Japan’s most important businessman, SoftBank’s Masayoshi Son, made his bones in recent years venturing overseas to diversify away from an aging, shrinking home market.
Now, the venture-capital giant is going the other way, merging SoftBank’s internet subsidiary Yahoo Japan, of which Son owns more than 48%, with messaging app Line Corp, owned by South Korean portal operator Naver.
A wise pivot? Sure, on the face of it.
Son, after all, has had a dismal few months. Red ink at his US$100 billion Vision Fund is spreading as huge bets in WeWork, Uber, Lyft and Slack go bad. What better way to change the Son-has-lost-it narrative than create a $30 billion Japanese tech colossus to mirror the tech monsters dominating the US and Chinese markets? Son also suddenly has local rival Rakuten on the run.
Too bad, though, the Yahoo-Line deal highlights two dynamics holding back Japan’s economy. One, this may create a new monopoly that runs counter to Tokyo’s desire for a more competitive corporate sector. Two, Son is empowering a syndrome that has long plagued Japan.
The two are related, of course, but comprise different risks at a moment when Prime Minister Shinzo Abe claims to favor a Ronald Reagan/Margaret Thatcher shakeup in Japan.
Engineering a monster
In fusing Yahoo and Line together, Son clearly seeks to create his own Alibaba. His prescient decision to hand $20 million to an obscure English teacher in Hangzhou in 2000 is, after all, the source of his “Warren Buffett of Japan” halo.
By 2014, that bet was worth more than $50 billion when Jack Ma took Alibaba public. Son is desperate to replicate that success.
This quest for financial scale, though, too often has Son aiming to create new monopolies where they’re not needed. Here, think Uber in North America, Grab in Southeast Asia, Ola in India and WeWork dominating the shared-office game from New York to Singapore.
Say what you will about Alibaba or Amazon, it’s still hard to make a case such giants don’t hurt the small-to-size companies that create most jobs and make tax revenues thrive.
Since 2012, Abe has been working to level the Japan Inc playing field and catalyze a startup boom. Here, Son has been little help, sprinkling very little capital on homegrown disrupters. Now, here comes Son to bigfoot young tech entrepreneurs already starved for financing, government tax incentives or any commercial space to grow businesses.
Where a Yahoo Japan-Line amalgam can’t naturally squeeze out any potential competitor, it can just buy them out – the way Alibaba, Google, Facebook and Samsung do.
So, good for Japanese users who will soon have a single, dominant portal to read news, search cyberspace, shop, message friends and the boss and make payments.
Bad news for competitors squeezed to the sidelines and would-be startups angling to make Japan more efficient and productive and generate fresh wealth.
Where’s the global play?
Insularity has long plagued Japan Inc. For decades, Japan has had a knack for highly-evolved, game-changing products that thrive in the home market but have difficulty succeeding beyond the water’s edge.
Corporate Darwinism has rarely worked in Japan, thanks to a model that often has executives and government bureaucrats saving businesses and practices better left to extinction.
There are few better examples of this dynamic than Apple’s iPhone. Long before Steve Jobs wowed the globe with a new tech species, Sharp and Toshiba had been adding cameras and internet and e-mail options to mobile phones. It just never occurred to Japan Inc to simplify the design and sell it overseas.
A related worry emerges with the Yahoo-Line hookup. Where, after all, is the cross-border potential?
Line, to its credit, has more monthly average users outside Japan than inside – 82 million in Japan versus 140 million overseas.
Caveats abound, though. In 2016, Line pulled off one of that year’s splashiest initial public offerings. Investors were bullish on its sales and ad revenue potential hawking digital cartoon stickers to share with friends while messaging. Yet getting users abroad to pay at least $2 per sticker disappointed. Line has since been in the red.
And Japan may remain the world’s third economy, but the combined body is not going to be a challenge for true economy-of-scale colossi – particularly as Japan Yahoo remains a largely domestic, Japanese language shop. The appeal outside Japan is highly questionable considering the ubiquity of Google everywhere and Baidu in China.
Detailing the deal
SoftBank says Yahoo Japan, which in October changed its name to Z Holdings Corp, hopes to complete the deal with South Korea’s Naver, which owns 73% of Line, in October 2020.
Details on the roughly $12 billion transaction are expected to be hammered out next month. At the moment, the plan is for a 50/50 control split between Z Holdings and Naver.
In a November 19 investment note, Seoul-based analysts at Nomura wrote: “We believe the integration will likely create synergies in Line’s and Yahoo Japan’s existing online businesses, including e-commerce, mobile pay and advertising, through leveraging each other’s large user base and big data.”
They add that the “two companies could also improve the return on investment, by consolidating the investment efforts in new business areas such as AI, fintech and O2O,” the latter reference being to so-called online to offline flow between the internet and the physical world.
Even so, SoftBank Group shares fell 1.34% in Tokyo trading Tuesday. Punters are sure to pay close attention to Line when it starts trading on the New York Stock Exchange Tuesday.
And it’s not clear, though, that this a win for Japan’s structural reform efforts. The kind way to put it is that Japan’s top messaging app and a top online retailer joining forces merely means consolidation in the tech industry.
It also could be seen as SoftBank returning fire at Rakuten for moving into Son’s core mobile services business.
And it’s hard to see how another giant monopoly at home is good for Japanese innovation. Nor is it clear how pivoting to betting big on a demographically-challenged, disinflationary home market makes sense for SoftBank in the longer run.