For those of us still struggling to use our cell phones and PCs, there is a whole new world of Internet activity and interaction going on that we will have to stay up with if we want to sell online to anyone under the age of 30. One of these hot new business sectors is that of Social Networking Services in Japan (SNS), which lets millions of people find new friends and relationships online by matching profiles and forming groups.

By Social Networking, we do not mean “Deai”, or dating sites, but rather portals that allow people to type in their profiles and only hear from others with similar interests. In the US, the most famous of these is Myspace.com, which has more than 100m members and as of August was the second most visited domain on the Internet, with 20m visitors, just behind Yahoo which had 21.1m.

Here in Japan, the SNS of note is Mixi, a site incubated and funded by well known Bit Valley proponents Kiyoshi Nishikawa and Satoshi Koike of the Netage Group. Mixi recently announced that it has more than 5m members and that in July it had more page views than Rakuten. Both Mixi and its biggest competitor, Gree, are growing dramatically.
The two sites have added about 2m more members in just the last 4 months, and are expected to keep growing at a rate of about 20% per month for some time to come. Indeed, Mixi’s own press archive shows that as recently as August of last year, the number of members was just 1m — revealing a quite amazing level of growth.

This huge increase hasn’t gone unnoticed by the majors.
Both Yahoo Japan and Rakuten entered the SNS market earlier this year. However, right at the moment, all eyes are on Mixi. With so much traffic, coupled with a savvy business model, the company recorded a net profit of JPY987m
(US$8.58m) on sales of JPY4.79bn (US$41m) in the last fiscal year. As a result, the company plans to IPO on the Mothers market on September 14th.

Looking at the Mixi website, it is interesting to see that the company initially relied on their closely-related FindJob recruiting business to fuel income and profits for the first 3 years, and only after the number of users reached the millions did they then push hard for ad and other revenue opportunities. This has been a very smart way of overcoming the negative-income results of most other SNS hopefuls.

Already diversifying further, Mixi recently announced that it was starting a music download business. We guess that once you have the numbers in an online marketplace — and especially when the users are a somewhat captive audience since they have to use your services to reach their online friends — you can pretty much sell anything you like. It only takes a 0.1% take-up on a new product or service to create 5,000 new customer enquiries…

Another web site, also incubated by Netage, has taken the revenue focus one step further. The site is Yubitoma, which is dedicated to letting the Japanese stay in touch with their school friends. Although few Westerners have heard of it, the site has been going since 1996 (the company started in 1990) and now has over 3.4m members.

Unlike Mixi, Yubitoma is more focused on the relationship between its members and one particular subject — their old schools. The creators of the site know just how much importance the Japanese give to life-long relationships started at school, ranging from “yochi-en” (kindergarten) through to university, and how this translates into a human network for business and social success. Thus while Yubitoma is a slower burning business than Mixi, it nevertheless appears to be just as successful. In particular, its management have been quite innovative in ways to make money from their member base. These include doing low-cost, quick-turnaround online market research, and even offering a Yubitoma Visa credit card.

Investors are watching the Mixi IPO carefully, because after some slackening in demand in the middle of this year for new stocks, Mixi is being touted as being THE stock to reignite the public’s demand for small issues. No doubt part of the build up in expectations has been the fact that MySpace.com in the USA was bought out as a loss-making business by Rupert Murdoch’s News Corp. for a cool US$580m last year. Although this seemed like a crazy price back then, in the passage of the last 12 months the service is now rumored to be worth about 10 times that sum.

Given that Mixi is growing at a similar speed but is already profitable, the underwriter is going for the high end and is putting a market cap on the company of JPY109bn (US$947m), i.e., if the 70,500 shares are valued at JPY1,550,000/share. If this turns out to be the final listing price, then the company will raise at least JPY10bn in cash on the 6,600 shares being offered. Again, an amazing achievement.

One interesting side light on this listing is the incubation company behind Mixi, Yubitoma, and another 50 internet companies — Netage. This company itself went public on Mothers on August 30th, on the strength of an 88% surge in consolidated sales to JPY19.bn (US$16.5m) and a 1200% increase in pretax proft to JPY360m (US$2.6m).
Actually, these don’t seem like big numbers, but seeing as how NetAge is sitting on 16% of Mixi’s stock and even bigger positions in many of its other portfolio companies
— the asset base of Netage is quite impressive.

And that spells a lot more high-profit revenue over the next few years, and makes the company look much like a smaller version of Softbank Investment. Take a look at the list of major shareholders at Netage (you can check it out at www.tokyoipo.com) and you’ll see that the line-up reads like a who’s who of the internet sector. Among the big names are Transcosmos, Mikitani, Globis, Usen, Orix, and others.

Clearly the founders of Netage are well connected as well as savvy operators.

Lastly, if all this talk about IPOs has whetted your appetite for starting a company, you’re in luck. Our last Entrepreneur’s Handbook seminar for 2006 will be held at a new location in Shinjuku on Saturday, September 30th. If you would like to receive an intensive run-down from an expert in the field (your’s truly, Terrie Lloyd) on how to set up and run a successful company in Japan, then please email us at seminar@japaninc.com. See http://www.japaninc.com/handbook_seminar3/ for more details.