Cover Story: Son of the internet
As the world's largest investor in cyberspace, reportedly owning 25 per cent of the Internet, Masayoshi Son will either go down in history as a blinding visionary or a reckless fool. While all around him whisper about bubbles bursting, the man from Japan is shouting `buy, buy, buy!' What does he know that we don't?
Wednesday 17 February 1999
Bill Gates, of Microsoft, believes that these soar-away stocks should be trading on lower multiples than ordinary companies; he wouldn't advise even his worst enemy to invest at these levels.
Rupert Murdoch thinks the phenomenon will destroy more businesses than it creates. And The Economist believes they are about to come "spectacularly crashing to Earth".
Everyone, it seems, is convinced the US craze for Internet companies is a financial bubble about to pop, and that when this happens, the consequences will be quite disastrous, not only for those who have invested in them at these apparently fanciful levels, but also for America's vibrant Silicon Valley and quite possibly for the world economy, as well. Everyone, that is, apart from those crazy Americans, who have taken to trading these stocks, generally on-line, as if this was a Saturday afternoon at the races; everyone, that is, apart from Masayoshi Son, or "Mr Internet" - the man who owns a quarter of cyberspace.
There is no doubting the bubble-like characteristics of the phenomenon. Individual Internet stocks have been known to change hands up to 10 times in a day, so frenzied is the level of trading, while it is not uncommon for the value of shares to yo-yo by 50 per cent in a single trading session.
Some of the hottest Internet companies - Yahoo!, AOL and Amazon.com - have come to be valued, despite their insignificant profits, at more than Boeing and Disney.
So convinced is one leading US economist of the bubble-like characteristics of the Internet craze that he has labelled it "Tulip.com", after the great seventeenth century speculation in tulip bulbs. Rarely have investors seemed so determined to lose sight of reality.
So is the Internet shares phenomenon a dangerous game of financial roulette, which is bound to end in tears, or is there more to it than that?
One person who believes there might be is Mr Son, a 41-year-old financier and entrepreneur who, with foresight the rest of us can only dream of, managed to take big shareholdings at an early stage in a whole raft of today's highest flying Internet companies. So inspired was his investment strategy, that he is now not only far and a way the biggest investor worldwide in the Internet, but he can realistically claim to own 25 per cent of cyberspace. This may seem a meaningless boast, but shareholdings of around 30 per cent in Yahoo!, the most visited site on the Internet, Geo Cities, number three, and E.Trade, one of the US's biggest Internet stock brokers, are just the more visible and valuable in a portfolio that includes nearly 100 "pure" Internet companies. No one else comes close to that concentration of power in what has become the world's fastest growing industry.
"I admit that what's now going on is crazy hype," Mr Son says. But he won't call it a bubble. "Yes, of course there will be a correction, probably later this year or early next. The increase in valuations has obviously been far too fast. But we are long-term investors and this doesn't matter to us."
Mr Son's view of the Internet investment phenomenon is that we are only at the beginning. Today, the quoted Internet sector is worth about $200bn. "My bet is that over the next 10 years, this sector will go to $2,000 billion," he says with a degree of confidence that only other self-made billionaires could match. "I say it will rise ten-fold but that is only because I want to stick with a conservative forecast. Actually, I think twenty-fold is more realistic."
To back this forecast, Mr Son cites the example of the personal computer sector. Ten years ago, the collective stock market value of personal computer companies, including giants like Microsoft, Intel and Compaq, was $38bn. Today they are worth more than $2,000 billion. That's a degree of wealth transfer and creation unmatched in recent history. Is it really possible to repeat the trick with this second generation of technology and entrepreneurialism?
Of course it is, says Mr Son. At the World Economic Forum's annual meeting in Davos, Switzerland, last month, Mr Son asked a select audience of businessmen, bankers and economists which sector they thought would eventually be bigger, PCs or Internet? "Ninety-five per cent voted Internet," says Mr Son. "And they must be right. The PC market is limited to hardware, software and retail. The Internet is unlimited in size. From flowers to automobiles, the Internet will come to be key in virtually all industries.
"There are only two numbers in my vocabulary - zero and infinity. The Internet encompasses both these characteristics. It has zero variable cost; there is a zero decrease in accuracy as information is passed around. At the same time, it has infinite reach, infinite information and infinite product range. Neither of these things - zero or infinity - were possible in the past.
"Whoever understands these characteristics and incorporates them into their business model, will succeed in revolutionising their industries, and taking over from the old, established firms."
Prophetic, starry-eyed stuff. Is he right?
The record, it might be said, speaks for itself. Mr Son is today one of Japan's leading entrepreneurs and very much the face of "new" Japan - self-made and mistrustful of the past.
Amazingly for one listed as among 10 to watch out for in the latest assessment published by Forbes magazine of the 200 richest people in the world, he still answers his own e-mails - and he does it religiously every day. If Japan has its own version of Bill Gates, Mr Son is it.
His beginnings, however, could hardly have been less auspicious. He was born into a poor family of Korean descent who lived in a shanty town on the edge of Tosu city in southern Japan, where they eked a living from breeding pigs and chickens. Perhaps because of this, Mr Son shunned the traditions of Japanese education and, at the age of 16, went to California to complete his schooling, eventually ending up at Berkeley. There his entrepreneurial skills received an early boost when he invented, and subsequently sold to Sharp for $1m, an early version of a multi-lingual pocket translator. His other business venture as a student was the import of used video games from Japan. He earned enough money to return to Japan and establish a business, Softbank - a distributor of PC software.
He was pushing at an open door. The PC market in Japan, unlike the US, was still in its infancy. Few others were doing it and Mr Son rapidly moved to a position where he was supplying some 50 per cent of the total retail market in Japan. From there, he moved into PC magazines, developing along the way an almost absurdly simple and ambitious strategy - to control as much of the world's digital future as he could. If nothing else about Mr Son is particularly Japanese, this kind of mission statement is - a straightforward, no-nonsense, statement of ambition and aim.
Inevitably it was to take Mr Son back to the US and that extraordinary hothouse of hi-tech entrepreneurial endeavour, Silicon Valley. By 1994, the Internet had already reached take-off point in the US and it was spawning a new generation of companies, so different in their nature, ethos and decentralised management style from anything that had gone before, that many of them did not seem like conventional businesses.
For many of these Internet entrepreneurs, their companies were a personal crusade, a hobby and a lifestyle venture.
Softbank examined more than 5,000 of them, the idea being to take big strategic stakes in up to 100.
"The thing to think about," Mr Son says, "is not that we risked our money in investing in 100 of these start-ups, but that we turned down 4,900 companies."
What were his criteria? "Yes, of course we looked at cash flow, but since many of these companies have no cash flow, this doesn't mean a lot. What we concentrated on was the business model - management and the strategy for growth."
Even then, these companies were not cheap. It is hard to tell exactly how much Softbank has invested in US Internet stocks. Mr Son says it was $100m. Others say it was much more.
What is not in dispute is that with the explosive growth in valuations, the combined worth of Softbank's Internet investments is now in excess of $15bn.
On top of that, there is an associated venture capital fund with a myriad of investments in smaller Internet enterprises. What singles Mr Son out from other Silicon Valley venture capitalists is that he invests only in pure leading-edge Internet companies, shunning software, hardware and backbone infrastructure.
At the start, the strategy worked like a dream. With the help of a team of former Nomura financiers, hired especially for the purpose, Mr Son would use the "cheap" money available in Japan to finance his American adventures in technology. Against traditionally high Japanese valuations, his investments did not seem expensive.
It has not all been a bed of roses. Despite the runaway success of many of his gambles, there has been persistent scepticism. Like many entrepreneurially led companies, Softbank is widely regarded in the investment community as being overburdened with debt. Its financial affairs are less than transparent and its accounting practices are, by Western standards, of dubious quality.
As a consequence, Softbank's share price has been a mirror image of the volatility of the Internet shares it invests in, climbing to dramatic heights before plunging downwards and recovering again.
The Japanese stock market's scepticism is amply demonstrated by the fact that today Softbank is valued at less than the worth of its stake in Yahoo! alone. Mr Son regards this as "ridiculous", but it is testament to the degree of concern in the investment community that the last Financial Times cutting on Mr Son described his company as "the troubled Japanese multimedia conglomerate". That article appeared more than a year ago and Mr Son would no doubt claim that the subsequent rise and rise of traded Internet stocks has more than vindicated him. Nonetheless, the doubts remain. Even the biggest and best Internet companies still devour, rather than generate, capital, and Mr Son's exposure is such that he has to try and feed that appetite. Is he not in danger of over-extending himself?
Perhaps, perhaps not. But on one thing Mr Son is not alone in his thinking. Everyone agrees that the Internet is going to transform the way business is conducted and organised. It is, as yet, uncertain whether that revolution will be as awe inspiring and all-encompassing as, say, the development of the railway and the motor car, or the discovery of electricity.
On one level, e-commerce and the Internet are just alternative methods of distribution. Nothing very exciting about that, it might be said. On the other hand, the Internet allows for a degree of competition and price transparency never before seen. What's more, it brings this about on a global scale. If that might seem to be bad for the profitability of business and, by extension, for the value of companies, just dwell on this: One of Mr Son's recent investments is Buy.com, a company which incorporates a zero or even negative margin into its business model. Who, in their right mind, would dream of starting a business which sells products for less than it bought them for? An Internet entrepreneur, of course. The idea is that the difference in price is recouped from advertising.
The Internet's share of total advertising worldwide is much less than 1 per cent. Mr Son and others like him think this will rise exponentially with the growth of e-commerce. "If you see an advertisement on your TV set and you are wearing your pyjamas at the time, what is the next action you can take?" he asks. On the Internet you can purchase that item immediately, rather than waiting till the next morning.
And still Mr Son's Japanese investors, who allow Softbank's shares to trade at such a huge discount to its underlying assets, don't seem to get it. "They will eventually," Mr Son predicts confidently.
`Internet Shares Will Rise Ten-fold'
Masayoshi Son's thoughts on the future of Internet companies:
"Stock prices have risen too fast and there is bound to be a correction, either later this year or next."
"On a long-term view, this correction will be like nothing. Internet companies are the companies of the future."
"Over the next 10 years, the stock market value of the Internet sector, currently some $200bn, will rise ten-fold as existing companies grow and their ranks are swelled by newcomers."
"I am a conservative person and this is a conservative estimate. Actually, it is more realistic to expect a twenty-fold rise."
"This bet is based on what has happened to the PC sector over the past 10years. In 1988, it was worth just $38bn, including Microsoft, Intel, Compaq. Today it is worth $2,000 billion worldwide. The Internet sector is worth $200bn today so there is easily scope for it to grow to $2,000 billion."
"The Internet sector will eventually be much larger than the PC sector. The Internet has the capacity to expand into virtually all business areas, so it will be much larger."
"Whoever understands the characteristics of the Internet - its capacity for infinite reach and zero variable cost - and builds their business model around it, will succeed while traditional business models will fail."
"The biggest business growth area on the Internet will be e-commerce."
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