Show Time at Softbank

Spend a few minutes with Masayoshi Son these days, and odds are he will sit

you in front of his computer screen and give you a demo of Yahoo! BB, his new

Japanese high-speed Internet access service. First comes a video news clip of

Osama bin Laden firing his Kalashnikov, followed by a performance from the local

rock group. "This is the fastest broadband access anywhere," Son says,

smiling. "We have a mad scientist engineer who did this."

The president and CEO of Tokyo-based Softbank, the globally ambitious

Internet venture fund, has reason to be obsessed with the five- month-old

service. After all, its transmission speed is twice as fast as anything in

Japan, the US, or South Korea. And Son is counting on Yahoo BB to be the smash

hit that will start to turn around the fortunes of his struggling company. The

service has already signed up 200,000 subscribers and is angling for 1.5 million

more. Moreover, Yahoo BB is not merely a new add-on to Softbank’s 51%-owned

Yahoo Japan, the offshoot of megaportal Yahoo. It could allow Softbank to

migrate all its Japanese affiliates to a faster and more profitable broadband

track.

That’s the plan, anyway. Certainly, Son needs to counter all the bad news

about Softbank of late. A sprawling operation with about $3.6 billion in

revenues and a patchy profit record, Softbank has invested in 600-odd Internet

and wireless outfits since the mid-1990s. Son made a killing by getting in early

on Yahoo, E*Trade, and mobile-phone service provider UTStarcom.

But many Softbank companies are now beginning to losing money.

Back in 1999, when Softbank was sitting on unrealized gains from its Internet

stock portfolio of about $15 billion, Son was hyped at home and abroad as a

visionary. It seemed more than deserved. But the cratering of global high-tech

stock prices has diminished Son’s aura. In late November, Softbank reported a

half-year net loss of $448 million, mostly because it was forced to mark down

the value of its Internet portfolio. Softbank’s market capitalization has

plunged to about $27 billion, from roughly $200 billion back in 1999. Worse,

Japan’s recession is pounding the profitability of its core publishing and

software retailing operations, and its fledgling online financial services.

Dot-bombs



Although Son has made some shrewd investments in Silicon Valley over the

years, he and his team got badly burned at the tail end of the Net frenzy, when

venture funds on the West Coast, Softbank’s VC arm included, bid up companies

with unproven business models to ridiculous heights.

There may also be a bomb hidden deep inside Softbank: the $800 million or so

it has invested in unlisted startups, primarily in the US that are expected to

break even next year. Still, debt pressures are mounting. Softbank owes $4

billion to creditors, $800 million of that is due in the next two years. True,

it has $1.22 billion in cash and marketable securities. It also has a credit

line of $700 million. But with unrealized gains on its portfolio down to $6

billion from $15 billion, analysts are starting to worry.

Son knows it’s show time on the profits front. JP Morgan Chase analysts

figure the company will lose $633 million for the fiscal year that ends next

March, on about $3.3 billion in sales. Son concedes the write-downs on soured

investments and Japan’s recession likely will result in a big loss.

Some are saying Softbank should pull out of the VC game, do triage on its

portfolio, and get down to the nitty-gritty detail work of turning its

subsidiaries into lean, mean profit machines. Son has already shuttered a

money-losing online Japanese bond-trading venture with Lehman Brothers and

pledges to be ruthless in cleaning out the rest of his stable.

No rest



For the moment, Son is being selective about new and second-round financing

in the US and Asia. And he isputting in 19-hour days getting Yahoo BB on track.

Now that the service is up and running, Son thinks he can get that critical

subscriber base of 1.5 million by late next year. His stable of e-commerce units

expect to see a jump in sales by cross-promoting on a souped-up Yahoo that

reaches some 20 million Japanese Web surfers.

Son still argues that the Internet will change everything. That may be true,

but Son has to prove he can make money on the hot technologies he has already

backed. Otherwise, the Internet revolution may move on to its next phase without

him.

By Brian Bremner in Tokyo in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc