Terrie's Take: Changing Web Business in Japan, Secrets Law, Child Abuse, Square vs. PayPal, Social Security, and High-End Property

Terrie's Take - AkihabaraNews.com

Terrie’s Take is a selection of Japanese-centric news collected and collated at J@pan Inc by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:

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Terrie’s Take on December 9, 2013


  • Changing Web Business Models for Japan


  • Secrets law is passed
  • Figure put on cost of child abuse
  • Square versus PayPal in Japan
  • Social security costs rise another 2.7%
  • High-end property firm to double assets in Japan

Changing Web Business Models for Japan 
It's always interesting to see how foreign business models that have done well overseas by breaking new ground will do here in Japan. Usually such businesses are from the sector most responsible for shaking up our world these days -- the Internet. It's no accident that most of these companies come from the USA, where extreme funding opportunities allow them to buy massive numbers of online users with compelling value propositions, and thereby leverage or disenfranchise traditional service providers in the same sector. Think of the hotel industry to see just what effect this can have. How many of you do NOT cross-check Expedia, Booking.com, or Agoda.com when checking the prices and room availability on a hotel's own website?

Another great example is Groupon, the couponing company that offers subscribers a 50% or larger discount on restaurants, massages, and other services, and of the remaining 50% takes half as a commission. Groupon surged into the Japanese market with the purchase of a local company, QPod, back in August 2010 and kickstarted (although a now-defunct local player, Piku.com, started the scene here) a discounting revolution in the restaurant business. Or, so they thought at the time. However, the idea that a restaurateur would be happy with just 25% of the normal pricing AND have to service new customers chasing deals pouring in through the doors was just too much to ask of this mostly conservative group.

Yes, Groupon is a great marketing idea for service businesses to get attention, but unless it leads to repeat business the merchants quickly realize that they are just fodder for Groupon's marketing machine -- and thus the Groupon model is eventually bound to fail. Groupon doesn't break out its Japan revenues in its financial reports, but given that all of EMEA is not doing well and it is only expansion in the USA that is carrying the stock, we imagine that Groupon is going to have to change its model. Indeed, back in the USA, Groupon has already admitted publicly that it needs to take a smaller share of the revenue to continue attracting merchants. Numbers of 30%-40% are being bandied around, instead of 50%. Eventually we think the acceptable commission will fall to around 5%-15% -- much the same as auction sites.

Groupon's newest service, a marketplace that lets local users search for local deals, will most likely be more successful here, so long as Groupon agrees to price that marketplace differently. Because the buyers are local, instead of delivering hoards of deal chasers, Groupon will instead be delivering to restaurants customers who are more likely to be repeaters and thus be of long-term value to these local advertisers. We wait with interest to see how things play out for this new market.

Soon to hit our shores will be crowdfunding. In the USA, as we have noted previously, "crowdfunding" is actually a misnomer, because out of legal necessity companies operating such funding platforms had to make the "funding" either a donation or a product/service purchase. So in this respect the person providing the funds is essentially paying for the entertainment of watching a company receive money, develop its product, then either go commercial or go out of business. We never really thought this would fly in Japan, it smacks too much of asking the funder to be a sucker for unscrupulous or inexperienced business aspirants -- and the chances of getting value for your money is low. In other words, you could get just as much entertainment rolling a JPY500 coin down Dogenzaka hill in Shibuya, and watch people run after it.

Rather, what will make crowdfunding take off in Japan is the ability for individuals to invest small amounts of money in real companies operating under real laws and with real stock to sell. Yes, this will by necessity involve more paperwork and take away some of the convenience and spontaneity of crowdfunding sites, but in return it will give the funder a real opportunity to get something in return, and this is something that business-minded individual Japanese (otherwise known as the nation's Mrs Watanabes) are used to.

Actually, the same metamorphosis is going on in the USA as well, where the Jumpstart Our Business Startups Act signed back in 2012 is starting to take shape. Now everyone is waiting for the Securities and Exchange Commission (SEC) to finish up on its rules so that the race can start. Our best guess is that the crowdfunding provisions will be in place mid-2014, and thereafter companies will be able to raise up to US$1m on their favorite crowdfunding platform. Interestingly, VCs will also be able to raise funds the same way, to make their own investments outside the public marketplace. We'd love to see this kind of VC come to Japan -- which we think is likely, since the Japanese authorities seem to be indicating that they are going to model their regulations on the JOBS Act. If so, we could see a major shake-up in the volume and funding levels of start-ups in Japan by 2015.

The third business model we want to look at today (of course there are dozens of others), is that of hotel booking websites in Japan. You have the major players here such as Rakuten and JTB, while the foreign interlopers are Expedia and Booking.com. When the two foreign firms first arrived in Japan, they tried hard to break into the huge domestic bookings market, but quickly found that it was almost impossible to offer deals when the incumbent competitors had fifty times the number of hotels to offer. Consumers want convenience as much as they do price.

As a result, both foreign firms decided to stick to their knitting and offer Japan's 17m outbound travelers great international deals, through their substantial off-shore networks. Built on strategic partnerships with most major travel sites, both companies now pretty much control the outbound online hotels booking market. Where the adjustment to Japan has come in for both of them is that they are now reinvesting their local earnings to substantially build out their inventory of local hotels as well -- with the eventual goal of having a similar inventory levels to JTB and others, while using their superior technology to whittle market share. Both companies are making good progress in signing local hotels, and Booking.com in particular has a large team out approaching Japanese hotels and ryokan. The challenge is in getting the Japanese establishments used to the idea of paying higher fees than the locals charge, but the benefit of signing is that they can then tap into the flood of inbound foreigners as a bonus.

What is common across these three examples is the fact that "localizing" to be successful in Japan means first and foremost being convenient and useful to the stake holders over a long period -- this means building large inventories and easy-to-use websites and purchasing methods. Then there is the need to keep margins acceptably low so that there is no real reason for a consumer to go to a competitor, thus creating a pool of loyal repeaters. Square is learning this importance of this in their tussle with Softbank/PayPal over the small merchant credit card payment systems business.

Perhaps lastly, it is fair to say that where foreign companies abroad have traditionally made high margins and need to continue making them to stay in business, then they need to be looking at customer sectors that can afford the premiums involved and where loyalty once built is strong. We think general consumers like pet owners fall into this category, as do health and fitness fanatics. Conversely, small business people such as restaurateurs definitely do not fall into this category. Salesforce.com learned this reality the hard way a decade ago. Rather, these small businesses are under extreme pressure from competition and reduced customer spending, and unless the online solution can make an immediate impact on their bottom line, they will see any new business model involving their making a significant new investment as buying snake oil. In this respect, the idea of doubling down one's investment in marketing in the hope of trading out of difficulty appears to be a Western (perhaps uniquely American?) idea and is the antithesis to Japanese small businesses.

Secrets law is passed
In a sad day for freedom of speech and government transparency, the Abe government has rammed through legislation that allows ministries and agencies to classify 23 types of information as secret, and disclosure of them punishable with prison, almost indefinitely. Abe says that the measures are needed so as to ensure uninterrupted flow of intelligence from the USA, but the measures passed are extremely broad and threatening. Critics say that the vaguely-worded bill could include almost any type of information and is likely to gag Japan's investigative media. ***Ed: In particular, this bill could be used to protect the likes of TEPCO should anything go wrong at the Fukushima power plant -- which is definitely NOT in the public interest.**
(Source: TT commentary from aljazeera.com, Dec 7, 2013)

Figure put on cost of child abuse
It boggles the mind to think how a researcher would draw the line on related costs, but nonetheless, the first study of its kind in Japan has found that child abuse costs Japan at least JPY1.6trn a year (as of FY2012) -- mostly in the form of lost productivity by the victims as they grow up. The methodology seems to follow similar studies conducted in the USA and Australia, and includes direct costs such as child counseling and welfare facilities, as well as indirect costs such as suicides, mental care, welfare benefits, and the aforementioned reduced productivity. Of the JPY1.6trn, a mere JPY100bn is direct costs, with the rest being the indirect ones.
(Source: TT commentary from asahi.com, Dec 8, 2013)

Square versus PayPal in Japan
Merchant credit card transactions are increasingly moving on to mobile devices, of which tablets and smartphones are the primary choices. To allow merchants to process customer cards, the new low-end devices are coming from two major suppliers: Softbank, which is selling PayPal's smart-phone card readers, at 3.24% commission per transaction, and Gurunavi and Sumitomo Mitsui Card, who sell and service Square's readers for 3.5%-8% (depends on company size) per transaction. Both companies are compelling choices for small merchants, saving them about JPY200,000 on the cost of a normal card reader and clearing service. ***Ed: This is a good article, with lots of detailed figures on the credit card spending in Japan versus the USA.**
(Source: TT commentary from bloomberg.com, Dec 6, 2013)

Social security costs rise another 2.7%
With statistics already two years old and therefore suggesting that things are even worse today, the National Institute of Population and Social Research has just announced that FY2011 social security costs rose 2.7% over the year earlier, to JPY107.495trn (US$1.04trn). This is equivalent to the spending of JPY841,100 for every man, woman, and child in the country. The money was spent on pensions, medical, family welfare, Tohoku relief, and other items. Pensions and health care for the aged accounted for most of the increase, with health care in particular increasing 3.5% to JPY34.634trn. Pensions accounted for the bulk of the spending, though, at JPY53.623trn, up 0.2% over FY2010. ***Ed: Given that the dankai generation is now pretty much all retired, we imagine that the numbers for JPY2013 will be up another 5% at least.**
(Source: TT commentary from asia.nikkei.com, Dec 7, 2013)

High-end property firm to double assets in Japan
Interesting article in the Nikkei about UK real estate developer, Grosvenor, and their plans to double their portfolio here in Japan to JPY120bn. The company specializes in high-end rental properties, such as the Grosvenor Place Kamizonocho next to Yoyogi Park, which reputedly offers the most expensive apartments in Tokyo. Apparently Grosvenor is bullish on Japanese high-end real estate because of strong demand from both Japanese and other buyers in Asia. As the Nikkei points out, prime residential real estate in Tokyo is actually cheaper, at JPY7m/3.3m2 than Singapore (JPY8m/3.3m2) and Hong Kong (JPY15m/3.3m2).
(Source: TT commentary from asia.nikkei.com, Dec 6, 2013)

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Images: Terrie’s Take; AkihabaraNews.com