Joi Ito's Web

Joi Ito's conversation with the living web.

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This is a letter I got from Prime Minister Koizumi asking me to join the cabinet consumer policy committee. Actually, the reason I was invited to this committee is because professor Iwamura suggested I be added to represent the position that the Net provides a new way for companies to interact with its customers. This is a pretty important committee and I feel a bit out of place, but it's a great opportunity to try to get stuff about the Net built into some of the basic laws governing information disclosure and corporate governance.

My comments on "Versioning: The Smart way to Sell Information" (Carl Shapiro and Hal R. Varian, Harvard Business Review, 1998) written July 29, 2001 for Kokuryo-sensei's class.

Information Is a Service, Not a Product

By Joichi Ito
July 29, 2001

In their article "Versioning: The Smart Way to Sell Information" (Shapiro and Varian) suggest that by creating different versions of software and information products, priced differently with slightly different features, publishers can provide products for each of their customer segments and use the segmenting to allow some versions to be highly priced. They explain that prices should be based on the value to the customer rather than cost of production.

Although I found the article useful in thinking about the current models of versioning, especially from a market segmenting perspective, I believe there is a much more important lesson to be learned in the information distribution business model.

Treating information as a static product capable of being packaged and distributed or of being stored and protected in a server has many difficulties. Copyright will become exceedingly difficult to enforce and people who understand the nature of information will see through the segmenting as in the case of airline tickets, which they mention.

I believe the only robust model for information in the future is a services model. People will pay for live contact or highly customized information. People will see value in information as it is produced. I think that non-customized, already-produced packages of information will continue to drop in value.
As long as people continue to be familiar with old marketing and media models, many of the strategies in the article will continue to produce results. However, all businesses should assume that customers will not be willing to pay more just because it is 努orth more to them.・We must try to find business models that allow pricing to reflect both the value to the customer and the work done to deliver the value to the customer.

Services such as support, community, customization, live audio and video streams and other less scalable aspects of information distribution are the easiest to charge for. I believe that
servers that store the information and software that allows users to search the information (New York Times and Business Week) to a lesser extent are still 電elivery services・ We should focus our attention on the point that the company is providing a storage and search service, rather than focusing on the point they are providing more 妬nformation・to paying customers.

As peer to peer networks become easier to use and the cost of hard disks plunge, just having a lot of storage and search capability will not be enough. In addition, although the law can try to prevent the copying of music, software and other digital assets, I believe that it will become quite difficult. Companies and artists will have to come up with models which do not rely on their ability to control copying.

Another way mange this dilemma is to receive payment up front before delivering or even working on the software or information product. 典he Wall Street Performer Protocol・(Chris Rasch, 2001) describes a software completion bond mechanism for funding open source software development. Other ways to do this might be for fans to pre-pay for first rights to receive a new music track from an artist, or for artists fund recording by integrating this with paid performances.

Although I believe that copyright will continue to cost more and become more difficult, it is important to note that it will take time for the current information infrastructure to make it obsolete. Also, buying habits are strongly influenced by media, and although I believe that the Internet will create a new much more active media, mass media still has the most impact on the public. Therefore, I believe all companies and artists should keep in mind that long term trend is away from packaged information distribution, there is still a great deal to be gained short term from finding creative solutions for copyright, versioning, and marketing.

From my column in Japan Inc.:

...We talked about i-mode and the future of 3G and wireless. Mr. Ishiwata pointed out that 80 percent of DoCoMo's revenues still come from voice and that DoCoMo basically subsidized handset makers so that they were able to sell them at the same price as the plain old voice handsets being sold by competitors. It wasn't a brilliant marketing scheme allowing companies to sell the Net to young people so much as a way to use DoCoMo's deep pockets to subsidize a new device for stealing voice traffic away from competitors. Also noted was the fact that most i-mode email is with other i-mode users. Is the service simply a merger between the teenage pager market, which was huge in Japan, and voice?

From my column in Japan Inc.

WENT TO AN IBM JAPAN LUNCH WHERE THEY INVITED their top executives and "NetGen" partners. NetGen is a IBM group set up to work with "Net Generation" companies. I'm in favor of IBM's attempt to bridge the gap between itself and Net ventures, but the Net is converging with traditional IT and the distinction is becoming negligible.

One feature of Net companies discussed was fast growth, but I think ventures are slowing down to focus more on earnings. I sat across from Takuma Otoshi, president of IBM Japan. I told him that I was spending nearly as much time with legacy systems and people as doing the dot-com thing, and that I'm not sure I want to be categorized as a NetGen company. Being called a dot-com now is almost an insult (see www.blowthedotoutyourass.com). It makes sense for IBM Japan to focus on such companies and get traction in this space, but they're up against similar teams at Dell, Toshiba, NEC, and others. To win, it'll have to pick the winners and gain their trust.

Participated in a panel at a conference organized by the Institute for the Future. Moderating was Tim Oren, who ran the Advanced Technology Group at Apple and is now a VC and consultant. I like him because he still puts technology center stage. Also on the panel were Mr. Shohei Ishiwata of Nomura Research Institute and Renfield Kuroda of Morgan Stanley Dean Witter.

Mostly we talked about i-mode and the future of 3G and wireless. Mr. Ishiwata pointed out that 80 percent of DoCoMo's revenues still come from voice and that DoCoMo basically subsidized handset makers so that they were able to sell them at the same price as the plain old voice handsets being sold by competitors. It wasn't a brilliant marketing scheme allowing companies to sell the Net to young people so much as a way to use DoCoMo's deep pockets to subsidize a new device for stealing voice traffic away from competitors. Also noted was the fact that most i-mode email is with other i-mode users. Is the service simply a merger between the teenage pager market, which was huge in Japan, and voice?

Even if it is, DoCoMo, with its near-monopoly and huge cash reserves, may be able to create a dominant content platform. On the other hand, few are making money on content over i-mode, and the promises of video and broadband on 3G/IMT-2000 may be overrated. Renfield said the idea that people would use 3G phones for videoconferencing was naive, particularly since no one has ever shown that people want videoconferencing.

In any event, though I think the i-mode team did a great job, there are many factors that make the success unique, and just copying this in other markets may not work.

Went to Singapore to visit the various government funds and incubators there. We met with GIC, a group that invests government funds for financial return; Temasek, the government holding company for its corporate assets; and the National Science and Technology Board, which funds companies and research in science and technology. We also met with various incubators.

I was extremely impressed with the quality of the people that we met. Jimmy Hsu, at GIC, knew more about Japan than most Japanese investors. Singapore has been able to recruit some of the best talent available to run its government funds. These funds have invested in Silicon Valley and other places and made it a condition that their partners set up shop in Singapore. The result is that Singapore has been able to import a great deal of attention and brains and is now using this to invest in and leverage its assets across Asia. The fact that everyone there speaks English also helps. In Japan, we're still trying to get a bill passed so that government funds aren't used to line politicians' pockets, and we can't even get English recognized as a second language. Singapore is clearly running circles around the Japanese in many areas.

I was also very impressed with the incubators, which I believe are much further ahead than their Japanese counterparts. In particular, the Kent Ridge Development Laboratory was interesting. It receives over US$20 million a year from the government to fund about 300 researchers (many from India and China) and then spins out startups. Why can't Japan do clever things like this instead of building bridges that no one uses?

From my column in Japan Inc.:

Gnutella, Toyota, Oki Matsumoto of Monex and sneaky stock tricks.

From my column in Japan Inc.

WAS INVITED BY GENERAL ELECTRIC to a round table lunch with Jack Welch. Kenichi Omae, Masayoshi Son, Jun Murai, Oki Matsumoto of Monex, Takeshi Natsuno of NTT DoCoMo, Hiroshi Mikitani of Rakuten, and others. Jack was as impressive as I had imagined he would be. He went around the room and hit people with hard questions and sparked some very interesting discussions about Japan, the nature of the Net, and the future of B2B markets. One obvious thing, which I hadn't thought about until Jack raised it, was that the Internet was causing more electricity to be consumed. GE has an obvious interest in how much electricity is consumed in the world. I often use electricity as an example of how basic and invisible the Internet will someday become, but I had forgotten how basic and invisible electricity is. Anyway, Jack was very concerned as to whether new technologies would cause more electricity to be consumed.

・Went to Kyoto to be on a panel organized by Mitsuhiro Takemura for Kyoto City. Present was Gene Kan, one of the founders of Gnutella, the open source peer-to-peer software that lets you make your hard disk available for download to anyone else in the network. As has been covered ad naseum, it really throws a wrench in the ongoing debate about copyright because Gnutella, being open source, allows anyone to create software that makes it possible for people to "share" their music collections. Because the software is free and open, it's very difficult now to stop it from spreading. Gene is very outspoken about the notion that even if we want to save copyright, it is already dead. Gene and I realized that I was 10 years older than him. I remember when I was always the youngest and the most radical. Not anymore, I guess.

・Took a day trip to Toyota-shi to visit Toyota. Being my first time in Toyota, it was obvious, but still a surprise to notice, that every car in sight after leaving the train station was a Toyota. I only saw Toyota dealerships and everywhere everything was about Toyota. The Toyota team that we met were pleasant, smart, and appeared to be very happy. As we waited in the lobby, people came back from jogging; others arrived in test-purpose electric vehicles that employees could use. The team told me that Toyota still rarely hires people from other companies and that very few people leave. I guess if you live in Toyota City, drive a Toyota, and go to parties where everyone works for Toyota, you have very little incentive to leave. Riding the shinkansen back, it struck me that Toyota City seemed to be on an entirely different planet from my venture world. In any event, I decided that there was always a great deal of value in bridging such vastly different cultures, as long as it was done properly.

・Oki Matsumoto, the former Goldman Sachs partner who quit just before their IPO to start Monex (which, it turns out, has been a great success), came to our offices to give a talk to our partner companies (ones that Neoteny has invested in). It was a great eye opener for many, including myself. Oki has really led the way for many significant changes in Japanese policy regarding the structure and process of building and taking companies public.

In particular, he devised a sneaky way to get around the エyen;50,000 per share split limit and the inability to go to non-par-value stock in the middle of a company's development. Ask Oki for the details, but when he went public, he had エyen;1 par value stock, which allowed him to get a great deal of liquidity by making his stock reasonably priced. Many Internet companies have stock prices in the $100,000 and $1 million range because of the inability to split stocks, severely limiting their liquidity. Since Oki went ahead and did it, many companies now want to follow his example, and Monex is providing support for such companies. Many traditional Japanese securities companies are still against this method, even though government officials and the stock markets have agreed that it's acceptable.

From my column in Japan Inc.:

Had dinner with Shigeaki Saegusa, spoke with Mitsumasa Murase, appeared on Hodo 2001, met Tim Collins of Ripplewood.

From my column in Japan Inc.

Had dinner with Shigeaki Saegusa and Ryo Hato at one of their favorite French restaurants. Saegusa-san, a composer, is one of those strange non-business people who seems to know everyone in Japanese business. Saegusa-san reported that he was currently working on a full orchestra piece approximately 45 minutes in length for the family of former Sony head Akio Morita, to be performed at his memorial event. Saegusa-san said he is doing it for free because if he charged for his time, it would end up being some ridiculously expensive endeavor that they couldn't pay for anyway. He said he gets stuck writing corporate anthems and other things for his friends. Of course, friends in high places come in handy when he is looking for corporate sponsors for his mega-operas. Ryo Hato is an amazing consultant who was one of the earlier members of McKinsey in Japan. Now he runs a small outfit called XCEED that basically does high-level consulting for companies that Hato-san happens to like. The rest of the time he spends fishing. My regular dinners with the Ryo and Shigeaki duo are always a very funny view into the amazing but true side of Japanese big businesses.

・The president of Jafco, Mitsumasa Murase, and I were invited to speak at a hearing at the Liberal Democratic Party headquarters about the necessity for change in the corporate code. The hearing was very frank and straightforward. I was allowed to complain in length about the stupid laws that assume companies have poor governance and investors who are ignorant; still use abacuses for the finance; and can't close their books more than once a year. Murase-san and I talked about all the nitty gritty that drag us down and drive my legal bills into the stratosphere. The legal professors are intent on protecting the almost geometrically perfect balance of the Japanese commercial code, which is reputed to be written in katakana and kanji from the 1800s. As usual, the politicians were annoyed about the closed process and threatened to propose a bill themselves. The MOJ promised that they would change the code in one and a half years. I got a last word in edgewise and asked for companies such as ours to be involved in the lawmaking process, and for the new laws to reflect IT enabled, best-practice-turbocharged companies instead of paper-pushing giants.

・Appeared on Hodo 2001, a weekly program on FujiTV. The show was focused on Ryu Murakami's new book, the title of which translates roughly into Exodus of the Land of Hope. It's about half a million students who drop out of junior high in 2002, use the Internet to build businesses, and move to a commune in Hokkaido, where they denounce the government. I helped Ryu come up with some of the ideas, and the main character's name is "Ponchan" Joichi, though I don't think the character is really based on me. Joining Ryu and myself was Ikuyo Kaneko of Keio University, who talked about the educational issues. The discussion drifted all over the place, but we discussed how technology was creating a communications divide between the establishment and young people. I said that if the old economy folks would be a bit more humble, it would be a lot easier for all of us to communicate.

・Met Tim Collins of Ripplewood. He and Chris Flowers have their hands on the tiller at LTCB/now Shinsei Bank. Like many foreigners who've spent a lot of time in Japan, he was very cynical about the general state of Japanese corporations, but unlike most foreigners, he's actively doing something about it. He, Chris, and a group of foreign (and some Japanese) managers are attempting to turn Shinsei into a hitherto unheard-of animal -- a Japanese bank run on Western standards. From a Japanese etiquette perspective, many of the things they are doing may appear quite rude, and the press takes swipes at them. But I think they are performing a very important market efficiency process on Japan, one that's needed right now. As the economy starts to pick up again, I think Japanese companies are starting to slow down on their restructuring. Ripplewood is a reminder that they still have a long way to go.