Issue 11.08 - August 2003

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Fat Pipe Dream

Softbank founder Masayoshi Son lost $75 billion in the dotcom crash. His new master plan: superfast, supercheap DSL for the masses.

By Brendan I. Koerner

"My dream is big, OK?"

Coming from a man who used to boast of having a 300-year business plan, that's saying a lot. But Masayoshi Son isn't exaggerating. His latest master plan includes nothing less than the demolition of Japan's telecom industry, and, not incidentally, the revival of his moribund company, Softbank. To get there, he's hawking next-generation, superfast, supercheap DSL to the Japanese masses.

He may no longer be the world's eighth-richest man - Softbank's stock price is down 98 percent from its bubble peak - but Son still moves with an impressive entourage. A cadre of yes-men, crowded around him in a Tokyo conference room, nod anxiously as their diminutive, balding maestro tries to sell me on Softbank's improbable makeover from venture capital washout to broadband pioneer. "We are the first service to have a pure IP-based network," crows Son, his placid face betraying an I-told-you-so smirk. "It is more powerful than anything else that exists around the world."

Softbank has spent close to $2 billion building out a gigabit Ethernet network and leasing copper wire from Japanese telecom giant Nippon Telegraph and Telephone. The result is a service, offered under the Yahoo! BB brand, that provides Internet access to Japanese homes at 12 megabits per second - eight times faster than what Americans are used to - for about $21 a month. Every day, as many as 7,000 new subscribers fire up their plug-and-play DSL modems, making Yahoo! BB the world's fastest-growing broadband service.

Satoshi Miyazawa

So things are looking rosy, right? Not quite. Softbank is spending $250 to acquire every new customer - $50 million per month. Outside Tokyo subway stations, rain or shine, cute teens in white Yahoo! BB mackintosh coats hand out a free modem to anyone who breaks stride. A second-rate baseball team, the Orix Blue Wave, now plays in Yahoo! BB Stadium. Such marketing gambits increase the company's profile but only add to Softbank's staggering $3.9 billion debt.

The safe move, given such a financial mess, would be to lay off workers, slash budgets, and curb investment - as so many stateside VCs and IT companies have done. But that's not Son's style. This is a man who poured nearly $400 million into Yahoo!, $100 million of it when the company was a 15-person nothing. He's a high-roller who would rather go all-in on a pair of deuces than fold.

Of course, Son believes he's holding more than a pair of deuces. He thinks the Japanese appetite for broadband connectivity makes the climate right to humble his nemesis NTT. Yahoo! BB's main draw, even more than superfast Net access, has been a voice-over-IP feature. It's an economical approach to telephony that allows Softbank to offer ridiculously low rates (less than 3 cents a minute for a call from Tokyo to New York). Son even foresees the not too distant day when VoIP calls are virtually free - the email of the 21st century.

If he's right, Yahoo! BB could herald the beginning of the end for NTT's fixed-line telephone business - a cataclysm for the Ma Bell of Japan - and portend dark days for doddering US telcos. But Son's not stopping there. His IP backbone is so robust, it has him eyeing Japan's TV industry, too. Last year, Softbank began rolling out a video-on-demand service that can cheaply pump Hollywood movies into Japan's living rooms - over the same 12-Mbps DSL connection.

Will Son survive long enough to see his huge bet pay off? Softbank's plan for making money isn't nearly as remarkable as its fancy new network. To a legion doubters, Yahoo! BB is a return to that most foolish of dotcom ploys: selling a dollar for 80 cents and making it up on volume.

Son shrugs off the skepticism. Broadband is good for the economy, he suggests, and a revived economy is good for Softbank's far-flung investments, from Yahoo! Japan to E*Trade. His peers acknowledge he's at least half right. "If Japan can create a broadband network that really works, the country will be able to get back to its core strength - marketing new technology at home and pushing it overseas," says Joichi Ito, CEO of the Tokyo VC firm Neoteny. If everyone in Japan can suddenly swap video, for example, imagine the impetus for consumer electronics firms to create cheaper, faster digital cameras. Or Wi-Fi phone handsets that can play movies.

"People say we're crazy, and maybe we are" was among the first lines I heard from Taro Hashimoto, president of Softbank Broadmedia, the subsidiary that manages the network's content delivery. It seemed like a rare instance of bluntness for a Japanese executive, but it's a rehearsed line from a playbook. Son later recited the identical quip.

To Son, crazy is a slightly warped outlook that sparks innovation. Of course, there's the other kind of crazy - as in Napoleon assuming the Russian winter wouldn't be so cold. Give Son's dealmaking record a scan, and he starts to look more like he's marching into Moscow in mid-September. In 1996, he bought trade mag publisher Ziff-Davis for an estimated $2.1 billion from Forstmann Little, which had purchased Ziff only 15 months earlier and flipped it to Softbank for a $700 million profit. By the time Son unloaded it, he was out a cool billion.

Softbank blew billions more on Asahi TV, Asia Global Crossing, SKY Perfect, and a throng of dotcom dogs: Kozmo.com, More.com, SportsBrain. Webvan? Yep, that was him. He envisioned setting up an independent Nasdaq in Tokyo, which would list the energetic startups that couldn't be found on the stodgy Nikkei. But government regulators nixed the idea. For Son, the whole Nasdaq experience amounted to another billion-dollar write-down - $1.2 billion, to be exact.

But all of Son's failures are overshadowed by one amazing jackpot: Yahoo! His investment has become a tale of dotcom prescience - and dotcom cojones. He wagered $374 million on Yahoo! between 1995 and 1998, a bet that, at its peak, increased in value more than 50-fold.

Contributing editor Brendan I. Koerner (koerner@newamerica.net) wrote about drug comebacks in Wired 11.06.

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