Terrie's Take 908 -- Soracom M&A - 3 years old and worth US$180 million, e-biz news from Japan
Terrie's Take
terrie at mailman.japaninc.com
Mon Aug 7 10:14:18 JST 2017
* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)
General Edition Sunday, Aug 06, 2017, Issue No. 908
- What's New -- Soracom M&A - 3 years old and worth US$180 million
- News -- Stem cell spinal cord repairs may be possible in 2018
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Rustic cafe in Biei, Hokkaido, and moss forest in Nagano
- News Credits
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+++ WHAT'S NEW
Early this week, one of Japan's Big 3 telcos, KDDI, announced that it
would buy out a Japanese start-up company active in the Internet of
Things (IoT) space, named Soracom, for an estimated JPY20bn (US$180m).
This deal appears to be a record price locally in Japan for such a young
start-up, it raises two big questions. Firstly, it's not clear that the
IoT space as Soracom has defined it is even profitable, so why is KDDI
taking such a bit punt? Secondly, coming after just 3 years of
operation, and just over 12 months since their last major funding
(Series B, for US$27.8m), why is the Soracom team selling now rather
than taking the business through to an IPO?
The motivation for KDDI is pretty clear. Although the company's
consolidated revenues were up 6% over FY2016, and operating profit was
up almost 10%, in reality very little of this was coming from their own
internal operations. Instead, KDDI has reluctantly joined the MVNO wave,
supplying affiliates whose major selling point is SIM-free phones and
undercutting the major carriers in price. We think this is covering
stagnation in the main business. The problem for KDDI is that these
MVNOs are rapidly gaining marketshare and will probably eventually ruin
the profit margins of the mobile phone market. Good for consumers, of
course.
With the writing on the cards, KDDI has been purposefully casting around
for alternative business streams for some time now - both developing
internal businesses, which don't seem to be gaining much traction, and
making strategic investments. IoT has of course been high on the list of
buzzwords, and looking through KDDI's most recent Investor Relations
materials, you can easily see where they are headed. Think of
intelligent toilets, intelligent waste water management, intelligent
medical devices, and other businesses that rely on device frequently
reporting back to a central location.
Now with the Soracom acquisition, KDDI has catapulted itself from just
being one of the many IT/Communications companies jawing about IoT but
with very little to show customers, to now actually having a highly
productive software platform and a bunch of enthusiastic customers besides.
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[...Article continues]
Perhaps another reason KDDI went after Soracom and paid such a high
price is that with this deal they can put a serious dent into the side
of NTT DoCoMo. Most of Soracom's reputed 7,000 customers (we don't know
how many are actually in Japan, but we'd guess more than 80%) have been
running on SIMs and communications that Soracom uses over the DoCoMo
national network. Now, in one foul swoop, KDDI will be the carrier of
choice and as a result NTT DoCoMo will be reporting a big drop in MVNO
revenues next fiscal year.
We have been following Soracom for about two years. We first approached
them while working on a freemium SIM project for the www.japantravel.com
business and needing someone who could provide user access control -
something necessary if you want to make users do certain actions before
giving them unfettered access to the Internet - via an automated
interface technique known as an API (Application Interface Program). We
wrote about the importance of APIs back in http://bit.ly/2v9o3DE, and
how Japan is a bit of a Galapagos in this area due to the fears of
database owners allowing others to connect to their business systems.
But while the API market has generally been retarded by cultural issues
here in Japan, one segment that is not plagued by protectionism is IoT,
because it's still an emerging market with no incumbents. IoT devices
range from sensors on machines and trucks that report back to the
operators and makers on the condition and quality of the machinery,
through to farming sensors fitted to fields and hot houses to do much
the same thing. It's a big and growing market. In fact, according to
numbers from Invest Tokyo, of all new sectors in IT and Healthcare, the
greatest growth and largest revenue opportunity will be from IoT.
Already as of 2014, there were about 560m devices installed around the
country, in a market worth about JPY9trn, and by 2019 there will be
about 960m devices, with the market to be worth approximately
JPY16.4trn. But while it's a big market, it's not clear that it's
actually profitable yet.
KDDI is paying a whopping price for Soracom. The number of US$180m
doesn't attract much attention in the USA or, indeed, even around other
parts of Asia. But here in conservative Japan, it's unheard of for a
company just 3 years old to be fetching such a high price. Indeed, this
is normally the valuation that one would associate with doing an IPO and
so gives us a good indication of just how badly KDDI wanted the
acquisition. Soracom had some high-powered investors in its 2016 Series
B round, and you can be sure that they wouldn't have sold unless the
price being paid was comparable to doing IPO, or, unless they have been
faced with some serious hurdles which would have made a successful IPO
questionable.
That of course also begs the question as to why Soracom isn't doing an
IPO. Our guess is that while the company did set a new standard within
Japan as to software/API utility, and in so doing made it possible for
hundreds of start-ups to develop new business models around their
network and the IoT sector, many of these firms needed lots of hand
holding to start up, and by the very nature of the service, they are
only buying a few kilobytes of data a day. Since Soracom had to bulk buy
and pre-pay DoCoMo as well as providing lots of developer support. No
doubt this created not only a huge financial risk but also lots of
wastage as they tried to match forecasts made months ahead of time with
actual demand. Our guess is that the revenues were there, but the
profits were not. The burn rate for the company must have been
horrendous - especially with the overseas expansion.
We will say that Soracom's software is excellent - easily up to par with
anything available in the USA. In fact several years ago as we started
developing with them, we had discussions with several competing MVNOs
and when we asked for a high-grade API like Soracom's, typically the
response we got was "Soracom who?" But in the last 6 months, now those
same firms are coming back to us and showing us API plans that are
directly modeled on what Soracom pioneered. So from that point alone,
KDDI has made a great choice in taking out the only real innovator in
the field, and one which still has a 1-2 year lead on the competition.
...The information janitors/
***------------------------****-------------------------***
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***********************************************************
***------------------------****-------------------------***
+++ NEWS
- Real wages fall 0.8%
- 2018 may be year 18-year olds become adults
- Polyphenol icecream that doesn't melt (easily)
- Stem cell spinal cord repairs may be possible in 2018
- Airbnb competitors tie up
=> Real wages fall 0.8%
While Japanese LISTED firms are making record profits, most of Japan's
employees work for SME domestic companies who are not easily able to
improve their businesses (as they don't export). As a result of ongoing
cost-cutting measures, price-adjusted real wages fell 0.8% in June, the
largest drop in two years. The main reason for the drop was a reduction
in summer bonuses, even as basic pay has been increasing slightly. The
overall average salary in Japan for full-time people - at best a
misleading figure now that at least 1/3 of the population are irregular
employees - was JPY572,984. Part-timers, just one slice of those
irregulars, earned a meager JPY103,466 a month. (Source: TT commentary
from the-japan-news.com, Aug 04, 2017)
http://bit.ly/2vEexKc
=> 2018 may be year 18-year olds become adults
You can vote in Japan at 18 but for some strange reason you can't be
considered an adult and go have a beer until you are 20. Now the Justice
ministry is looking to submit a bill to the Diet making the age of
majority 18 - the first time this age has been altered since the law
first appeared on the statute books 100 years ago. At the same time, an
amendment to the age one can get married will also change. For men it
will remain as 18, but for women, the minimum age for marrying will
increase from the current 16 to 18. (Source: TT commentary from
japantimes.co.jp, Aug 04, 2017)
http://bit.ly/2ufZWE8
=> Polyphenol icecream that doesn't melt (easily)
Well OK, the ice creams do eventually melt, but a strawberry
essence-derived polyphenol is credited with extending the melting period
for Kanazawa Ice popsicles from just a couple of minute to more than
several hours. The new long-frozen treats are able to retain their shape
in hot conditions thanks to a property of the polyphenols which makes it
difficult for water and oil/fat to separate under warm conditions (i.e.,
melting). You can buy the new popsicles in Kanazawa, Osaka, and Tokyo.
(Source: TT commentary from cntravel.com, Aug 03, 2017)
http://bit.ly/2wjziYs
=> Stem cell spinal cord repairs may be possible in 2018
Japanese medical researchers are surging ahead with stem cell treatments
and the latest exciting news is that medical equipment maker Nipro may
be ready to commercialize a procedure next year which will repair spinal
cord injuries and restore motor functions to paraplegics. The company is
harvesting stem cells from bone marrow, culturing them for greater
volume, then reinjecting them into injured sections of the spinal cord.
Nipro has been working on the procedure for the last 3 years with the
Sapporo Medical University. Nipro says it is fine-tuning its processes
to significantly increase the speed that stem cells can be cultured
after harvesting, and automating the process. (Source: TT commentary
from asia.nikkei.com, Aug 05, 2017)
http://s.nikkei.com/2wwV36j
=> Airbnb competitors tie up
Airbnb's most aggressive competitor in Japan is Chinese firm Tujia,
which has just signed a deal to tie up with Rakuten's Lifull Stay, to
start offering vacation rental homes here in Japan once the Minpaku law
comes into force early next year. Tujia is the largest share
accommodation company in China and has 500K listings in 1,100 cities
around the world. The company started a Japanese language website in
March this year, although it is mostly focusing on rentals to Chinese
tourists. Tujia reckons they will have about 200K listings in Japan by
2025. (Source: TT commentary from Rakuten press release, Aug 02, 2017)
http://bit.ly/2uwfAH0
NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.
***------------------------****-------------------------***
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Discover the charm of Japanese spirits! On Sep 4 at Togo Kinenkan, a
variety of Japanese craft liquors will be presented, with information,
at a special event. Tasting opportunities available.
Free attendance; registration required.
http://metropolisjapan.com/freeshochutasting
-----------------------------------------------------------
+++ UPCOMING EVENTS
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Details: Complete event details at:
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Date: September 1st (Friday)
Cost*: ¥3,000 ICA members; ¥4,000 non-members. Special Offer on the
night; Join the ICA for ¥5,000 instead ¥10,000 annual fee, which is a
50% discount, and you pay and get in at the member rate!
RSVP: Tickets will be limited and you must register with the ICA by
August 29th by 5pm at the absolute latest as space is limited.
-----------------------------------------------------------
+++ CORRECTIONS/FEEDBACK
=> In TT-907, we considered the countermeasures available to Japan,
should North Korea decide to threaten the Olympic Games.
*** Reader: Talking to a Japanese manufacturer the other day that has
had a business relationship with a South Korean sub-contractor for
years, in excess of $10M/yr. The Japanese side is now winding down their
purchasing business in South Korea for fear of the risk of what may
happen if Japan or the USA retaliates against the North Korean regime.
Their current thinking is to replace the South Korean source with a U.S.
subcontractor and simply pass the higher costs on to the Japanese
consumer. Yet another example of the havoc that both Kim and Trump are
wrecking upon third parties.
=> In TT-906 we wondered aloud why Japanese firms would be considering
ships in preference to rail freight. One of the great things about
writing this newsletter is that there is always someone who has the
experience and the answer!
*** Reader: Shipping by rail indeed is the least expensive way to move
freight (see graph on page one of http://bit.ly/2uwHkuX) in large
countries, like the US, whose privately owned railroads have built out
extensive networks dedicated to moving freight and bulk commodities.
Japan at one time did move a good deal of freight by rail, but in the
capital constrained post-war years Japan's state owned railway,
privately owned ones too, concentrated on building out the passenger
network. Hence, today there is almost no infrastructure/rail lines
dedicated to moving cargo. Also, moving cargo by rail almost always
takes longer, and shippers need to hold cargo to build up volumes, which
can impact supply chains and production schedules. So, pay the price to
ship by truck, full truck load or LTL, but optimize one's production
line, or retail operations to make up for it.
What Sapporo and Aeon are doing makes sense given the way that shipping
lines operate. They run their vessels in service "loops", meaning
several stops here in Japan, and maybe elsewhere in North Asia, to fill
out the vessel before embarking to, say Europe, where the ship will stop
at something like 3 to 5 ports to unload. With capacity to spare on the
south/westward loop here in Japan, most operators would love to pick up
some domestic cargo. This is incremental revenue which requires next to
no additional expense to handle.
Cheers, from an ex-logistics guy.
***------------------------****-------------------------***
+++ TRAVEL DESTINATIONS PICKS
=> Picnic Cafe in Biei, Hokkaido
Rustic cafe along the way to the Blue Pond
Picnic is a rustic cafe off the road on the way from Biei to the Blue
Pond (Aoiike). This quaint restaurant serves a variety of light meals
and dessert, in addition to coffee. There is counter seating and a few
tables available for larger groups. The fare is light and includes
sandwiches such as a BLT, tuna avocado or cheeseburger. Various toasts
and desserts such as cake or ice cream are on the menu. A daily soup
(cold refreshing tomato soup on this visit) is also available. Coffee is
excellent and the atmosphere is relaxing and quiet.
The staff is gracious, helpful and do speak English. Kids are welcome,
and there are coloring pencils and notebooks for them to draw in. The
food is inexpensive and delicious and can be ordered for dining in or
take-out. Take a break from driving in the hills of Biei or returning
from the Blue Pond and stop at Picnic for a satisfying bite to eat.
http://bit.ly/2vuNYq6
=> Koke no Mori - The Moss Forest, Nagano
An entire forest covered in moss in Northern Yatsugatake
Straddling the border of Chino, Sakuho and Koumi, the Kita-yatsugatake
(North Yatsugatake) is known for its "Koke no mori" (Moss Forest). The
moss forest is now getting popular as one of the locations chosen for
this year's Shinshu destination campaign.
There are more than 1,800 species of moss only in Japan! I was so
surprised when discovering about such diversity during the tour: there
is Shippo-koke (Tail moss) which looks like the bushy tail of a horse,
Sugi-koke (Cedar moss) which is just like a miniature cedar, Kamoji-koke
(False hair moss), which is like a carpet laid on tree bark,
Chirimen-koke which is like a silken cloth with good texture. Moss has
no roots so it can't get nutrition from the ground. It lives only by the
process of photosynthesis and by getting water from the air. That is why
moss can grow even where the soil is infertile.
http://bit.ly/2fjEtnd
***------------------------****-------------------------***
***********************************************************
END
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+++ ABOUT US
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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)
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