Mauling Skeptics
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By Gene Galbraith, AsiaWise
30 Nov 2000 12:30 (GMT +08:00)
From the U.S. to India, Internet websites that cater to consumers and business – B2C and B2B models – are being maligned for a lack of earnings. Japan cybermall operator Rakuten is proving that conventional wisdom wrong as it profits from a boom in the country's e-commerce.
Rakuten, Japan's biggest online mall, said in October that net profit - that's right, real money in the bank - in the third quarter of this year surpassed $2.8mm, up fourfold year-on-year, on sales of $7.8 million. Year to date earnings top $4.2 million.
How did they do it? The company's success is part of a story of rapid growth in e-commerce in Japan. Although the U.S. is by far the global e-commerce leader, growth in Japan is in fact much faster.
According to a Goldman Sachs study, in 1999 B2B e-commerce revenues in Japan of $3.2 billion accounted for 24% of Asia's total e-commerce revenue of $13.2 billion. By 2002, the study forecasts Japan will have about 35% of an Asian e-commerce pie that will have grown tenfold to about $131 billion. Japan's projected 14-fold growth in e-commerce in the coming four years is twice that expected in the North American market over the same period.
The broad changes that e-commerce is bringing to big-name Japanese businesses are well documented. Countless newspaper features and magazine covers dissect the shifting fortunes of Japan's maverick investors such as Softbank (an AsiaWise investor). Reams of brokerage research and specialist studies have chronicled the rapid emergence of innovative technologies like NTT DoCoMo's iMode. Since its unveiling in Feb. 1999, iMode has facilitated Internet access of 12 million subscribers.
Less reported are the ways in which small, innovative and – what is perhaps most distinctive – genuinely profitable homegrown Japanese firms like Rakuten are flourishing.
Founded 1997 by Harvard MBA Hiroshi Mikitani, Rakuten has confounded the skeptics who doubted the willingness of Japanese consumers to shop online. It hosts more than 3,000 cybershops whose product offerings range from foodstuffs - the most popular category for Japanese online shoppers - to sports gear and automobiles. Its online auction site, begun in September 1999, offers more than 60,000 goods and ranks No. 2 among such sites in Japan. In June of this year Media Metrics reported that Rakuten was Japan's 9th most popular domain, boasting 4.5 million unique monthly visitors and a reach including nearly one-third of all Internet households.
Since its inception Rakuten has been profitable, setting it apart from most of its virtual B2B and B2C cohorts. The company's principal sources of revenue are "rents" and advisory fees charged to cybermall tenants, commissions levied on auctioned goods, and advertising. It entitles tenants access to the Rakuten Merchant Server, a software package that creates standardized commercial web pages linked to the company's online portal, and to the services of the company's e-commerce consultants and 'shop advisors'. Its revenue mix has been solid as well. Rentals account for about 68% of sales, advertising 19% and commissions and other sources contribute the remaining 13%.
A source of concern among investors has been the scalability of the company's model. Some have been concerned that consumers might become frustrated or confused by Rakuten's fast-growing variety of cybershops and auctioned items. Today's reported acquisition by Rakuten of web navigation service Infoseek Japan may represent an effort by its management to address this potential pitfall. At $81 million, it would be the biggest ever purchase of an Internet service company in Japan.
Admittedly, the company's profits aren't much to write home about compared to traditional businesses, at least not yet. But Rakuten's success dwarfs the results of its U.S. and European counterparts who are still years from breaking even.
Company Links:
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