Mr. How Son Captured Japan's Internet Economy
By Neel Chowdhury

(FORTUNE Magazine) – Having made his name as one of the savviest investors in Silicon Valley and piled up billions of dollars in paper profits along the way, Masayoshi Son is back home in Tokyo with even bigger dreams. His aim: to build an Internet zaibatsu--a 21st-century online counterpart to the sprawling industrial giants that tower over Japan's corporate landscape.

He is well on his way. Son's Internet empire already includes an Internet portal (Yahoo Japan), currency sales (Forexbank), insurance (InsWeb), an auto retailer (CarPoint Japan), a neighborhood directory company (GeoCities Japan), a stockbroker (E*Trade), a toy store (E-shopping Toys Japan), and a stock exchange (Nasdaq Japan). Mahendra Negi, a technology analyst at Merrill Lynch in Tokyo, estimates that Son owns 70% of Japan's Internet economy--a dominance that is sweet revenge for a man who has felt ostracized by Japan's corporate establishment because of his Korean ancestry. Today Son flaunts his outsider status like a badge of honor, boasting that it emboldened him to do things differently and beat Japan Inc. online.

Son made his name--and an estimated $20 billion--by slick speculation in Silicon Valley startups, taking stakes of up to 30% in stock market winners like Yahoo, E*Trade, GeoCities, and In Japan he is doing things differently. His flagship Softbank Corp. holds a majority interest in nearly all its investments. With a dozen startups under construction, Son must now prove that he is as skilled at managing companies as he is at investing in them. If he fails at that, his dream of creating the first postindustrial zaibatsu will be lost in cyberspace.

In Son's master plan for Japan, Softbank will eventually become a pure holding company. Yahoo Japan, 51% owned by Softbank, is the critical element in his imperial dream. Almost 85% of Japan's 17 million regular Internet users have visited the Yahoo Japan Website, making it the country's most popular Internet destination and most powerful cyberbrand. More important, it is a gateway to Son's e-commerce sites, where he hopes to make real money by selling toys, news, books, music, jobs, stocks, bonds, insurance, or foreign currency.

He has few competitors. Japan's major corporations have so far failed to make much headway in online software or e-commerce. Son figures they are at least ten years behind, slowed by hierarchies that can't cope with the Internet's democratic, visionary culture. Softbank itself is no freewheeling California startup: Despite Son's casualness, a very Japanese sense of propriety and decorum pervades the company's Tokyo headquarters. There is only one nose ring in the place, and none of Son's Japanese managers seem apt to challenge the boss. Still, Son's massive head start makes his nascent Net-batsu a potential powerhouse--and an appealing buy. Softbank's stock price has risen almost fivefold since the end of last year, vs. 25% for the Nikkei index, Japan's Dow.

The outlook wasn't always so rosy. Though Son styles himself a general, until the Internet came along he was a grunt in the technology wars. Returning to Japan in 1980 after graduating from UC Berkeley, he had $1 million in his pocket from a patent for an electronic organizer he had sold to Sharp. His early business moves seemed more opportunistic than visionary. After founding Softbank in 1981 as a distributor of PC software--it's now an industry leader--Son branched out into media, successfully launching Japanese computer magazines.

He made his first big international splash in 1996, when he bought U.S. computer-magazine giant Ziff-Davis for $3.1 billion. That deal now looks like a dud. In the fiscal year ended in April 1998, Ziff-Davis' sales fell 4% and it lost $78 million. Son is trying to sell it, just as he rid himself of Kingston Technology, a money-losing chipmaker he could not turn around.

Ziff's poor performance and Softbank's ever-increasing debt kept the company's stock in the doghouse through much of the 1990s. The record at Ziff-Davis also hints at a serious problem: When it comes to the nitty-gritty of running a company, Son's track record is spotty. Only his success at picking Internet winners has bailed him out. For example, in 1996, at the behest of editors at Ziff-Davis, Son bought 30% of the fledgling search engine Yahoo for $100 million. Today Son's 28% stake in Yahoo is worth $8.4 billion.

Son's speculative success nullified the importance of Softbank's debt. today the debt is tiny (about $2 billion, including convertible bonds) compared with the value of its U.S. Internet holdings. Son's U.S. experience has shaped his vision for Softbank in Japan: He sees it as an Internet octopus with tentacles reaching into every crevice of e-commerce. "I've gone to the future," says Son, referring to Silicon Valley, "and now I'm bringing it back to the past"--Japan. Taking a page from the Valley's book, he is financing his blitzkrieg through the stock market, even when his ventures are cyberembryos. Yahoo Japan was founded in 1996 with startup capital of roughly $3.5 million; it debuted on Japan's over-the-counter market less than a year later. Its market capitalization today is $1.5 billion. The journey of Pasano Softbank, an online job board, was almost as fast. Founded by Son in April 1996, Pasano had its IPO on Japan's OTC market last June and is now worth more than $300 million.

Piling up paper fortunes from flashy IPOs may be relatively easy, but Son knows how difficult it is to make money from operations on the Net. Therefore, he is testing a variety of Internet business models. Yahoo Japan, for example, sells advertising, and it managed to turn a profit almost immediately. In 1998 it made $15 million, a jump of 167% over the previous year's net, on sales of roughly $160 million. It helps, grins Masahiro Inoue, Yahoo Japan's CEO, that "we have no real competition in Japan."

A far riskier way to make money is through e-commerce. That is where Son faces his toughest battle. Most of the goods Son plans to sell over the Internet, starting in the next three to six months--toys, music, used cars, and books--are aimed at middle-class consumers used to shopping in department stores. Son can lure them online by selling cheap, but price cutting can ravage an Internet company's bottom line.

Softbank's greatest financial opportunity on the Internet might lie in middleman services such as stockbroking. Son is already generating revenue--though no profits--by selling stocks, foreign currency, and insurance online. The pickings look rich. Japanese households have trillions of yen in low-yielding savings accounts. The ongoing deregulation of Japan's financial-services sector (dubbed the "slow bang") could unlock those assets. Merrill Lynch Securities in Tokyo estimates that total revenues from online brokering, foreign exchange, and insurance services could reach $6 billion to $7 billion by 2002. Son is dipping into that money pie with stakes in four financial-services companies already doing brisk business on the Net--E*Trade, Morningstar Japan, Forexbank, and InsWeb Japan. If Son builds his zaibatsu, he stands to make more billions. His personal stake in just three of his listed Japanese companies (Softbank, Yahoo Japan, and Pasano Softbank) is worth roughly $2 billion, and he has large personal stakes in others as well. More important, he will be in a position to dominate the technology of the future in the world's second-largest economy, an awesome prospect. By extending its tentacles throughout Japan's Internet economy, Son's octopus looks ready to embrace the future--while much of corporate Japan is still at sea.

--Neel Chowdhury