The Weaknesses in Japanese Internet Companies

Weaknesses in Japanese Internet Companies: What the Livedoor Scandal Didn't Show

The recent drop in stock prices for Internet companies-the companies that form the core of the emerging net market in Japan-was provoked by the following commonly held belief: “Not just Livedoor but all Internet companies, , use the capital market to split stocks and take over other companies in order to grow.”

It was this kind of thinking that not only threw Internet company managers into despair, whom had just succeeded in recovering from the disastrous images of Internet companies after the Internet bubble, but it also discouraged many venture capitalists, analysts, and others related to the Internet market. This belief also led to cautionary voices regarding Japan's backwardness in financing and IPOs. When viewed in the long-term, however, there is a strong possibility that this misunderstanding will fade with time, just as they did after the bursting of the Internet bubble.

If there are to be doubts about the future potential of Internet companies, then these doubts are not related to the Livedoor scandal. In this paper I wish to point out the weaknesses of Japan's Internet companies.

Weakness 1: Dependence on Major IT Companies

The first major weakness that many Internet companies suffer from is their reliance on existing major IT companies for investment and product sales. To investigate this problem, a survey was conducted on Internet companies in Tokyo in 2004. The survey examined where individual Internet companies received investment from, and what kinds of companies formed their target sales destinations.

The survey revealed that only 26% of investment in Internet companies came from venture capital, whereas 71% came from general business companies (the remaining 3% came from individual “Angel Investors”). Further, almost 70% of investment by general business companies came from so-called major IT companies. Additionally, the survey on sales destinations for Internet companies revealed that fully 73% of sales to companies came from major IT companies.

Of course, for a companies' long-term capital strategy, it is obvious that investment from general business companies is much more advantageous than investment from venture capital, which aims for short-term capital gains. Additionally, considering the nature of Internet companies' business, there is also no problem with major IT companies accounting for the bulk of a company's sales.

If we look at the relationship of major IT companies to Internet companies from a slightly different point of view, however, we can also grasp the very conventional nature of this relationship, one in which subcontracted Internet companies are controlled by the major IT companies. In other words, there is a strong possibility that the future of the new business frontier known as “Net Business” that is being taken on by Internet companies will be largely at the mercy of the business performance of Japan's major IT companies, which are widely regarded as lacking competitiveness in the global market.

Moreover, it is also likely that these major IT companies will view Internet companies as nothing more than subcontractors. This could cast a shadow on the very independence of Internet companies. It is highly likely that the development of the majority of Internet companies will be hindered by their dependence on major IT companies as the providers of financing and work orders.

Weakness 2: Local Structure

The second weakness of Internet companies is their locally oriented structure. This is closely connected with the first weakness of Japan's Internet companies. The survey introduced above makes it clear that there are almost no overseas companies included within the investors in Japan's Internet companies and those companies that account for the majority of Internet companies' sales.

When we consider that not only Internet companies but the majority of fast-growing companies receive investment from overseas investors and carry overseas sales routes, the doubts concerning the future potential of Japan's Internet companies-which are dependent exclusively on local markets-are even more tangible.

Moreover, Internet business means that there is no need for physical bases. Thus, fundamentally, Internet companies should be able to expand globally with little difficulty. In spite of this, the fact that Japan's Internet companies have still not been able to acquire global financing and expand their sales routes is cause for concern.

What Japan's Internet Companies Should Do

It goes without saying that the new business frontier given birth to by the Internet is expanding rapidly. It is also common knowledge that, now as ever, the number of ideas that should become reality via the Internet far outnumbers the number of existing companies and potential entrepreneurs.

The pattern of new technology producing new services, which in turn leads to the creation of further derivative services, will likely continue for a while yet. Additionally, as we learned from the diffusion of the concept of Web 2.0, which highlighted the importance of incorporating The Long Tail, it is certain that the number of users of Internet business will also continue to grow. For this reason as well, Japan's Internet companies clearly have plenty of room to grow, even if they continue to depend on major IT companies as before and focus only on conducting business in the domestic market.

However, the competition between domestic Internet companies to will grow more intense. In order to rise above future competition, managers of Internet companies must strive to investigate and overcome the above weaknesses that shackle Japan's current Internet companies.