Softbank Corp.

views updated

Softbank Corp.

3-42-3
Nihonbashi-Hanacho
Chuoku Tokyo 103
Japan
(81) 3-5642-8020

Public Company
Incorporated: 1981
Employees: 1,700
Sales: $900 million
SICs: 5045 Computers Peripheral Equipment & Software

Softbank Corp. ranked as Japan’s largest software wholesaler and top publisher of computer magazines and books. The company also gained a reputation as a notable software venture capitalist. In 1995, Softbank marked its thirteenth anniversary and its first year as a publicly traded business by posting over $900 million in annual sales. The Tokyo-based firm was founded and led by Masayoshi Son (rhymes with “lone”), a self-promoting 34-year-old whose rapid rise earned him the nickname “the Bill Gates of Japan.” Son possessed a rare combination of character traits as an inventor, businessman, and “consummate salesman.” Although he hailed from a country that was not often distinguished for encouraging entrepreneur-ship, the editors of Business Week ranked him one of the best entrepreneurs of 1994. Son was often cited as a driving force behind the development of Japan’s $2.75 billion PC software market, of which his company controlled a sizable share. Although the firm diversified widely during its relatively brief history, software wholesaling still accounted for over half of annual revenues in 1994.

Son was born in 1957 to Japanese citizens of Korean descent. By his own account, his early years were characterized by second-class citizenship and poverty. In a 1992 interview with Alan M. Webber of the Harvard Business Review, he acknowledged that, like many other Koreans in Japan, his entire family had assumed a Japanese surname, Yasumoto, in order to better assimilate into society. Son’s family was able to move out of a squatter town and into the middle class by the time he reached the age of 13. At 16, Son traveled to the United States to attend high school.

The youngster flourished in his new environment, resuming his Korean surname and breezing through three grades to graduate from his California high school within a couple of weeks. Son attended Holy Names College for two years, then transferred to the University of California at Berkeley. It was there that, with the help of some professors of microcomputing, he made his first $1 million at the age of 19 by developing a pocket translator. Son sold the patent for his device to Sharp Corp., which marketed it as the Sharp Wizard. By the time he was 20, Son had earned another million importing used video game machines from Japan.

Although Son realized that it would be relatively easy to launch a business in the United States, the budding entrepreneur also knew that the Japanese culture tended to produce employees who were likely to be more loyal and work harder than their American counterparts. Consequently, he decided to return to his homeland upon his graduation from college. He spent the next 18 months researching 40 different business options ranging from software development to hospital management. Using a matrix, Son ranked each one against 25 of his own “success measures.” He described a few of these to Webber in the Harvard Business Review interview: “I should fall in love with [the] business for the next 50 years at least;” “the business should be unique;” and “within 10 years I wanted to be number one in that particular business.” The field he chose— wholesaling personal computer (PC) software—met the majority of his criteria. At the time, most software developers did not have the capital to promote their products to hardware manufacturers, and most hardware manufacturers and retailers did not have software to run on their machines. Son hoped to carve out a profitable niche as a liaison between the two groups.

At first, his Softbank Corp. was more spectacle than substance. Using a combination of previously earned and borrowed funds, Son purchased one of the biggest display areas available at a 1981 consumer electronics show in Tokyo. Having absolutely no product to offer, Son called all 12 of the software vendors he knew at the time and offered to display their wares at his booth gratis. Not surprisingly, many jumped at the opportunity. Although his exhibit, which featured a large banner proclaiming a “revolution in software distribution,” caught many attendees’ attention, most already had their own contacts with software vendors. The show earned the fledgling entrepreneur only one contact; luckily, it was with Japan’s foremost PC retailer, Joshin Denki. Son negotiated exclusive rights to purchase software for the chain, then parlayed that top-notch industry connection into exclusive contracts with other firms, including Hudson Software, the country’s largest vendor. Over the course of its first year in business, Softbank’s monthly sales mushroomed from $10,000 to $2.3 million. By 1983, the company served over 200 dealer outlets.

By that time, Son was already pursuing additional business interests in the broader field he called “computing infrastructure.” He first diversified into publishing. His first two magazine titles, Oh!PC and Oh!MZ, lost hundreds of thousands of dollars in their inaugural months due to lack of interest. But Son feared that if he dropped these sidelines clients would smell trouble, so instead he revamped the layout and threw the weight of an expensive television advertising campaign behind the project. By the early 1990s, the flagship Oh!PC enjoyed a circulation of about 140,000 and had become the forerunner of a stable of 20 Softbank-published periodicals, including the Japanese edition of PC Week. Writing for Forbes in 1992, Andrew Tanzer noted that “the magazines rather shamelessly promote products Son distributes,” an accepted practice in Japan. By the early 1990s, the division had also put out over 300 computing books and become Japan’s leading publisher of high-tech magazines.

A lengthy bout with hepatitis sidelined Son from 1983 through 1986. Although he gave up Softbank’s presidency during this period, Son kept tabs on the company via computer and telecommunications equipment installed in his hospital room. His prolonged recuperation apparently gave him time to conjure up new ideas. Upon his return to Softbank’s helm, Son invented a “least-cost routing device” that came to form the basis of the company’s DATANET telephone data division. The idea evolved when Japan’s telephone monopoly, Nippon Telegraph & Telephone Corp. (NTT), was joined by three new common carriers—DDI Corporation, Teleway Japan, and Japan Telecom—in 1986. Although they offered lower long-distance rates, the inconvenience of dialing the three newcomers’ additional four-digit prefixes deterred many customers from signing on. Son’s computerized invention, which he described as about “the size of two cigarette packs,” would automatically choose the cheapest carrier and route, then dial the appropriate number. Periodic on-line updates kept the routers’ rate information current. Softbank offered the devices free to telephone customers and made money by collecting royalties on common carriers’ increased billings. In the early 1990s, Son expanded the business by offering routers installed in new telephones and fax machines.

Seeking ways to invest his profits—and perhaps to erect a bulwark against getting bypassed in the distribution chain— Son soon earned renown as a venture capitalist and corporate “matchmaker.” Early deals paired U.S. software vendors with Japanese partners who modified American computer applications for sale in Japan. Softbank made commissions on the matchmaking, then distributed the newly modified products.

The “marriages” got bigger in the early 1990s. In 1991, Son arranged two major computer networking alliances that combined the resources of a coterie of well-known rivals. The lead company in the first venture was BusinessLand Inc., a top systems integrator in the United States. It owned 54 percent of the $20 million venture, appropriately named BusinessLand Japan Co. Softbank held another 26 percent of the equity, while Toshiba Corp., Sony Corp., Canon Inc., and Fujitsu Ltd. each controlled five percent. Unlike its California-based majority partner, BusinessLand Japan eschewed the retail market in favor of corporate customers. While some analysts observed that the new venture’s Japanese participants would give it a leg up on pre-existing competitors like America’s Electronic Data Systems (EDS), IBM Corp., and Digital Equipment Corp., others noted a conflict of interest in having computer manufacturers among BusinessLand Japan’s investors. In fact, the venture failed and was liquidated within a year.

Nonetheless, Son had no trouble convincing many of those same corporations to invest in a second endeavor that same year. America’s Novell Inc. owned 54 percent of and lent its name to the venture, Novell Japan Ltd. Softbank held 26 percent of the new company, while hardware manufacturers NEC, Toshiba Corp., Fujitsu Ltd., Canon Inc., and Sony Corp. each chipped in four percent of the equity. Although each of the latter five partners produced its own version of the networking system, all were compatible. The coalition sold network operating systems, peripherals, cables, transceivers, boards, and other network-related products. Since, according to Son’s estimate, less than five percent of Japan’s PCs were networked in 1990, the allies expected to make Novell’s NetWare the industry standard there. Son predicted that the Japanese computer networking industry would “grow like hell” in a 1992 interview for the Harvard Business Review. This prediction came true: by 1994, Novell Japan Ltd. boasted $130 million in annual sales.

That same year, Son engineered what Business Week called a “sweeping alliance” involving Cisco Systems Inc., Fujitsu Ltd., Toshiba Corp., and a dozen other Japanese firms. The partners anted up a total of $40 million to fund the launch of Nihon Cisco System, which planned to distribute internetworking systems in Japan.

Although he was widely hailed as a “whiz kid,” Son was not infallible. Within just six months in 1991, he allegedly lost $10 million in a bungled on-line shopping venture. Systembank, a joint venture with H. Ross Perot’s Perot Systems, was intended to provide systems integration for large Japanese corporations. According to a February 1995 article in the New York Times, Systembank was “quietly disbanded.” In 1994, Son convinced NTT to invest $200,000 in a “video on demand” alliance. The proposed interactive system would allow subscribers to request movies and other media at their leisure. Son boldly predicted that the joint venture would have 10 million customers by the turn of the century. But NTT, which had a similar agreement with Microsoft Corporation, did not plan to have the necessary infrastructure (i.e., fiber optic cable to households) ready for another five to ten years, which pushed back Son’s anticipated timetable substantially.

Son’s first post-graduate American venture, Softbank Inc., was formed in 1993 with the cooperation of Merisel Inc., Phoenix Technologies Ltd., and telemarketer Alexander and Lord. The new subsidiary planned to distribute software through the interactive Softbank On-Hand Library service. Softbank Inc.’s vice-president, Meg Tuttle, described the demo disks as “adware.” Reviewer Steve Bass of PC World “fell in love” with the $10 CD-ROMs, which allowed users to “test-drive” over 100 programs, then order and pay for the selected software on-line. Several big-league computer companies, including Apple Computer, Inc., IBM Corp., and Ingram Micro Inc., had already launched similar promotions. But other analysts and competitors ballyhooed the idea. For example, David Goldstein, president of Channel Marketing, told PC Week’s Lawrence Aradon that offering software on compact disks would become “the Edsel of the computer industry.” The venture’s direct competition with one of Softbank’s most important consumer groups, software retailers, broke what Steve Hamm of PC Week called one of Son’s golden rules: “don’t compete with clients or suppliers.” By early 1995, in fact, a number of industry analysts pronounced the venture defunct for that very reason.

Son took Softbank Corp. public in 1994 in an offering that valued the company at $3 billion. The founder retained a 70 percent interest in his company. Coming off the late 1994 loss of a bidding war for the U.S. magazine publishing operations of Ziff Communications Co., Son acquired that firm’s trade show division for $202 million. The subsidiary’s name was changed from ZD Expos to Softbank Expos. Early in 1995, Softbank made a major addition to that interest with the $800 million purchase of a package of 17 computer trade shows from Sheldon Adelson’s Interface Group. The acquisition, which was financed with at least $500 million in debt and a new offering of Softbank Corp. shares, nearly doubled Softbank’s U.S. operations.

The acquisition included the Las Vegas Comdex show, which was characterized in a 1995 Wall Street Journal article as “a huge draw in the computer industry.” Launched in 1979, Comdex attracted 195,000 attendees and 2,200 exhibitors to its November 1994 show. Although it remained popular, the event’s high prices had come under criticism in recent years. Some major exhibitors, including Compaq, Packard Bell, Oracle, and Seagate Technologies, had already opted out of the show by the time Softbank took over. Son expressed confidence that he could revitalize the event without a total revamp, citing the fact that exhibit space for the 1995 show was already 90 percent booked by the previous spring. Expansion plans for the new businesses included the first French Softbank Expo in 1995 and the premier Japanese and British Comdexes in 1996.

In 1995, 37-year-old Son predicted to Steve Hamm of PC Week that he would “do something big” while in his 40s. While it seemed likely that he would stay within the bounds of the computer industry, potential rivals within that very broad category were expected to keep a close eye on the movements of this innovative competitor.