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Business Week
08/12/96
Cover Story: CYBER-MOGUL
By Brian Bremner in Tokyo, with Amy Cortese in New York and bureau reports
Cover Story: CYBER-MOGUL -- To conquer the Net, Masayoshi Son takes to the
high wire
At some point amid the endless courses of sashimi, tempura, and chilled oc-
topus, Masayoshi Son's dealmaking synapses started firing frantically. Son
had invited Rupert Murdoch to a swank Ginza eatery for an evening of
kaiseki ryori, or Japanese haute cuisine, in late May. Having heard that
Murdoch's News Corp. might launch the Japanese equivalent of its British
Sky Broadcasting Corp. satellite-TV service, Son grilled the media tycoon.
Bemused, Murdoch acknowledged the plan, then mentioned some potential Japa-
nese partners.
As the sake flowed, Son started emoting about his own digital dreams for
his Softbank Corp., the software distributor he has built into a high-tech
powerhouse. After a $3 billion, two-year, debt-fueled acquisition tear,
Son, the president and CEO of Softbank, already had emerged as the world's
biggest computer-trade-show impresario and most powerful publisher of high-
tech magazines. Softbank was pumping big money into unproven but promising
Internet ventures. Why not jump into the high-tech world of digital broad-
casting, too? ``I told Rupert, `The partner you're talking to is all
wrong,''' Son says with a laugh. ```It should be me.'''
The next morning, Murdoch summoned Son to the Park Hyatt Tokyo Hotel, and
the outlines of a deal started to emerge. On June 20, the duo unveiled
plans to pay $380 million for 21.4% of Asahi National Broadcasting Co.
Highly rated Asahi TV would serve as the programming and news-gathering
base for Japan Sky Broadcast, their 50-50 venture. Overnight, Son had es-
corted Murdoch the Barbarian right into the cloistered world of Japanese
media.
Crashing the gates and disrupting the old order is standard operating pro-
cedure for the 39-year-old Son. In a nation where high tech is dominated by
lumbering, tradition-bound electronics conglomerates, Son stands out as a
Western-style entrepreneur, part Bill Gates, part Murdoch. He's a nonstop
networker and dealmaker whose circle includes such Silicon Valley
luminaries as Oracle Chairman Lawrence Ellison, Sun Microsystems CEO Scott
McNealy, and Microsoft's Gates, a frequent golfing buddy.
Since Softbank, Son's confederation of high-tech publishing, trade-show,
distribution, and software companies, went public in 1994, its stock has
soared 200%, to $160, adjusted for three splits. Son's 52% stake, worth
$4.5 billion, makes him one of Japan's wealthiest businessmen.Even with the
stock off over 20% from its high, Softbank trades at 150 times last year's
earnings.
It commands this lofty, valuation because Son's ambitions--if realized--
will make Softbank a huge force in high-tech marketing in the 21st century.
Already a massive marketing machine in Japan, Softbank is branching out--
into the U.S. and onto the Internet.
Through a combination of print publications, TV programs, trade shows, and
online services, Son is positioning Softbank to be everywhere consumers and
businesses buy, sell, or talk about information technology.
RIPE PLUM. In other words, Son's empire could become the hub of a massive
digital marketplace. Advertising alone--in magazines and Web sites that
cater to computer shoppers--will grow from last year's $2.2 billion to $4.7
billion in 2000, according to New York-based media consultants Wilkofsky
Gruen Associates. But there's a bigger plum. That's to get in the middle of
the transactions that move hundreds of billions worth of personal computing
products every year. In Japan, Softbank already does that through its
wholesale business. Now, as more and more technology products are flogged
in cyberspace, Son sees a way to get a cut of the business in the U.S. and
around the world. ``The Internet is where our future is,'' he says.
To get ready, Son has been using his richly valued stock--and a staggering
$2.4 billion of debt--to assemble an international network of companies. In
1994, he bought Ziff-Davis Publishing Co.'s computer trade-show business
for $202 million. Last year, he paid $800 million for the Interface Group,
which runs Comdex, the computer industry's biggest show. With those buys,
Son got 75% of the U.S. computer trade-show business. Then, in February, he
paid a stunning $2.1 billion for Ziff-Davis Publishing, the $850 million-a-
year computer publisher. Among Ziff's 30 titles are the three biggest in
the field: PC Magazine, Computer Shopper, and PC Week.
He's not stopping there. Softbank is now on the verge of a $1 billion ac-
quisition aimed at further strengthening its position in the U.S. Company
officials won't say what kind of company Son is after. But, says Gary Reis-
chel, senior vice- president of the U.S. affiliate Softbank Holdings Inc.,
``this is a big play in one of our core businesses.''
Where will Son's empire-building end? ``I have a 300-year plan for our-
selves,'' he says without a hint of irony. Meeting with Ziff-Davis employ-
ees, Son was asked if the Ziff deal would be his crowning achievement. His
reply was that Ziff is important, but just one step in his personal 50-year
plan. ``I want to do something really big in my 40s,'' Son told the stunned
employees.
DEEP POCKETS? There are questions, however, as to whether Softbank can keep
up with the boss's ambitions. Up to this point, Son has been able to fund
his drive into the U.S. by exploiting favorable currency exchange rates and
Softbank's surging stock price. But he's saddled with an awesome $2.4 bil-
lion in debt and mounting interest payments. Some Tokyo analysts are con-
cerned that the company is already stretched thin. But Chief Financial Of-
ficer Yoshitaka Kitao figures that with Japan's low interest rates, Soft-
bank could easily handle $3 billion more in acquisitions. He cites another
development that cuts his costs and also indicates confidence in Softbank:
Its bond rating has been upgraded from BBB+ to A-.
So far, Son has been able to go after just about whatever catches his eye.
Since early 1995, he and his scouts at Ziff have scoured Silicon Valley for
promising Internet startups (table, page 59). Through two company-
controlled venture-capital funds and Softbank itself, Son has put more than
$200 million into some 30 Net companies, including Yahoo!, the top World
Wide Web search-engine service. Son's 37% stake was worth $200 million
after the initial public offering in April, but has since fallen to about
$65 million.
Son wants more than a quick buck, though. He sees synergy between invest-
ments like Yahoo! and other Softbank businesses. The Yahoo! site is one of
the best advertising venues on the Net. Also, Son has launched a Japanese-
language version of Yahoo!. In turn, it has become a major client of Cyber
Communications Inc., a joint online advertising venture between Softbank
and ad giant Dentsu Inc.
Another example of Net synergy is the investment in U.S. Web, which helps
companies set up online storefronts. It will sell content from Ziff-Davis
and advertising services from Softbank Interactive, too. Internet Profiles
Corp., in which Son has about a 10% stake, counts the number of visits made
to Web sites--a Nielsen-like service that will help Softbank sell online
ads.
When Son sees a company with promise, he pounces. He decided to back Yahoo!
over pizza with its founders. After a preliminary feeler via E-mail, he met
with CyberCash Chairman Dan Lynch last spring at a lounge in San Francisco
International Airport. They cut a deal for Softbank to pay $15.4 million
for a 9.5% stake. ``It took about an hour,'' marvels Lynch.
Son has now raised a separate $500 million Internet venture fund backed by
Asian investors. So confident is he in his investment acumen that he has
pledged $500 million of his own to guarantee investors' principal. Oh yes,
he also will take a 5% management fee and 35% of the capital gains. Most
venture funds keep 25%.
When he's done, Son expects to have a network of companies that will work
in concert to create a new digital marketplace. Having built his fortune
partly by using his Japanese computer magazines to plug the products that
Softbank sells, Son sees endless possibilities for cross-promotion on the
Net. The Web's hyperlinking technology nicely blurs the lines between
editorial content and advertising, making it easy to lead a consumer from a
product review to a vendor ad to an online store--with Softbank collecting
a fee at every stop.
The pieces are falling into place. Shortly after Son acquired Ziff-Davis,
for instance, it recast its startup publication Internet Life as Yahoo! In-
ternet Life to focus on the Son affiliate. And on May 9, Son snapped up 20%
of inquiry.com, which provides information on high-tech products and com-
panies on its Web site--a natural promotional vehicle.
MOTHER LODE. Son also plans to cull a huge direct-marketing database from
the 9 million Ziff-Davis subscribers and trade-show attendees. He hopes to
share the data, including who owns what type of computers and software,
among Softbank companies and affiliates and sell it to others. ``This is an
incredible marketing tool,'' says Son.
By yearend, Softbank plans to have a Web site linking all its businesses.
Then, a Net surfer visiting a Ziff magazine site will be able to link to
another page to learn more about an upcoming Comdex event, or visit a Soft-
bank online store for a software download. Softbank's first online shop,
NetBuyer, will be launched by ZDNet this fall. Son says that 30% of Soft-
bank profits will be Net-generated in five years and 50% in 10 years.
If he can get through the next few years, that is. Son's amazing buying
streak has been fueled by some lucky breaks and some energetic financial
engineering. Softbank bought Interface, for example, when a supercharged
yen was around 80 to the dollar. Now, with the yen at 109, Softbank has
lucked out again: Its earnings are getting an extra kick as U.S. profits
are converted to yen. A quarter of Softbank's earnings last year were
currency-driven.
But exchange rates could swing against Son, and with its huge debt load,
Softbank could soon see its earnings growth stall. To pay for Ziff, for ex-
ample, Son raised $630 million in cash from an equity offering but borrowed
the rest with convertible and straight bonds. Softbank's $2.4 billion in
debt is more than twice its equity. Interest expenses will jump from $3.4
million in fiscal 1995 to an estimated $82 million in fiscal 1996, ending
next March. So far, growth has kept Softbank from feeling the pinch. Pretax
earnings tripled, to $132 million, in fiscal 1995, and analysts expect a
66% gain this year, to $220 million on $2.6 billion in revenues.
Maintaining a high stock price is another key to Son's buying plans, and
that may become trickier. Some analysts have already soured on Softbank
stock, in part because of aggressive accounting practices that reduce the
impact of the buying binge on earnings. Softbank decided to write off $2.7
billion in goodwill from the Ziff-Davis and Comdex buyouts over 30 years
rather than the more conventional 10 to 15 years. ``If they wrote off the
goodwill over 10 years, they would barely be profitable,'' figures Jonathan
Dobson, a fund manager with Jardine Fleming Investment Management's OTC
Fund. Last month, he dumped his $30 million stake, about 5% of his total
Japan holdings. Softbank insists that its accounting is prudent given the
brand value and market-leading positions of the properties.
Concern about possible dilution in Softbank shares also has scared off for-
eign investors, Dobson says. Foreigners own just 4% of Softbank shares vs.
20% at other fast-growth Japanese companies, he notes. The reason: $640
million in convertible bonds will turn into new shares over the next five
years.
Then there are questions about how well the Softbank's cross-selling will
work in the U.S. While Ziff employees insist there has been no pressure to
compromise editorial integrity--by emphasizing companies or products that
Softbank has interests in, for example--rivals suggest that Softbank in-
evitably will abuse its power. One fear is that Softbank could trade
coveted Comdex booth positions for more ads from computer makers. ``They
are positioning the business more toward a selling system and away from an
independent journalistic enterprise or exposition field,'' says Patrick J.
McGovern, chairman of International Data Group (box). Counters Son: ``We
have a very neutral position on editorial content.''
``DARKNESS INSIDE.'' Son didn't get where he is by paying attention to such
qualms. The grandson of Korean immigrants, he has spent his life making his
own rules to get around barriers. He has succeeded, but the pain of growing
up as a member of a despised minority has never gone away. The outwardly
exuberant Son calls this pain his ``darkness inside.''
Born in Tosu on the island of Kyushu, Son was given the Japanese surname
Yasumoto because of a Japanese law aimed at forcing assimilation. That
didn't stop racism, however. ``When I was in kindergarten, some kid hit me
in the head with a stone,'' Son recalls. ``It hurt me emotionally, and I
decided to try to hide my identity.''
At 16, Son bolted to South San Francisco where he lived with family
friends. He assumed his Korean name, Jung-eui Son and, after high school,
enrolled at the University of California at Berkeley. An economics major,
he made a small fortune importing the Space Invaders video game from Japan.
He also co-developed an electronic dictionary that he later sold to Sharp
Corp.
After Berkeley, Son returned to Japan and in 1981 launched Softbank. He saw
two opportunities: to distribute software to Japan's consumer electronics
and computer stores and to fill the need for readable high-tech magazines.
So he went looking for a bank loan, using his Korean surname. After so many
years in the U.S., he was shocked by the rejections that followed. But in-
stead of retreating, this time he persisted. He recalls that when skeptical
loan officers would suggest Son was a strange name, he would snap, ``O.K.,
I'm a Korean, so what?'' Eventually, a sympathetic banker at Dai-Ichi
Kangyo Bank Ltd. relented with a $1 million loan. ``I told him he could use
my life as the collateral,'' Son jokes.
It was a bumpy start. Son would rent out booths at trade shows and phone
software companies offering to display their titles for free. But manufac-
turers ignored him and went right to the retailers. The big break came when
Osaka-based Joshin Denki Co. asked Son to supply a large quantity of soft-
ware for a PC superstore it was opening. Son got an exclusive deal by of-
fering every major software package in Japan. It took inspired salesmanship
to persuade software makers to go along, but it worked.
His business almost collapsed in the mid-1980s, however, when a scandal at
Dai-Ichi forced the bankers to call in risky loans such as Son's.
Desperate, he received emergency financing from Industrial Bank of Japan.
Then came another setback. He was hospitalized in 1984 with hepatitis and
was forced to give up day-to-day control. ``The company tried to keep it
very secret,'' recalls Novell Japan President Kazuya Watanabe, a Son friend
for 10 years. ``Yet everybody knew he had great difficulties.''
On the mend by 1987, Son resumed control, and Softbank started to get a
dominant share of the software-distribution market. The near-collapse of
Ascii Corp., Microsoft's original distributor, helped. So did key al-
liances. Son helped set up the Japanese subsidiary of network software sup-
plier Novell Inc.--taking a 25% stake (now 20.4%). Another joint venture,
Softbank Korea was formed with Pohang Iron & Steel Co. Some ventures didn't
pan out, though. Softbank dropped $10 million in a botched online shopping
venture, and an attempt to distribute dozens of software programs on a
single CD-ROM flopped.
Now, Softbank has taken off, along with the Japanese PC market, where ship-
ments jumped 70% last year. Softbank moves 30% of Microsoft's Windows 95
and Word programs in Japan, as well as 15% of Novell software. And it dis-
tributes 60,000 other software titles and a variety of PC gear. Revenue is
expected to hit $2.6 billion this year--up from $408 million in 1990.
HARD KNOCKS. Son has now joined the ranks of the superrich. But he scarcely
hides his disdain for the old-boy network that would not let a Korean in.
``I'm maybe the fourth-richest guy in Japan--and the other three probably
inherited real estate from their fathers,'' he says.
Within his business empire, Son has also busted the Japanese management
mold. Instead of the usual pyramid, Softbank is run as a network of 64
profit centers. During Son's illness, he began decentralizing, organizing
his workers into groups of 10, each with profit-loss statements that would
be updated daily. Those who ran out of cash ran out of luck. Today, top ex-
ecutives meet with Son for biannual ``1,000 knocks'' sessions--grueling
five-hour meetings in which the boss scrutinizes every detail of business
plans. ``Son likes measuring everything,'' explains Softbank Holdings'
Reischel, ``and taking a stick and tapping something 1,000 times.''
On the other hand, Son also doles out lavish bonuses to star performers.
Last year, he gave $1 million to Softbank's managing director of networking
and $500,000 to the editor-in-chief of the magazine that covers DOS/V, the
Japanese-language version of the MS-DOS operating system.
Outside Softbank, Son is known as a charming schmoozer--and a relentless
deal-chaser. Take the Ziff-Davis saga. After negotiating licensing deals to
publish Japanese versions of Ziff computer magazines, Son cultivated social
ties with the reclusive Ziff family. Eric Hippeau, Ziff's chairman and CEO,
recalls the time when Son, along with his wife and two young daughters,
visited William B. Ziff Jr. at his retreat in Aspen, Colo. When Ziff sug-
gested a hot-air balloon ride, Son didn't hesitate. The Sons set out in one
balloon and Hippeau and some other Ziff execs were in another. As they
floated around, Hippeau began to wonder why he didn't see Son in the other
balloon. It was not until they landed that the diminutive Son came crawling
out of the balloon's basket and confided that heights made him queasy.
When the Ziff family decided to sell out in 1994, Son thought he might have
the inside track. Instead, he was blindsided when they canceled an auction
and sold 94% of the company to buyout boutique Forstmann Little & Co. for
$1.4 billion. Forstmann offered an all-cash bid that was lower than Son's
$1.6 billion offer. Son might have won it had his Japanese banks moved
faster. ``Forstmann had the cash in hand,'' says Softbank CFO Kitao, a
Cambridge-educated ex-Nomura Securities Co. man whom Son hired after the
debacle.
BLUE PERIOD. Son went home with the consolation prize, Ziff's trade shows.
But he didn't give up. He kept pressing Theodore J. Forstmann, who refused
to see him, sending ``not for sale'' messages via underlings. Last fall,
Forstmann relented. Son, Kitao, and Forstmann's team met at the financier's
Park Avenue apartment. As they admired the Picassos and Matisses, the deal
talk began. The next day, Softbank agreed to pay a whopping $2.1 billion
for Ziff, handing Forstmann a $700 million profit.
The price stunned media analysts who said Son overpaid for a mature fran-
chise. Computer makers were shifting ad dollars to TV and general-interest
publications such as Time. Ziff, they figured, was most vulnerable, since
PC Magazine, PC Week, and Computer Shopper deliver 80% of its profits.
Again, Son lucked out. Driven by the Net, PC ads are growing twice as fast
as other print ads. Ziff magazine revenue rose a healthy 9.8% in 1996's
first half, according to Adscope Inc., despite ad pages at PC Magazine
being off 2%.
Now, Son has a bold plan for Ziff: to go from 80 print titles now to 1,000
in 10 years. That means adding almost two a week. It's not as crazy as it
sounds. Ziff has lots of opportunity to expand internationally. It already
licenses its 30 U.S. publications in 100 countries, but most countries
carry only one or two titles. Softbank is also adding to Ziff through
startups and acquisitions, most recently buying Chicago-based Sendai Pub-
lishing Group and its magazines about computer games.
Increasingly, though, Son is interested in electronic media. He has plowed
$20 million into a TV venture, including a studio in San Francisco where
ZD-TV will produce shows that promote high-tech products. The first show is
The Site, which is carried on the new MSNBC cable-TV network. Murdoch's
Hong Kong-based STAR-TV will carry Ziff's programming in Asia. Ziff also is
exploring radio over the Net.
Softbank is also betting big on cyber advertising. Online ads are a $50
million market now, but some analysts predict they could hit $2 billion in
four years. Softbank Interactive, created by merging Interactive Marketing
Inc. with Softbank's Internet sales division, already places 40% of the ads
in cyberspace. ZDNet itself is one of the top sites for ad revenues.
All of these ventures could indeed have the vast potential Son foresees.
But it's hard to ignore the financial high-wire act needed to keep his en-
terprises going. Son, characteristically, seems unconcerned. He keeps a
grueling schedule, crossing the Pacific two or three times a month. At the
Comdex gala in May, Son cruised the floor with Ziff editors, looking for
Internet investments. In a T-shirt and V-neck sweater, he looked like a
Silicon Valley guy. And he acted like a kid in a candy store. This cyber
mogul had arrived.
The Softbank Empire
Masayoshi Son has built his software distribution business into a $2.6 bil-
lion, global high-tech powerhouse
PUBLISHING
With its $2.1 billion acquisition of Ziff-Davis Publishing, Softbank became
the world's biggest computer publisher. Ziff, with annual revenues of $850
million, has 80 print titles, including PC Magazine, Computer Shopper, PC
Week, and Mac Week. Ziff also publishes more than 200 ``how-to'' manuals
annually. Son's plan is to expand to 1,000 print titles by 2005.
TRADE SHOWS
Softbank is now the biggest computer trade show organizer in the world,
with a 75% lock on the lucrative U.S. market. Through the 1995 acquisition
of the Interface Group, Son took over Comdex, the industry's biggest venue.
INTERNET
Softbank has spent $200 million snapping up stakes in some 30 Internet
startups including Yahoo! CyberCash Inc., and inquiry.com. Softbank Inter-
active is also a big player in Web advertising with 40% of the U.S. market.
NETWORKING
Softbank owns 20.4% of Novell Japan Ltd., the booming subsidiary of the top
network software supplier. An alliance with Cisco Systems is aimed at
promoting a Japanese standard for network equipment.
SOFTWARE DISTRIBUTION
Softbank, a wholesale distributor, controls more than 40% of Japan's soft-
ware market. Softbank distributes 30% of Microsoft's programs in Japan and
has teamed up with the software giant to develop PC game software.
MULTIMEDIA PROGRAMMING
A joint venture with Nippon Telegraph & Telephone, plans to distribute
digital movies and software to Japanese homes via phone line. And, together
with Rupert Murdoch, Son bought 21.4% of TV network Asahi National Broad-
casting, with an eye toward launching a satellite-TV service in Japan. In
the U.S., a Ziff unit is creating The Site, a daily computer show for the
MSNBC cable network.
Son's Big Dare
Foreign investors aren't enchanted with his risky ploys
-- ACCOUNTING Softbank is writing off $2.7 billion in goodwill over a 30-
year period from his Ziff-Davis and Comdex buyouts rather than the more
conventional 10 to 15. So instead of a $270 million charge against earn-
ings, Softbank is taking only $90 million a year. That allowed it to report
a net profit of $132 million in 1995, instead of barely turning a profit.
-- STOCK AS CHEAP MONEY Softbank has raised $630 million in fresh equity to
finance its spending spree. So far, the dilution hasn't hurt investors. But
that could change when $640 million in convertible bonds come due over 5
years. Softbank's stock has already fallen 20% from its high, reducing
Son's buying power.
-- CURRENCY RISK Son bought Comdex and Ziff-Davis when the yen soared. Now
the yen has weakened. That cuts his buying power even as it boosts earn-
ings. Some 25% of Softbank's earnings in fiscal 1995 came from currency
gains.
-- LEVERAGE Son's $3 billion spending spree on U.S. assets has saddled
Softbank with $2.4 billion in debt--more than twice its equity level. With
70% of its pre-taxearnings now coming from the mature Comdex and Ziff-Davis
buyouts, Son can't afford to misstep.
Seeding the Future
Where Son has bet $200 million on the Internet
-- WEB SERVICES/ ADVERTISING
Andromedia
Decisive Technology
Electric Classifieds
E*Trade Group
I/Pro (Interactive Profiles)
Multex
Softbank Interactive Marketing
USWeb
Yahoo!
-- GAMES
Engage Games
Express Plus
GT Interactive Software
Kinesoft Development SEGA Entertainment
-- ONLINE PUBLISHING
2Way Media
inquiry.com
Minds
-- ELECTRONIC COMMERCE
CyberCash
Electric Communities
-- WEB SOFTWARE
Agents
American Cybercast
BACKWEB
Connected
Freeloader
Intervista Software
IOTA
OnLive! Technologies
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