhood!

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