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Breaking the Bank: How Softbank is Betting Everything on Bringing Broadband to Japan

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

[It is time to get back to work. Those who are interested in following the story of Chase Cringely and the effort to build a SIDS monitor will find further information at http://www.cringely.com and http://www.chasecringely.org.]

Japan, which for years had the most expensive Internet service in the world, now has the cheapest thanks primarily to Softbank, the high tech investment braintrust that has invested billions in bringing cheap DSL service to the world's second largest economy. We all know Softbank, the Japanese company that owns the Ziff-Davis computer publishing empire and the Comdex computer show. Softbank was also an early and significant investor in most of the important Internet companies of the 1990s, including Yahoo, eTrade, and hundreds of others.

At the height of the Internet boom, Softbank was one of the most valuable companies in the world and is still worth more than $15 billion today. But with many of its U.S. investments gone sour, the company is looking more and more toward its home market and has committed major resources toward consumer broadband service under the Yahoo brand. In addition to home DSL, the company just announced cheap 802.11 wireless Internet service for Japan in association with McDonald's restaurants. This is great for Japanese web surfers, but I find myself wondering: Will Softbank will run out of money before the strategy becomes profitable?

It is hard for Americans to understand how expensive Japanese Internet service used to be. The major ISP is Nippon Telephone and Telegraph (NTT), which until not long ago was a government-owned monopoly. NTT was big and fat and — like most other big fat Japanese companies -� made its money by avoiding at all costs providing real value to its domestic customers. Japanese paid by the minute for local calls and paid through the nose for Internet service. As anecdotal proof of how expensive things used to be in Japan, I tried to colocate a server with NTT in 1998, and the price they quoted me was $75,000 per month!!! One might guess that they just didn't want my little Linux box, but just the opposite was true since NTT was an investor in my business then. They were just trapped by a price sheet that said colocation cost $75,000.

Well, that has all changed. Softbank has driven the cost of ADSL down below $20 per month, and Softbank competitors have matched those prices. In the wireless space, mighty NTT just announced its own dual mode 802.11b and 802.11a Internet service to be rolled out in Tokyo railways stations, hotels, and restaurants for $12.40 per month. Think about that for a minute: 802.11a runs at up to 54 megabits-per-second -� faster than the T-3 line your ISP uses for thousands of customers �- but Tokyo web surfers will be able to drink from that fire hose for less than most Americans pay for dial-up service.

This is great news for Japanese Internet users and will undoubtedly spur many new and interesting web services, but how do the service providers make money? They don't, and there lies the rub.

What Softbank is trying to do can be traced back to a brilliant strategy devised in the 1980s by Ray Noorda, then head of Novell. At that time, few PCs were networked, and Noorda wanted to change that. Novell owned a hardware division that made network adapter cards, among other things, so Noorda made the aggressive decision to sell the cards for just what it cost to make them. 3Com had been doing a good business selling Ethernet cards for around $180 each when Novell waded into the market selling cards for a third that price. Noorda called it "growing the market." 3Com founder Bob Metcalfe called it "attempted murder." The result was an explosion of Ethernet sales all going to customers for Novell's Netware network operating system, which quickly became the de facto standard. 3Com, of course, had to drop its prices, and they also fought back by entering the network operating system business, which turned out to be not such a good idea.

Growing the market was brilliant — if counter-intuitive — in an era when companies prided themselves on high profit margins. Novell made high margins, just not on its network cards, which quickly became a standard. What Noorda did was turn on its head King Gillette's notion of effectively giving away safety razors in order to make big profits on razor blades. Noorda's adapter cards were the razor blades, given away to encourage the sale of razors (network operating system licenses). And it sure worked. Novell became the de facto standard for office networking with a market share as big as Microsoft or Cisco have today. Though the company eventually faltered when it bought WordPerfect and Quattro Pro, Netware remains a significant player in network software with around 50 million seats in use.

What Noorda had done by growing the market was cited again and again by companies striving for growth during the Internet boom. But there is a critical difference between what Novell did and what those Internet companies did and what Softbank is doing in Japan. Novell sold its Ethernet cards AT COST, not at a loss, and Novell had a parallel, high-margin business to benefit immediately from the sale of all those adapter cards. Most Internet companies didn't have a second business, nor does Softbank, which effectively gives away a $100 bill every month with each DSL account. This can't be sustained.

Softbank tells itself that there are opportunities for synergies and greater revenue in the ADSL and wireless businesses. In the 802.11 deal with McDonald's, for example, Softbank says it intends to offer voice-over-IP services to essentially allow users to make mobile phone calls without per-minute charges. While this does promise additional revenue, it promises even more to annoy NTT DoCoMo, Japan's largest mobile phone carrier, a company that could easily crush Softbank.

Eventually, Softbank or its competitors will run out of money. And since NTT has more money than Softbank can even imagine, the outcome of that competition would seem to be inevitable. Even worse, I'm told that even if Softbank decided to get out of the DSL business, there is a $400 per account cancellation charge due to the participating telcos, which might explain why the company seems to be leaning every more steeply into the business. It's all they can do.

That, and pray.

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