Softbank:

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European Management Journal Vol. 19, No. 1, pp. 1–15, 2001  2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(00)00066-9 0263-2373/01 $20.00

Softbank: An Internet Keiretsu and its Leveraging of Information Asymmetries MICHAEL LYNSKEY, Saı¨d Business School, Oxford, and Hitotsubashi University, SEIICHIRO YONEKURA, Institute of Innovation Research, Hitotsubashi University, In this paper we examine the development of Softbank, the Japanese Internet investment conglomerate, and make two propositions. Firstly, we suggest that while the traditional keiretsu system began to unravel, Softbank, ironically, represented a new kind of keiretsu. Paradoxically, during its evolution, Softbank has resembled each of three broad types of traditional keiretsu. Secondly, we attribute Softbank’s success to its ability to leverage asymmetries in three types of information: the value-chain asymmetry between software developers and retailers; the financial asymmetry between practices in the US and Japan; and the technology asymmetry between computer products in the US and Japan.  2001 Elsevier Science Ltd. All rights reserved

ship of the ‘new economy’ in Japan, based on entrepreneurship, venture capital and internet startup companies.

Introduction

In this paper, we make two propositions. Firstly, we propose that while the traditional keiretsu system in Japan began to unravel, Softbank, ironically, represented a new kind of keiretsu — a keiretsu for the Internet age. Paradoxically for a new company, during various stages in its evolution, Softbank has resembled each of three broad types of keiretsu synonymous with traditional Japanese companies. Secondly, we attribute the rise of Softbank to its ability to leverage asymmetries in three types of information. These were the value-chain asymmetry between software developers and retailers; the financial asymmetry between practices in the US and Japan; and, finally, the technology asymmetry between computer products introduced first in the US and later in Japan. Softbank, a new model of keiretsu, successfully managed to exploit these information asymmetries and was able to do so at the expense of large Japanese companies, the members of traditional keiretsu, that were hindered by traditional practices.

At the beginning of the new century, a company relatively unknown in the West became the world’s top performing equity and one of the largest firms in Japan in terms of market capitalisation, surpassing long-established names such as Hitachi, Mitsubishi, Sony and Toyota. Remarkably, it had achieved this position in less than twenty years, and its founder was challenging Microsoft’s Bill Gates as the world’s richest man. More than any other Japanese company, Softbank epitomised the break with traditional Japanese business practices and was seen as the flag-

This paper is divided into several sections. First, as a backdrop to the discussion, we review the idea of the ‘new economy’ and the role of venture capital funding, comparing the situation in Japan with that in the United States. We then overview the traditional keiretsu system, which was such a prominent characteristic of Japan’s post-war development. Subsequently, we examine Softbank’s strategy and address how the company can be described as an Internet keiretsu. Developing this theme, we then look at how Softbank successfully exploited various infor-

Keywords: Internet, Keiretsu, Information asymmetries, New economy, Venture capital, Entrepreneurship, Start-up companies

European Management Journal Vol 19 No 1 February 2001

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SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

mation asymmetries at different stages of its development. In a concluding section, we discuss the implications and outlook for the company.

Part I. Historical Context The ‘New Economy’ and Venture Capital At the beginning of the 21st century, the relentless pace of change and development in business is calling into question the traditional business models that served so well in the 20th century. In February 2000, the United States marked its longest period ever of uninterrupted economic growth (which started in March 1991), and there was talk of a ‘new economy’.1 In the period 1996–99, the US economy became more productive, with the rate of growth averaging 2.25 per cent, and in 1998–99, the figure was a little over 2.75 per cent. Much of this growth was attributed to a combination of several factors, such as returns from investment in high technology, the explosive growth of the Internet, flexible capital markets, and an economic climate conducive to risk-taking. This growth was exemplified by the provision of venture capital, which provides a link between initial private funding and the broader public capital markets (Figure 1).2 For 15 years until 1993, funds raised by venture capital firms in the US for investment remained relatively constant, at between $3 billion and $5 billion annually. Since 1994, however, venture capital funding rose exponentially, reaching nearly $50 billion in 1999 (Table 1). Another striking example of the ‘new economy’ was that, of the top 100 companies by market capitalisation in the US at the beginning of the new century, about one quarter did not exist a generation previously (Table 2). Indeed, in 1999, on the crest of the internet boom, dotcom companies were the largest recipients of venture capital funding, receiving nearly $32 billion, a huge increase over the $7 billion they received in 1998 (Table 3). There were 544 initial public offerings (IPOs) in 1999 in the US alone. Fifty per cent of these were venturebacked, up from 20 per cent in 1998 (Table 4). This expansion in the US economy was accompanied by falling unemployment (which in 2000 stood at a 30year low of 4 per cent), but remarkably, without the attendant inflationary pressures and wage demands one expected traditionally, leading to a dampening of fluctuations in the business cycle.3 While these changes were occurring in the United States, equally momentous and far-reaching changes 2

Figure 1 The Venture Capital Process

Table 1 Year 1995 1996 1997 1998 1999

US Venture Capital Investments Number of companies Amount invested ($bn) 1369 1882 2493 3446 3649

5.8 9.9 14.0 19.2 48.3

Source: National Venture Capital Association

were also calling into question some long-standing institutions and work practices in Japan. Slowly, but surely, there was an inexorable process of disintegration underway of Japan’s keiretsu system. The business conglomerates which were the powerhouses of Japan for 50 years were unravelling as Japan moved from a business world based on relationships to one based on the free allocation of capital. Compared to the United States, the development of venture capital in Japan has been pedestrian and small scale.4 One can identify three periods of interest in venture capital. Japan’s first venture capital firm, Kyoto Enterprise Development, was established in 1971. The following year, large venture capital firms European Management Journal Vol 19 No 1 February 2001

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

Table 2

Largest Dow Companies vs Largest Non-Dow Companies

Largest Dow companies

Largest non-Dow companies

Market value ($bn)

Year incorporated

389 223 211 195 162 161 159 152 140 133 193

1892 1911 1969 1882 1934 1968 1885 1919 1887 1905

General Electric IBM Wal-Mart Exxon Merck Citigroup AT&T Coca-Cola Johnson & Johnson Procter & Gamble Average

Market value ($bn)

Year incorporated

483 269 220 202 154 153 146 145 122 111 201

1981 1968 1984 1995 1942 1967 1983 1933 1987 1968

Microsoft Intel Cisco Lucent Pfizer AIG MCI WorldCom Bristol Myers Squibb Dell Computer Bank of America Average

Source: The Wall Street Journal (30 August 1999)

Table 3

US Venture Capital Financing by Industry Sector ($bn)

Industry sector Internet specifica Communications Computer software and services Other products Medical/health Semiconductor/electronics Consumer related Computer hardware Biotechnology Industrial/energy Totals

1999

1998

% Increase

18.757 8.366 7.500 4.562 2.457 1.740 1.712 1.309 1.182 0.751 48.336

3.285 3.318 3.833 2.450 2.392 0.827 1.084 0.550 1.030 0.441 19.21

471.0 152.1 95.7 86.2 2.7 110.4 58.0 138.1 14.8 70.2 151.6

Source: National Venture Capital Association a Internet Specific is a very narrow definition of companies that would not exist without the Internet and that would not fit in any other industry sector category. Internet-related describes companies that provide content, e-commerce, hardware or services to the Internet economy. Internet-related companies are found in all industry sectors

Table 4 Period

1999 1998 1997 1996 1995

US Venture-backed Initial Public Offerings (IPOs) Total number of IPOs

Venture-backed IPOs

Total raised at IPO ($bn)

Total post offer valuation ($bn)

Average offer size ($m)

Average post offer valuation ($m)

544 373 629 868 580

271 78 138 280 204

23.6 3.8 4.9 12.2 8.2

136.2 17.8 22.6 58.6 33.2

87.2 49.2 39.5 43.6 40.6

502.7 229.1 164.3 209.3 163.0

Sources: Venture Economics and National Venture Capital Association

such as Japan Associated Finance (JAFCO), Yamaichi Finance, Nippon Venture Capital and Sumitomo Bank Finance were established. Since these firms were all created by large securities or banking corporations, such as Nomura Securities, Yamaichi Securities and Sumitomo Bank, they were different from those in the United States that financed venture firms from very early stages. This first period of venture business in Japan, however, disappeared with European Management Journal Vol 19 No 1 February 2001

the oil crisis in 1973, and the second period of interest did not appear until the first half of the 1980s. From 1982 to 1985, 63 venture capital firms were established; these included Nippon Investment Finance, Nippon ASEAN Investment, Nikko Capital and Fuji Bank Capital. Again, however, these firms were under the wings of large securities or banking firms. When one looks at the amount invested by these firms, one sees that they were active in the second 3

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

half of the 1980s, but their activities declined from the beginning of the 1990s, coinciding with the ending of the so-called ‘bubble economy’. The third and current period of interest in venture capital in Japan started in 1994. This year marked the point where for the first time venture capital investments exceeded venture capital loans. Traditionally, much of the financing that is termed ‘venture capital’ in Japan was, in fact, in the form of loans to small firms, rather than equity investment. The ratio of investment to loans was 0.7:1 in 1991; this reversed to 2:1 in 1995 and to 4.5:1 in 1997. However, compared with US venture capital companies, Japanese companies still tend to invest in late-stage bridge financing. To some extent, this can be attributed to Japan’s frail economic condition throughout most of the 1990s, which had a negative affect on the level of venture capital investment.5 Investments in Japanese companies fell 36 per cent to Y = 79.9 billion ($660 million) for the 1998 fiscal year.6 Typical of this trend were investments made by Japan’s leading venture capital company, JAFCO. These fell from Y = 13.7 billion for the year ending March 1997, to Y = 10.7 billion for the year ending March 1998, and Y = 9.5 billion for the year ending March 1999 (Figure 2). In order to revitalise Japan’s economy, however, it is recognised that one of the most urgent issues is to improve the environment for venture capital and venture businesses (Yonekura and Lynskey, 2000). Legislation has been passed to facilitate this transition. In 1997, the law was changed to permit the issuance of stock options for the first time. Such stock options have been used effectively in the United States to attract and reward key management personnel. In 1998, legislation was introduced to create limited partnerships for venture capital investment to attract money from institutional investors. The meaning of venture business varies from scholar to scholar; some define it simply as the creation of a

new enterprise, while others attempt to do so by using industry or market segmentation such as the creation of new firms in high-technology industries or niche markets. However, we define a venture business as qualifying for one of the following criteria: 1. A business funded by venture capital investment; 2. A business that realises a large capital gain in a relatively short period of time by an initial public stock offering (IPO); 3. A business that realises quick growth by leveraging gaps among markets or information. Since venture capital in Japan has been neither sufficiently available nor well developed compared to the United States, it has been difficult to identify any Japanese companies that fulfil all three of the abovementioned criteria. However, Softbank meets conditions 2 and 3, thereby qualifying as a venture business in our definition, and offers a fascinating entrepreneurial story in Japan. Before looking at Softbank’s development and why we suggest that it can be viewed as an Internet keiretsu, we need to overview what we mean by the term keiretsu, since it is a term that has been widely interpreted.

Overview of the Traditional Keiretsu System The term keiretsu, as commonly understood in most western literature, has been used to refer to the complex web of Japanese inter-firm relations that were perceived as a key facet of Japan’s business success. The term usually refers to the system of corporate groupings, typically with a large city bank and a trading company at its centre, in which member companies engage in cross shareholding. However, as Shimotani and Shiba (1997) maintain, the word keiretsu is ‘extremely ambiguous’ and has been used differently by different scholars to label various patterns of inter-firm relations. They point out that the con-

Figure 2 JAFCO’s Japanese Investments (Source: Japanese Associated Finance)

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SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

fusion arises because observers have applied the term keiretsu indiscriminately to at least three different types of inter-firm relationships. Before discussing these three broad types of keiretsu, it is worth recalling the generic competitive advantages of the keiretsu as an economic system because of their contribution to Japan’s post-war economic growth.7 Keiretsu is a somewhat ambiguous Japanese word for which a literal rendering into English might be ‘succession’, in the sense of a sequence of entities joined together, as links in a chain. In Japanese, the word keiretsu is used to refer to several types of business groupings, linked typically through investment and the exchange of personnel. Although these relationships appeared in the 1930s, it was only in the 1950s that they rapidly consolidated as a result of the intense post-war competitive pressures that existed among Japanese firms. Generally, they provide a number of competitive advantages: economies of scope and the multiple use of resources and information-sharing; cross-shareholdings which facilitated long-term investment; and an effective system of minimising external and internal transaction costs. These factors led to efficiency gains that helped to promote the fortunes of the inter-linked firms and the economy as a whole. At least three broad types of keiretsu can be distinguished: a horizontal keiretsu, a vertical keiretsu, and a distribution keiretsu. The most powerful of these are the horizontal, or kinyu (financial) keiretsu. These comprise a group of large firms in diverse industries. There are six, large kinyu keiretsu: Mitsubishi, Mitsui, Sumitomo, Fuyo (formerly Yasuda), DaiIchi Kangyo and Sanwa. Each of these is grouped around a former zaibatsu or a major city bank.8 Of the so-called ‘big six’ keiretsu, three are organised around the former zaibatsu of Mitsubishi, Mitsui and Sumitomo. The other three are centred on large city banks — Fuji Bank, Dai-Ichi Kangyo Bank and Sanwa Bank.9 These keiretsu are ‘loose federations of independent companies bound together over a long period of time because of mutual interests and the many benefits of co-operation’ (Whitehill, 1991, p. 96). As well as sharing common values, member companies of the kinyu keiretsu engage in substantial cross-shareholding and co-ordinate their activities through information interchange and monthly meetings of company presidents and other senior personnel. The kinyu keiretsu are based on the so-called ‘one-set principle’ — each keiretsu includes a company from each large industrial sector. The bank uses its depositors’ money to provide up to 40 per cent of the keiretsu’s financing. Relationships are cemented by cross-shareholdings, whereby keiretsu members hold up to 60 per cent of one company’s shares. Two other main types of keiretsu are regarded as having contributed to Japan’s success. The vertical, or sangyo, keiretsu describes the network that ties a large parent company to its medium- and small-sized European Management Journal Vol 19 No 1 February 2001

affiliate companies that are typically subsidiaries or subcontractors of the parent organisation. Such sangyo keiretsu, typified by the motor companies Toyota and Nissan, have been useful in controlling inventories and keeping production quality high. Finally, a third main type of keiretsu is the distribution keiretsu. As its name implies, these are directed marketing channels exemplified by Matsushita’s network of retailers dedicated to selling its products in Japan. The keiretsu system worked extremely well as the powerhouses of the economic expansion Japan enjoyed from the 1950s to the late 1980s. Indeed, as recently as the mid-1990s, the keiretsu system in Japan was still lauded by some foreign scholars as an essential factor of the country’s competitive strength. However, where the keiretsu were formerly considered as one of Japan’s greatest assets, they are increasingly deemed a liability. In fact, the keiretsu system may have obscured the misallocation of capital, labour and land, particularly in classic sunset industries, such as steel, chemicals and shipbuilding. The keiretsu were at the centre of a complex social contract between the government, banks, the corporate sector and the population. Government officials directed the banks to invest in certain sectors. The large companies provided lifetime employment for their staff, who then saved a proportion of their income in the banks. The banks then reinvested the funds as directed by the government bureaucrats, completing the virtuous circle. The relations were reinforced by cross-shareholdings of up to 60 per cent of a company’s stock. A number of factors have contributed to the undermining of the keiretsu. The first signs of weakness emerged during the so-called ‘bubble economy’ of the late 1980s. The major city banks (each one of which was at the core of a keiretsu grouping), which were regarded as the guardians of corporate governance, got caught in the asset bubble as capital was misallocated on a huge scale in value-destroying projects. In the succeeding economic downturn, both the banks and their keiretsu member companies became less attached to, and reliant on, their keiretsu. Since the bursting of the asset-bubble, the percentage of cross-shareholdings declined, and the proportion of loans the banks provided to their keiretsu firms also fell. An even more important catalyst for change than the bursting of the bubble economy was the propensity for banks to engage in mergers (Table 5). This had profound implications for the banks’ respective keiretsu, since the banks were the largest owners of crossheld shares. They guided the flow of cheap money within their respective groups, which was one of the rewards of coveted membership. As well as the unravelling of the horizontal keiretsu, the vertical keiretsu, too, began disintegrating. For example, Nissan (in which Renault gained a con5

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

Table 5

Consolidation of Leading Japanese Banks

Original banks

New financial groups

 Mizuho Financial Group (establishment of a joint

IBJ Nippon Kangyo Bank   Daiichi Bank  Fuji Bank Yasuda Trust Taiyo Bank   Kobe Bank  Mitsui Bank Sumitomo Bank Mitsui Trust Chuo Trust Hokkaido Takushoku Sumitomo Trust Bank of Tokyo   Mitsubishi Bank  Nippon Trust Mitsubishi Trust Toyo Trust Sanwa Bank

  

Subsidiary of Fuji Bank Taiyo Kobe Bank  Sakura Bank 

Sakura-Sumitomo (merger by April 2002)





 







  Mitsui-Chuo Trust   Acquired by Chuo Trust Bank of Tokyo-Mitsubishi (merged in 1996) Subsidiary of Mitsubishi Bank Subsidiary of Sanwa Bank

  









Tokai Bank Kyowa Bank   Saitama Bank  Daiwa Bank Long Term Credit Bank (LTCB) Nippon Credit Bank (NCB)

holding company in autumn 2000)



Daiichi Kangyo Bank

Tokai-Asahi

Asahi Bank



Sanwa/Tokai/Asahi Bank (establishment of a joint holding company in April 2001)

 

Acquires regional banks Nationalised, then sold to Ripplewood (US private equity group) Nationalised, then sold to Softbank consortium

Sources: Adapted from Lehman Brothers, 1999; The Japan Times (15 March 2000)

trolling 36.8 per cent stake in March 1999) simultaneously inched further away from the Fuyo horizontal keiretsu, and also disentangled its own vertical keiretsu. Renault’s plans for restructuring called for Nissan to cut the number of companies in which it holds a stake from 1394 to just four. Furthermore, Nissan’s supplier list is to be halved from 1145 firms to 600 by 2002. Finally, the distribution keiretsu are also undergoing change. Matsushita, for example, is undertaking the restructuring of its network of retailers. These changes, plus regulatory pressure in the form of new corporate reporting requirements, and new legislation permitting share swaps to occur between keiretsu members without incurring large tax penalties, are changing the traditional keiretsu system. Ironically, while these changes were occurring in Japan’s most famous and traditional keiretsu, a review of Softbank’s development reveals that it seems to have evolved by resembling in its structure the distribution, the vertical and the horizontal keiretsu.

6

Part II Masayoshi Son and the Evolution of Softbank Softbank was established in September 1981 by Masayoshi Son, using $80,000 from a $1 million windfall he had received from the Sharp Corporation for a multilingual pocket translator he had coinvented and patented while still a student at the University of California at Berkeley. At the time, almost nobody owned a personal computer. Son realised, however, that PCs would become extremely important. He also realised that the people who created software did not necessarily know how to sell it. While there were thousands of small software houses and potentially millions of customers, there were very few wholesalers and retailers at that time in Japan. Seeing an opportunity to bridge the gap between software houses and retailers, Son began buying vast amounts of software from manufacturers and reselling it to retailers. The company’s first goal was to become the leading packaged software distributor in Japan. The timing was fortuitous since some of the large retailers, such as Joshin Denki, had begun to think about opening specialised PC retail European Management Journal Vol 19 No 1 February 2001

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

shops. Son persuaded Dai-Ichi Kangyo Bank to give him a $750,000 start-up loan, after the branch manager had confirmed what Son said about his business with Joshin Denki and Sharp.10 Believing in Son’s entrepreneurial ability and business sense, Tadashi Sasaki, vice president of Sharp at the time secretly offered to act as his private guarantor. When Son had sold his speech translator to Sharp, he had found an extraordinary personality in Sasaki.11 Son told us that, ‘At that time, I really didn’t know that Mr Sasaki had personally guaranteed my loan. Afterwards, when I learned of his support, I decided never to forget his generosity’.12 Thereafter, Softbank’s growth was impressive and it quickly established itself as an integral part of the Japanese packaged software distribution sector. In 1982 it had already achieved the largest market share, and by 1983 about 4600 retailers had joined Softbank’s network. This number increased to 7600 in 1986 and to 15,000 in 1992. Five years later, the number of retailers had reached 25,000 and the number of related domestic and foreign software houses numbered 4000. It managed to achieve its founding goal within a decade, becoming the distributor for Microsoft, Novell, Sun Microsystems and Oracle, and made millionaires of more than 100 employees through the use of stock-options in the company. Once achieved, this goal subsequently evolved into a second goal which still seemed beguilingly simple: to control as much of the infrastructure of the personal computer market — from distribution to publications, information services and associated conferences — as it could. Initially, this policy seemed limited to Japan where Softbank concentrated on two sectors: computer software distribution and PCrelated publishing. Softbank ventured into the publishing business and started to publish two monthly computer magazines thereby gaining instant exposure and communication channels to address the growing market of PC users. By the mid-1990s, Softbank had achieved domestic market shares in the software distribution and publishing sectors of about 40 per cent and 30 per cent, respectively.13 Son took Softbank public with a listing on Japan’s over-the-counter stockmarket in 1994, raising $140 million. After the offering, the firm became obsessed with a third goal, foreign investments. It subsequently embarked on a series of major overseas investments unprecedented among high-technology companies in Japan, where mergers and acquisitions were traditionally viewed with distaste. Taking advantage of the yen’s strength in the mid-1990s, the company made $4.5 billion worth of acquisitions in the US.14 These transformed the company from a domestic software distributor into an international publishing and conferences group.15 In 1995, Son targeted the Internet, which was still in its infancy.16 In explaining his rationale for doing so, Son told us: ‘After analogue hardware such as radio and TV, analogue services such as TV programmes and other European Management Journal Vol 19 No 1 February 2001

media came to dominate analogue hardware. Then digital hardware in the form of computers appeared. After digital hardware, digital services should exceed them’.17 In January 1998, Softbank was listed on the first section of the Tokyo Stock Exchange, thereby gaining recognition as one of the big players in Japan. As of July 1999, Softbank had invested some $1.7 billion in more than 100 Internet companies. Softbank and its capital arm, Softbank Technology Ventures, had invested $906 million in eight Internet firms that had gone public, so that the initial investment was worth $14.1 billion. According to Son, as of July 1999, Softbank held 7–8 per cent of the publicly listed value of all Internet properties.18 As well as targeting investments in the US, Son did not ignore Asia. For example, Softbank gained a 51 per cent stake in Yahoo! Japan, an Internet portal for Japan’s 18 million Internet users (a figure that is forecast to double by 2005).19 Not content with the Internet business alone, Son expanded into the financial services sector. In June 1999 Softbank and the National Association of Securities Dealers announced plans to jointly establish a Nasdaq market in Japan in 2000 to create a public market for promising start-up companies.20 Its goals are to list entrepreneurial companies and give Japanese investors easy access to global markets, which hitherto have been restricted because of Japan’s closed market. Nasdaq Japan aims to conduct electronic trading in yen of US companies like Microsoft and Intel on Japanese-language screens, 24 hours a day. In November 1999, Softbank announced that it was part of a consortium to launch Europe’s first pan-Continental stock exchange in 2000. The consortium, headed by Nasdaq, the US stock exchange, was to complement the earlier launch of Nasdaq Japan, the first foreign trading platform for shares in Asia. The grand aim of the collaborating partners — Nasdaq, Softbank, e-partners (an investment fund established by News Corporation) and Vivendi (the French utilities group) — is to create the first global stock exchange. Based in Brussels, Easdaq began offering trading facilities in January 2000 in ten of the largest companies listed on the Nasdaq technology market in the US, with a further 30 Nasdaq stocks approved for trading by Easdaq’s board shortly thereafter.21

Softbank’s Corporate Strategy What is Softbank’s strategy? While its business style is regarded as reckless by some observers, if there is a coherent strategy at Softbank it seems to be in a combination of long-term vision and arms-length implementation. Softbank’s strategy appears to centre on two broad goals: developing an Internet conglomerate centred on financial services, and creating a vehicle for venture capital financing of small 7

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

companies. In meeting its first goal, Softbank’s Internet portfolio includes a brokerage and financial advisory services covering mortgages, insurance, consumer finance and a host of e-commerce ventures. It is also at the centre of a consortium to which the Japanese government has agreed to sell a nationalised bank, Nippon Credit Bank (NCB). To meet its second goal, Softbank has launched an investment fund to support Japan’s fledgling high-technology industry with equity financing, as well as launching Nasdaq Japan, an Internet based stock exchange on which Japan’s small companies can be listed. Softbank’s strategy can be viewed as wanting to reproduce in Japan the business models that have proved most successful and enduring in the more advanced Internet market of the US. In providing one-stop financial services over the Internet, with its attendant reduced transaction costs, Softbank aims to replicate for the Japanese market the commercial success of Internet-based financial services in the US.

Table 6

In terms of implementation, Son’s approach is to get in early, place bets that others shrink from and get out of the way to let the managers do the managing. Softbank invests broadly in many ventures during the early, crucial stages, then selects the most promising prospects and makes further substantial investments. In making investments, it starts by identifying businesses where substantial efficiencies can be gained by going on-line. In particular, Son has focused on Japan’s relatively inefficient worlds of brokerage, insurance and banking. Son is constructing an on-line financial mall that could create new channels for capital investment, just as deregulation is opening up Japan’s financial sector to global opportunities. In making these investments, Son views them not as one-off investments but as the start of partnerships. He invites his partners to annual technology forums and encourages inter-firm business. In this way, Softbank’s affiliates typically have four to five ties to one another.

conglomerates, which were subsequently replaced by the keiretsu in the post-war period), or net-batsu.23 Indeed, we propose that Softbank’s evolution seems to mirror not a single zaibatsu, but all of the three main keiretsu types outlined previously. Its earliest strategy of becoming the major Japanese distributor of computer software resembles that of a distribution keiretsu with its network of marketing channels and retailing outlets dedicated to selling packaged software (Figure 3).

At the start of the 21st century, Softbank was one of Japan’s largest companies in terms of market capitalisation, overtaking long-established industrial giants such as Toyota (a sangyo or vertical keiretsu), Fujitsu (a member of the Dai-Ichi Kangyo kinyu or horizontal keiretsu) and Matsushita Electric Industries (a distribution keiretsu) (Table 6). In 1999, Softbank’s stock rose more than 1000 per cent. In mid-November 1999, its shares soared to a new high of Y = 61,000, and its market capitalisation stood at Y = 6647.2 billion compared with Y = 3936.6 billion for Japan’s second largest motor vehicle manufacturer, Honda.22

Part III. Analysis of Softbank’s Success An Internet Keiretsu Masayoshi Son has said that his vision is to develop an Internet zaibatsu (the Japanese pre-war industrial 8

Top 12 Japanese Companies

Company

(Market capitalisation) Y = (’000)bn

NNT DoCoMo NTT Softbank Toyota Motor Sony Seven-Eleven Japan Oracle Japan Fujitsu Hikari Tsushin Matsushita Electric Industries Nomura Securities Bank of Tokyo-Mitsubishi

37.6 23.6 18.2 17.1 12.4 9.8 6.8 6.6 6.5 6.2 6.2 6.1

$bn 339.5 213.2 164.6 154.1 112.1 88.7 61.3 59.8 58.6 56.2 55.8 55.4

Source: Primark Datastream (February 2000)

As outlined above, this strategy proved so successful that within a decade Softbank became the sole distributor for the largest software companies: Microsoft, Novell, Sun Microsystems and Oracle. Its subsequent evolution to that of aspiring to control as much as possible of the infrastructure of the PC market, resembled that of the vertical, or sangyo, keiretsu. Such vertical keiretsu were essentially concerned with control — control of inventories and control of high-quality production in the traditional keiretsu. In a similar fashion, Softbank’s strategy for the PC market infrastructure, from distribution to publications, information services and associated conferences, was largely about achieving control (Figure 4). Son’s acquisitions seemed to be ‘part of a plan to create a synergistic software empire’.24 By compiling a huge database that incorporated the contact details of magazine subscribers and exhibition attendees, Softbank had at its disposal a valuable marketing tool capable of tracking some 100 million customers to determine what they were buying and when they required upgrades. Finally, Softbank’s most recent strategy resembles that of the horizontal, or kinyu, keiretsu, which are based on the so-called ‘one-set principle’ — to include a company from each large industrial sector. Softbank has spent more than $2 billion on equity stakes in more than 100 high-technology companies, European Management Journal Vol 19 No 1 February 2001

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

Figure 3 Softbank’s Distribution Keiretsu

keiretsu comprises numerous cross-border global alliances that are heavily reliant on foreign companies. Member companies of this horizontal network range from Internet portal companies such as Yahoo! Inc. to specialist firms like US Web, which specialises in design of web sites. Son envisages Softbank as the hub of a huge digital marketplace. Softbank-linked companies can exchange capital, ideas and expertise, and collaborate on joint ventures. Customers can use Yahoo! as an Internet portal, check out mortgages from E-loan, obtain financial news and analysis from mutual-fund tracker Morningstar Inc., trade shares using online broker E*Trade, price software on computer vendor Buy.com, and even purchase cars from CarPoint Japan — all companies affiliated with Softbank. Son has described his strategy as follows, ‘We have a strategy for always being number one (in key Internet markets), and we have to do it on a global scale’.25 The more successful brand name Internet sites Son can bring together, the greater the attraction for online advertisers and potential new partners.

Figure 4 Softbank’s Vertical Keiretsu

many of which are in Silicon Valley. These are assembled like the former horizontal keiretsu, but for the Internet age. Unlike the large, traditional in-house groups for which Japan is famous, Softbank’s kinyu European Management Journal Vol 19 No 1 February 2001

At the centre of each kinyu keiretsu, there was always a city bank, such as the Mitsubishi Bank in the case of the Mitsubishi keiretsu. Indeed, Softbank seems to be thinking of living up to its name and becoming a bank. In July 2000, the Japanese government agreed to sell a nationalised bank, Nippon Credit Bank (NCB), to a consortium led by Softbank.26 The other members of the Softbank consortium were Ito-Yokado, the retail chain group, Orix, the leasing group, and Tokyo Marine and Fire, Japan’s largest non-life insurance group. The Softbank consortium hopes to use NCB to develop an Internet conglomerate based on financial services, with Ito-Yokado providing banking services through its outlets, which includes Seven-Eleven Japan. The strategy behind the idea seems to be that a corporate lending operation would support Nasdaq Japan, the Internet based stock market Softbank planned to launch in 2000. NCB’s regional operation could identify candidates to list on 9

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

Nasdaq Japan, and also act as a platform to provide financial services through the Internet. This move was seen as highlighting Softbank’s efforts to consolidate its role as one of Japan’s leading Internet companies. In 1999, it also launched Internet projects with different partners to sell toys, books, music and cars over the Internet. These complemented its substantial stakes in such companies as Morningstar Japan, an on-line stock-quotation and mutual-fund ratings company; InsWeb, an on-line insurance seller, Forexbank, a foreign exchange company; Onsale, which conducts auctions; E-loan, which makes consumer loans; and CyberCash, which handles on-line payment services for Internet transactions. Thus, one can see in Softbank’s expanding conglomerate the ‘one-set principle’ — to include a company from several large industrial sectors — and recognise the resemblance to the traditional kinyu keiretsu (Figure 5).

Leveraging Information Asymmetries

The ‘pure’ entrepreneur observes the opportunity to sell something at a price higher than at which he can buy it. (Kirzner, 1973, p. 16)

There are several factors behind the entrepreneurial success of Softbank. When we look at each critical stage in the company’s development, one sees that it leveraged opportunities of arbitrage between different positions. In particular, an information asymmetry existing in Japan, and two important information asymmetries between the US and Japan created unprecedented opportunities for Softbank. These three information asymmetries were leveraged in overlapping sequence during Softbank’s growth, and are outlined as follows. Value-Chain Asymmetry: Softbank as a Co-Ordinator First, Softbank was able to leverage the information asymmetry that existed between, on the one hand,

domestic software developers who had neither sufficient capital or distribution channels, and, on the other hand, retailers who had neither access to the myriad small software houses or knowledge of the packaged software business. Softbank’s success as a software wholesaler owed much to its role as a coordinator of the industry. The software distribution industry in Japan, with its large number of small software houses and its large number of small retailers, suffered from inefficiencies. The lack of a dominant wholesaler capable of combining and centralising the twin roles of acquisition of products from many software houses and sales to many retailers, made it difficult for both the software houses and the retailers to seize a large opportunity in the emerging PC market. Softbank was able to fill this gap in the industry, by acting as a buyers’ market to the small software houses and, simultaneously, as a suppliers’ market to retailers. For both the software houses and the retailers, Softbank provided an infrastructure that facilitated purchase and sales, such as marketing, the handling of unsold software and the training of employees of related companies. Its large number of relationships with suppliers and buyers allowed Softbank early access to information on demand and supply. This informational advantage was used to improve services for both the retailers and the software houses. It also gave Softbank a strong bargaining position. Softbank’s knowledge of both sides of the market and key technologies gave it a synergetic capability. As a result of this co-ordinating ability, Softbank became Japan’s number one wholesaler in software distribution in the space of only one year after its establishment. There was another aspect of information asymmetry in Japan on which Softbank was able to capitalise. This was the information asymmetry existing between Softbank’s accumulated knowledge and that of its clients. When Son first envisioned his company, he selected to focus on service, not production, as its key area. After success in wholesale, Son enlarged the number of service businesses related to computers,

Figure 5 Softbank’s Horizontal Keiretsu

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software and networks. In addition to its central role in co-ordinating the activities of small software houses, it engaged in alliances with large firms such as Novell, NTT and Dentsu, a Japanese advertising agency. These alliances further expanded Softbank’s market dominance so that its market share grew to 70 per cent.27 These alliances, together with its diversification into the PC-related publishing business and computer exhibition/convention business (via acquisitions in the US of Ziff-Davis and Comdex), provided Softbank with the latest information on new hardware, software and networking products and services. Softbank, therefore, went beyond being a mere dealer of software. Its relationship with its alliance partners enabled it to leverage its accumulated information on the PC and networking businesses. It entered the client-server business, since it could use its knowledge of computer networks. Softbank offered not only client-server products, but also the technical advice to determine what kind of system and software its clients required. As part of its contract with clients, Softbank’s staff visited customers to consult on network building.28 Such consulting was evidently needed particularly in the networking business, as Softbank was able to expand its networking business by 17 per cent during the first three months of 1998. Thus, Softbank developed by successfully exploiting the gaps in information between software houses and retailers, and also between its accumulated knowledge of the computer networking business and that of its clients. These were two examples of its ability to leverage asymmetries in the value-chain of the domestic market. Financial Asymmetry: Leveraging Procurement Cost Differences between the US and Japan As well as leveraging the information asymmetries in the domestic market value-chain, Softbank was able to exploit differences between American and Japanese stock market valuations. Even though Japan’s economy took a downturn in the 1990s, the market in Japan traded at more than twice the average American price-to-earnings ratio, and Softbank traded at an even heftier premium. This permitted the company to purchase a US firm at a generous premium over its American valuation, and still see its own valuation climb by even more, simply because the US profits were now valued by Japanese standards. This, in turn, allowed Softbank to raise even more cash from banks and the capital markets. Softbank procured Y = 400.5 billion ($4 billion) from the Japanese stock market during 1994 and 1996. It procured a further Y = 180.5 billion by an IPO and Y = 22 billion by company bonds. How was this possible? As mentioned above, Softbank leveraged the information asymmetry in the value-chain between software houses and retailers and grew rapidly. From 1995 to 1997, the annual growth rate of Softbank was European Management Journal Vol 19 No 1 February 2001

around 40–50 per cent. This rapid growth provided the basis for its IPO. However, this internal growth alone was not enough to raise $4 billion. The growth rate of the entire Softbank group, including subsidiaries, however, recorded 77 per cent in 1996 and 120 per cent in 1997. By explicitly using these amazing growth rates, Softbank was able to procure the necessary capital from the stagnant Japanese market. In addition, the gap in financial practices with respect to venture businesses was of relevance to Softbank. In the US, a sound business plan and evidence of entrepreneurial talent are often enough to convince investors to open credit lines for young venture companies, whereas in Japan this has been inconceivable until recently. Moreover, in the US, venture capitalists specialise in supporting start-up businesses. They develop expertise in assessing and handling highrisk/high-return situations. In Japan, no similar infrastructure or investment culture has been established. Furthermore, the stock market and stock options are used widely in the US, while Japanese society is less investment-oriented and more savingsoriented. Thus, Softbank exploited favourable conditions for mergers and acquisitions in the US and leveraged its rapid expansion in the conservative Japanese stock market. Technology Asymmetry: Leveraging Technological Gaps between the US and Japan A third gap which Softbank was able to exploit was that of the level of technology between the US and Japan. Softbank took advantage of Japan’s two-tothree-year lag behind the United States in e-business. The company maximised its knowledge of the US computer-related business as part of its diversification and M&A strategy. After establishing a domestic presence in computer-related publishing, Softbank reinforced its role as an information provider by acquiring Ziff-Davis, the largest computerrelated publishing company in the US. Similarly, when Softbank decided to enter the computer network business, Son identified Novell as an ideal partner because it was already the international market leader in operating systems for local area networks where it owned a market share of 65 per cent. The introduction of new computer-related products in the US, in particular on the West Coast, preceded the introduction of similar technologies in Japan. US advances in hardware, software and Internet services resulted in a technology gap opening up between the US and Japan. Whenever Son visited the US, he was fascinated by new developments in the telecommunication industry, and in particular, by developments in the Internet. The company embarked on an investment campaign, investing in several Internet service providers. Its first investment was in 1996, when Softbank Holdings invested in 30 per cent of Yahoo!, and became the company’s largest stockholder. Softbank’s success seems to owe much to its timing 11

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

in exploiting and leveraging the gaps in each of these three types of information asymmetry. Timing, and perceiving gaps to exploit between old and news ways of doing business, remain crucial elements in Softbank’s strategy. This can be seen in its acquisition of Nippon Credit Bank, which threatens a radical shake-up of Japan’s traditional banking system, by creating two new businesses from one old one. First, Softbank plans to create an internet retail bank, which will gather deposits from customers who are disillusioned with traditional city banks that have lost their esteemed reputation in the post-bubble economy. It will also market financial products, such as those provided by Tokyo Marine and Fire, the non-life insurance group that is a member of the Softbank consortium. Secondly, Softbank aims to use those assets to extend loans to venture capital projects. Again, the timing is fortuitous. The Japanese government supports this scheme, since the traditional city banks have often refused to enter the venture capital business, creating funding problems for entrepreneurs.29 When asked how Softbank can compete with large US venture businesses, which have seen gaps between investors and companies on which to capitalise, Son replied that Softbank has three core advantages:30 1. Its strategy is focused solely on the Internet as the medium of the future; 2. It has a diversified portfolio across the Internet industry, from infrastructure and hardware to content, commerce and distribution. It is strategically positioned in the centre of an information network and is competitive in a range of industries; 3. Unlike other venture capital businesses, it has its own money to make substantial investments in promising businesses.

Implications and Outlook In a 1998 issue of Forbes, Son ranked among the world’s top ten billionaires and key figures of financial empires, unique among the young generation of Japanese.31 The value of Son’s personal stake in Softbank as of February 2000 had reached $70 billion, compared with a stake of $1.2 billion two years previously.32 It is not surprising, then, that he was labelled the ‘Bill Gates of Japan’33 While Softbank has proved enormously successful, its success seems largely built on timely investments in up-and-coming Internet companies. The fall from favour of internetrelated stocks since Spring 2000 and the volatility of markets has made such practices precarious. Indeed, several other well-known Japanese ventures have stumbled in recent years, illustrating how few successful venture companies Japan has produced compared with the United States.34 12

Softbank was helped by several fortuitous factors in the mid-1990s which encouraged its acquisition strategy: a high yen, high stock appreciation, upgraded bond ratings and low interest rates in Japan all supported Son’s approach to growth. It also benefited from the IPOs of, for example, Yahoo! and Ziff-Davis. In addition, high stock valuation in 1995 allowed Softbank access to outside capital. The issuing of corporate bonds helped Son to finance M&A. This was also supported by the bullish stock market in the US. On the other hand, one should also remember that Softbank succeeded during Japan’s worst post-World War II recession and it recorded one of its highest stock prices after the Nikkei had crashed at the end of the bubble economy in 1990. Thus, it can be said that Softbank had to cope with high share prices in the US for companies in a thriving economy while simultaneously having to generate cash in Japan where the economy was in recession and stock prices were low. The pursuit of Son’s vision of a digital infrastructure requires the integration of several diverse businesses that are to become elements in a larger whole. The question is, can Softbank become more than the sum of its parts? Can the company integrate sufficiently its diverse businesses so that mutual benefits and synergies will make the value created more apparent? These concerns about synergy have to be balanced by the concerns of others that Son is creating an empire, and that it will lack the necessary flexibility in high-technology markets. One feature that entrepreneurial start-ups have in common is that they depend on an entrepreneurial leader who is capable of recognising business opportunities and creating organisations to exploit them. The same holds true for Softbank and Son. Son is president of several companies, and sits on the boards of others. Since 1996, however, Softbank’s investment strategy has differed from that of previous years. Before 1996, Softbank only made investments by assuming total control. After 1996, Softbank abandoned the 100 per cent ownership approach to ‘building an empire’ in favour of investments of about 30 per cent of capital. This strategy to support ventures with capital investments without changing leadership, coupled with incentive structures that drive entrepreneurial companies, shows increasing orientation towards teams and alliances. Adopting this decentralisation strategy has at least three important effects. Firstly, taking a stake in a target company is easier than buying it outright. Secondly, minority stakes leave the target companies’ entrepreneurs in charge. The original team is thus used to exploit a venture’s potential more fully. Thirdly, Softbank is driven by synergies between different areas, industries, companies and competencies and not by acquisition of companies. Rather than a 100 per cent-owned empire, a synergistic network of allies is preferred. Thus, Softbank is less of an empire European Management Journal Vol 19 No 1 February 2001

SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

and more of a loosely coupled network, akin to a keiretsu. The changes that are currently sweeping through Japanese business are symptomatic of the ‘creative destruction’ envisioned by Schumpeter. The entrepreneur takes centre stage in these changes and influences not only business practice, but also organisations themselves (Lynskey and Yonekura, forthcoming). Hence the old-style keiretsu are increasingly viewed as liabilities. Indeed, much of the criticism levelled at Softbank can probably be explained by Son’s rejection of the traditional Japanese business model, epitomised by the keiretsu. Strong growth, fuelled with debt- and equity-financed acquisitions, distinguish his companies. According to Son, ‘speed is more important than scale, and traditional businesses are always worrying that they are going to cannibalise their existing business. That means the pure Internet player can always be more aggressive’.35 Elsewhere he has said, ‘We operate without fear, and this may be giving a lot of encouragement to other entrepreneurs here. The outsider is becoming the centre of a new age’.36 While influencing external changes, Son has not allowed Softbank internally to stand still. The group is consistently transforming itself and its strategy: first as a software supplier, then as an exhibition group and publisher of computer magazines, and then as Japan’s leading Internet investment groups and one of the world’s leading Internet and financial services conglomerates. This has plainly been effective. At the start of the 21st century, Softbank was the world’s top performing equity after climbing 1246 per cent in 1999 and overtaking the mighty Sony Corporation in terms of market capitalisation in the process (Table 7).37 The Internet keiretsu that Softbank has become seems destined for further change. Son has said that he plans to divide the group into hundreds of virtual companies, each with just several members. ‘Each of these units can make quick, dynamic, authorised decisions. Other Japanese companies are hierarchical and slow to react’.38 What is strangely paradoxical in all of this transformation is the resemblance Softbank Table 7

World Share Price Performance, 1999

Company

Softbank JDS Uniphase CSK Murata Manufacturing Japan Telecom Matsushita Communication Gruppo Edit. L’Espresso Sprint Nextel Communications Celestica

Share price % change for 1999 1245.51 866.42 545.64 443.23 416.40 406.96 366.73 357.20 357.05 346.87

Source: Financial Times (29 December 1999)

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has taken in its evolution to the three main types of keiretsu so characteristic of the business model that served Japan extremely well for 50 years.

Notes 1. The ‘new economy’ is said to have altered the rules of business, so that traditional measures of business performance are no longer relevant. This is premised on two ideas: network externalities and compatibility standards. First, in knowledge-based production, in contrast to physical manufacture, almost all the costs are incurred at the beginning. The marginal costs of dissemination are close to zero. Second, once an intellectual standard has been widely disseminated, the company that owns it has an unbeatable advantage because everything has to be compatible with it. So the theory runs that monopoly will be endemic, and first-mover advantage unassailable. There will only be a few winners, they will be large ones, and it is essential to be early among them. See Kay (2000). On 1 February 2000, the sustained period of US economic growth became the longest in history at 107 months. See Dunne (2000). 2. Venture capital is independently managed, dedicated pools of capital that focus on equity or equity-linked investments in privately held, high-growth companies. Many venture capital funds, however, occasionally make other types of private equity investments. Outside the United States, this phrase is often used as a synonym for private equity (Gompers and Lerner, 1999). 3. Core inflation rates during the 1961–69 US economic expansion rose from under 1 per cent to over 6 per cent. During the economic expansion of 1982–90, the core inflation rate fell from over 6 per cent but remained fluctuating closely around 4 per cent for much of the period, before rising again at the end of the period. The current period of economic growth, 1991–2000, has seen core inflation rates fall from nearly 5 per cent to 2 per cent. 4. The first modern venture capital firm, American Research and Development (AMD) was established in 1946 by MIT President Karl Compton, Harvard Business School Professor Georges F. Doriot, and local business leaders whose aim was to commercialise the technologies developed for World War II, particularly those innovations undertaken at MIT. In the United States, before the mid-1970s, the annual amounts of venture capital fundraising and disbursements never exceeded more than a few hundred million dollars. However, from the late-1970s, the growth of funds flowing into the venture capital industry and the amount of disbursements increased dramatically, reaching $11.699 billion and over $12 billion, respectively, by 1997 (Gompers and Lerner, 1999). As Table 1 illustrates, venture capital disbursements in 1999 reached nearly $50 billion. 5. Despite the fact that since August 1992 the Japanese government has announced ten stimulus packages — worth at least Y = 120,000 billion ($1135 billion) — to rejuvenate the economy, as of mid-2000, Japan remained in recession. In fact, GDP contracted for seven of the last nine quarters of the 1990s, a record not even matched by the UK in the 1970s or 1980s. See Abrahams (2000); Tett (2000). 6. Source: Nikkei Research Institute of Industry and Markets. 7. This paper does not permit space for a detailed discussion on the keiretsu. However, many excellent references are available in English on the subject, for example, Fruin (1992); Gerlach (1992); Aoki and Dore (1994); Shimotani and Shiba (1997). 8. Morikawa (1992) provides detailed definitions and explanations of zaibatsu. The zaibatsu were the pre-World War

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SOFTBANK: AN INTERNET KEIRETSU AND ITS LEVERAGING OF INFORMATION ASYMMETRIES

9. 10. 11.

12. 13. 14. 15.

16.

17. 18. 19.

20.

21.

14

II vast industrial conglomerates with a single family at the helm. Many emerged shortly after the Meiji Resoration (1868) and included the four largest zaibatsu — Mitsui, Mitsubishi, Yasuda and Sumitomo. The occupying allied forces disbanded them after the war and their leaders were banned from future public office. On this point, see Lynskey and Yonekura (forthcoming). The Dai-Ichi Kangyo group consists mainly of former members of the smaller Kawasaki and Furukawa zaibatsu. The Sanwa group had no pre-war antecedent. This seems to confirm the observation by Knight (1921, p. 274) that ‘demonstrated ability can always get funds for business operations’. While Son had been a student at the University of California at Berkeley in the late-1970s, with the help of a professor and research assistants, he invented and patented a multilingual pocket translator. On his return to Japan, Son sold his invention to Sharp Corporation, reputedly for $1 million, as a prototype for its Wizard electronic organiser. An account of the remarkable personality of Tadashi Sasaki, also known as ‘Rocket’ Sasaki for his agility and bullishness, is given in Kimura (1997). In our interview dated 15 October 1998, Son said that he did not know Mr Sasaki offered the guarantee to the bank. Son and Softbank celebrate one day in September, the ‘Seven Great Believers’ Gratitude Day’, as a sign of gratitude to the small number of initial investors who made Softbank possible. Interview with Masayoshi Son on 22 January 1999. The Economist (1996) In August 1995, the yen reached 79 yen to the US dollar. Softbank’s acquisitions included Comdex, the computer trade-show organiser, for $803 million in April 1995; ZiffDavis, the computer magazine group and publisher of PC Week and PC Magazine, for $2.1 billion in February 1996; and an 80 per cent stake in the world’s largest memoryboard maker, Kingston Technology, for $1.4 billion in August 1996. Internet technology emerged at CERN, the European physics research laboratory outside Geneva, and from ARPANET in the US. As late as 1993, the Internet was almost entirely the domain of universities and government-funded research projects. An ‘acceptable-use policy’ banned commercial applications from most of the Internet. In 1995, the value of electronic commerce was only about $300 million (it increased approximately 1000-fold by the end of the 1990s) and there were about 177,000 web sites domains (by the end of the 1990s, there were several million), according to International Data Corporation and Network solutions, respectively. Interview with Masayoshi Son on 22 January 1999. Weinberg (1999). In Japan, the average number of daily page views for Yahoo! Japan jumped to 39 million in December 1999, compared with 13 million in December 1998. The company claimed to have the largest online auction commerce site in Japan. In the four-month period from December 1998 to March 1999, Internet usage in Japan rose 22 per cent so that 13.4 per cent of the population (16.94 million people) were online. See Foremski and Taylor (2000); Clark (1999); Nusbaum (1999). Nasdaq is a US stock exchange, the acronym of which stands for the National Association of Securities Dealers’ Automated Quotation. The exchange was set up in 1971 in response to attempts by the US Securities and Exchange Commission in the 1960s to regulate off-market trading. In 1994, Nasdaq overtook the NYSE in annual share-trading volume and posted returns of over 20 per cent each year between 1995 and 1998. Nasdaq’s best-known listing is perhaps Microsoft, which joined the exchange in 1986 and went on to become the world’s most valuable company. Easdaq began trading the shares of Microsoft, Cisco Systems, Intel, Oracle, Sun Microsystems, MCI WorldCom, Dell Computer, Yahoo!, Amgen and Amazon.com.

22. 23. 24. 25. 26.

27. 28. 29.

30. 31. 32. 33.

34.

35. 36. 37. 38.

Harney (1999). Nusbaum and Tett (1999). Stein et al. (1996). Bremner and Himelstein (1999). Nippon Credit Bank (NCB), a corporate lender, was nationalised in 1998. In July 2000, Softbank agreed to take a 48.8 per cent stake — equivalent to about 49 billion yen ($450 million) — in the bank. The deal fuelled controversy about Softbank’s strategy because of the opportunity it presents Softbank to use NCB to lend to its Internet ventures and group companies, thereby raising a conflict of interest. Nikkei Business (13 October 1997); Toyo Keizai (29 August 1998). The Nikkei Sangyo Shinbun (27 October, 1993). The Japanese government agreed to underwrite the NCB sale to Softbank on extremely generous terms. Within three years, any NCB loan that falls by more than 20 per cent in value can be returned to the government. This presents Softbank with little downside risk, but correspondingly little incentive to turn round non-performing loans. From our interview with Son on 22 January 1999. Forbes (6 July 1998). Abrahams (1999). Tett and Rahman (2000). However, February 2000 marked the peak in Softbank’s share price. During the following six months, its share price fell more than 70 per cent. As a result, Son’s personal wealth declined sharply from the figure quoted here. Asahi Solar, a maker of solar-heating equipment, was touted as a fast-growing venture after its 1996 alliance with Toyota Motors. However, it was forced to scale back its operations following charges that its salesmen unduly pressurised customers. Likewise, another Japanese entrepreneur, Kazuhiko Nishi, president of high-technology publisher Ascii, was forced to sell a controlling stake in his company to CSK Corporation and Sega Enterprises after poor sales of new Ascii magazines. Abrahams (1999). Stein et al. (1998). Brown (1999). Stein et al. (1998).

References Abrahams, P. (1999) Pied Piper of the net. Financial Times 8 November. Abrahams, P. (2000) Japan’s fragile growth. Financial Times 14 March. Aoki, M. and Dore, R. (eds) (1994) The Japanese Firm: the Sources of Competitive Strength. Oxford University Press, Oxford. Bremner, B. and Himelstein, L. (1999) Softbank’s cyber keiretsu. Business Week 5 April. Brown, J. (1999) Back-in-favour Japan sweeps the board. Financial Times 29 December. Clark, T. (1999) The new gold diggers: the third VC wave comes to Japan. J@pan Inc. December. Dunne, N. (2000) US expansion is longest in history. Financial Times 2 February. Foremski, T. and Taylor, P. (2000) ‘Business as usual’ attitude causes concern. Financial Times 13 January. Fruin, M. (1992) The Japanese Enterprise System: Competitive Strategies and Cooperative Structures. Oxford University Press, Oxford. Gerlach, M.L. (1992) Alliance Capitalism: The Social Organization of Japanese Business. University of California Press, Berkeley and Los Angeles. Gompers, P. and Lerner, J. (1999) The Venture Capital Cycle. MIT Press, Cambridge, MA. Harney, A. (1999) Softbank shares soar to new high. Financial Times 13/14 November.

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Kay, J. (2000) Competing under the same old rules. Financial Times 11 August. Kimura, Y. (1997) Technological innovation and competition in the Japanese semiconductor industry. In Innovation in Japan, eds A. Goto and H. Odagiri. Oxford University Press, Oxford. Kirzner, I.M. (1973) Competition and Entrepreneurship. University of Chicago Press, Chicago. Knight, F.H. (1921) Risk, Uncertainty and Profit. Houghton Mifflin, New York. Lynskey, M.J. and Yonekura, S. (forthcoming) Profiles in leadership: Key determinants of presidential promotion in Japanese firms. Business History. Morikawa, H. (1992) Zaibatsu: The Rise and Fall of the Family Enterprise Group in Japan. University of Tokyo Press, Tokyo. Nusbaum, A. (1999) Free online access comes to Japan. Financial Times 2 November. Nusbaum, A. and Tett, G. (1999) Softbank’s bid for reinvention. Financial Times 17 November.

MICHAEL LYNSKEY, Institute of Innovation Research, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo 186-8603, Japan. E-mail: [email protected] (or) [email protected] Michael Lynskey is a Visiting Research Scholar at the Institute of Innovation Research (IIR) at Hitotsubashi University and at the University of Tokyo Research Center for Advanced Science and Technology (RCAST). He has been funded by scholarships from The Japan Foundation, The Science and Technology Agency and The Japan Society for the Promotion of Science.

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Shimotani, M. and Shiba, T. (1997) Introduction. In Beyond the Firm: Business Groups in International and Historical Perspective (Fuji Business History Series), eds T. Shiba and M. Shimotani. Oxford University Press, Oxford. Stein, T., Allan, K.C., Menaker, D. and Brown-Humes, C. (1996) The world’s greatest entrepreneurs: their powerful strategies for creating success. Success June. Stein, T., Allan, K.C., Menaker, D. and Brown-Humes, C. (1998) The world’s greatest entrepreneurs: their powerful strategies for creating success. Success June. Tett, G. (2000) Tokyo close to initiating 10th boost for economy. Financial Times 1 September. Tett, G. and Rahman (2000) Softbank founder closes in on Gates. Financial Times Weekend 18/19 February. The Economist (1996) After the party. 18 May. Weinberg, N. (1999) Master of the Internet. Forbes 5 July. Whitehill, A.M. (1991) Japanese Management: Tradition and Transition. Routledge, London. Yonekura, S. and Lynskey, M.J. (2000) Why Japan needs startups. Journal of Japanese Trade and Industry 19, 4.

SEIICHIRO YONEKURA, Institute of Innovation Research, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo 186-8603, Japan. E-mail: [email protected] Seiichiro Yonekura is Professor and Director of the Institute of Innovation Research at Hitotsubashi University. He received his PhD degree from Harvard Business School under the supervision of Alfred Chandler. His research interests are in innovation management and entrepreneurship.

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