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Leverage: Sprint Softbank Japan & Sumo vs Judo

Sumo: how to throw 20B of mass

You’ve probably seen the 20+ billion dollar deal that will leave Softbank of Japan owning 70 percent of U.S. telco Sprint. There are layers upon layers of rationale for any deal of that size, but here are some of the common themes:

LEVERAGE:

  • Yen to dollar exchange rate is shockingly close to a 10-year low
  • Corporate tax rate in Japan is quite high
  • Bank of Japan prime lending rate is between 0.0 and 0.1 percent
  • Japan networks and mobile user behavior is very advanced

A point that doesn’t by itself produce leverage (but creates a strong motivation for overseas expansion) is the saturation of the Japan market and the slower growth there.

This chart from Chetan Sharma (2011) reveals that Softbank is the top carrier in the world with respect to mobile data as % of total Average Revenue Per User (ARPU) and also with respect to total Data ARPU.

As you can see, the top three carriers in Japan are way ahead of the rest of the world in Data ARPU. Amazingly, Japan leads the world in how advanced their mobile user behavior is and how spendy those mobile consumers are.

 K.O. how to lose your leverage

This kind of extraordinary financial leverage has led to another Japanese invasion in mobile gaming, with Gree having acquired OpenFeint (104M acquisition) and DeNA acquiring ngmoco (303M acquisition).The Gree and DeNA acquisitions have been recently criticized for example, Pocket Gamer citing Gree’s acquisition price to be 368 times OpenFeint’s annual revenue. http://www.pocketgamer.biz/r/PG.Biz/PG.biz+Opinion/feature.asp?c=34579 Another concern that was expressed was the culture shock of the Japanese management model.

So the leverage was lost in management and operational integration as well as messy technology and product integration issues.

Judo how to throw from the hips

Good fences make good neighbors. The existence of huge economic leverage is not sufficient to create a good “throw” as we can see from the Gree and DeNA case studies, above.

The Judo throw is simply for the thrower to make the center of gravity of the system (both the thrower and the thrown) the same as the center of gravity of the thrower.

In business operations, this requires good boundaries between organizations, proper management structure and proper API contracts to enforce clean separation of technology concerns.

Kii Corporation’s recent launch of its Mobile Backend-as-a-Service, (picked up by TechCrunch http://techcrunch.com/2012/10/11/kii-cloud-opens-doors-for-mobile-developer-platform-with-25-million-end-users/) leverages some of these cross-border synergies. The operational approach
is to take a mobile backend that has been serving tens of millions customers in Asia and to open those APIs and SDKs globally. This approach does not presume that mobile user behaviors in Japan are the same as those in the U.S. Rather, it merely takes the cloud power and offers it to the developers of the world. Similarly, the investment strategy of Kii is to invest venture capital in small mobile application developers, which avoids some of the pain of heavy-handed, cross-border corporate takeovers. As with most early stage VCs, Kii gets a board seat, but the company management continues to operate the company, as it should.

But these efforts by Kii not only take advantage of simple economic leverage kept squeaky clean by API contracts and VC term sheets. Kii also adds a layer of cross-border synergy to the mix. Kii partners is a powerful distribution channel for app developers looking to partner with large carriers and handset makers.

So Kii is entering the MBaaS space as its largest provider and as an 800 lb. Godzilla, but formed from the strategic merger of a Tokyo-based company and a Silicon Valley startup. This approach leverages what is best in each region; separates out cultural issues in the apps via a
clean set of SDKs and APIs; separates out cultural issues in management by creating appropriate equity holding relationships (like venture capital); and of course, best of all, creates bona-fide operational synergies between Kii and its app maker partners. These are some of the unique
concerns about operating a cross-border concern like Kii Corporation.

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Sun IBM Collapse Heralds the Return of McNealy. Jonathan Schwartz is Toast.

The Wall st Journal reports two board factions at odds in Sun Microsystems, one in favor of the IBM deal led by Jonathan Schwartz, the other opposing, led by Scooter McNealy.

Pundits are already spinning this FAIL WHALE as a repeat of the Microsoft Yahoo! debacle starring another egotistical company founder, Jerry Yang.

Butting heads with Scott McNealy at Sun Microsystems is ill advised. Even if you are the CEO. With Schwartz touting an exit with IBM as being the company’s best option–after riding the share price down from 20 to a low of about 3… before rumors of the IBM takeover sent the stock soaring.

At a stock price of 3, Sun Microsystems was essentially being valued at about the same as their cash stockpile of 2.64 Billion, essentially declaring the company to be of no value.

Sun’s one billion dollar acquisition of MySQL is in shambles, with the source code forking and Sun having lost control of the key Intellectual Property as well as key technical founders.

This all makes Steve Gillmor’s Open Source Ponytail Video even more prescient.

Mark my words, Schwartz is toast, IBM deal or no deal. If the IBM deal fails completely (most likely outcome), look for Scott McNealy to pull a Michael Dell (or a Jerry Yang, depending on how you look at it) and to appoint himself CEO again. The board of Sun wouldn’t allow such a thing if there were even one viable suitor left. But there isn’t.

My 2 cents,
Miko

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