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Business Week e.biz
Movers & Shakers By Irene M. Kunii July 21, 1999


A Big Jolt of E-Biz from Japan's "Bit Valley"
Hiroshi Mikitani and his Rakuten cyber mall are shaking up Japan's work culture and its formula for making a profit

Eight years ago, 34-year-old Hiroshi Mikitani was simply one of dozens of young, blue-suited career bankers working their way up through the rigid hierarchy of Tokyo's ultra-conservative Industrial Bank of Japan. Mikitani, now Japan's hot new Internet star, might have kept to that staid path were it not for a bank-sponsored, two-year stint at Harvard Business School, where he earned an MBA in 1993. There, Mikitani discovered freewheeling American culture and learned about the possibilities of a then-fledgling Internet.

Today, Mikitani is founder of cyber mall Rakuten Inc. and one of the first success stories to emerge from Tokyo's new "Bit Valley" movement of Internet startups -- a group of companies that derives its name from the English translation of Tokyo's trendy Shibuya neighborhood. Literally translated, Shibuya means "bitter valley." Founders decided to shorten that nickname to the more digital-sounding Bit Valley.

 

For a fee, E-tailers get everything from a cyber storefront to auction services to tracking software
 

Mikitani has traded blue suits for blue jeans and polo shirts and his traditional job for the life of an Internet entrepreneur. His Rakuten, like the dozen or more Net companies that also call Shibuya home, is just starting to shake up Japan's change-averse business establishment. And so far, workers at Rakuten -- which means "optimistic" in English -- have every reason to be hopeful. Rakuten has signed up 850 merchants, including top retailers in the physical world, from ANA Hotel and Tokyu Department Store to Ono Suisan, a sushi wholesaler in Tokyo's famed Tsukiji fish market.

And more are coming online. Mikitani expects another 120 new Net retailers to put out their cyber shingles on www.rakuten.com in each of the next few months. For a fee that averages about $400 a month, retailers in the mall get a storefront, auction and billboard services, secure transaction processing, and software that lets merchants track items most popular with customers. "Most companies don't have $20 million to $30 million to own their own servers," Mikitani says. "We're making it easy for them to do E-commerce."

 A STREAM OF ECONOMISTS. So far, so good. The site averages more than 400,000 page views each day and generates close to $2 million in monthly sales, a figure that Mikitani expects could reach $5 million to $8 million by the end of the year. And the best part? Unlike many Web sites, Rakuten is profitable, expecting to rake in $1.5 million before taxes this year. With two years of profits behind him, the minimum required to list in Japan, Mikitani plans to make an initial public offering next year on Japan's over-the-counter market. "Maybe I'll be able to create some Net millionaires," he says, grinning.

The secret of his success? Credit his background. The son of an economics professor, Mikitani was exposed to new ideas early on. As a child, he attended American grammar school during his father's stint as a visiting scholar at Yale University. There, in New Haven, Conn., Mikitani learned to speak English fluently. Later, back home in Kobe, he recalls being impressed by the stream of top economists invited to the family's home, including the outspoken Jeffrey Sachs, director of Harvard University's Center for International Development.

One of Mikitani's greatest inspirations came years later, from Harvard B-school classmate John Kim, a Korean-American entrepreneur who, Mikitani recalls, "was keeping up with course work and building his own business" at the same time. Kim later sold his company for a "handsome sum," Mikitani says, and is now in the process of starting another.

 eBAY'S THREAT. With Rakuten, Mikitani will have to apply all of those lessons and his skills to fend off new Net rivals. Already, U.S. online auctioneer eBay Inc. has set up a Japanese-language section on its popular site and could pose a threat to Rakuten. "I am aware that in the Internet business, your friend could be your enemy the next day," he says.

But Mikitani isn't simply shaking up the formula for making money in Japan. He's also reshaping the workplace culture: Many of Rakuten's staff of 27 have received stock options, a rarity in egalitarian Japan. "Staff are much more motivated if they have stock options," Mikitani says. "And everyone here is well paid."

Other companies are following Rakuten's example, and the time is ripe for the changes. The number of Japanese Netizens is now estimated at about 17 million, up from almost nothing in 1994, the year after Mikitani got his MBA at Harvard. According to Japan's Ministry of Posts & Telecommunications, E-commerce in Japan last year generated $58 billion in sales revenues. That's expected to top $129 billion in the next three to five years.

 

The Japanese are "communication geeks," says Mikitani. They'll transfer their love of cell phones to the Internet
 

Also, Japan's long recession has pushed companies to slim down and become more efficient. The Net is seen as the tool of choice for some companies willing to experiment. "This year and next, you'll see a big initiative in Japan in electronic commerce of all kinds," says Scott Hartz, who oversees global consulting services, including E-business, for PricewaterhouseCoopers. Agrees Japanese economist Iwao Nakatani, deputy chairman of Japan's Economic Strategy Council: "In two years, Japan will see an E-biz explosion. Traditional businesses will have to strive hard if they hope to make the transition to the E-economy."

The changes won't be easy for some companies. NEC President Koji Nishigaki says that even a high-tech giant like his lags behind fleet-footed competitors in the U.S. and Europe. "Japanese are still not comfortable using the keyboard, with the exception of young people," he says. "And we still lack an Internet infrastructure." It hasn't helped that the cost of Japan's wired and wireless phone connections are among the highest in the industrialized world.

But none of this worries Mikitani. "Japanese are communication geeks," he says, laughing. "These are people who readily pay $100 a month for cell-phone services." If even half of Japan's 50 million cell-phone subscribers also take to the Net, you can be sure that Mikitani and other Bit Valley entrepreneurs will be laughing all the way to the bank -- rather than having to work there.

Kunii is a correspondent for Business Week in Tokyo.


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Hiroshi Mikitani: Founder of Rakuten
(Photo: Tsutomu Sueyama)


WEB POINTERS
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Rakuten (in Japanese)



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