Internet provider GMO has singlehandedly revolutionized internet usage in Japan. Some 90% of Google searches come back with companies who use GMO’s services. But what does the future hold? The founder and CEO of GMO, Masatoshi Kumagai, shares his vision of the next 35 years of the IT revolution, as well as his inspiration for entrepreneurs, internet users and government leaders.
What would you say has been the impact of Abenomics on the IT sector or GMO specifically?
First of all, we are providers of internet infrastructure and we have work to increase the number of websites in Japan. When you look at the websites that come up in Google search results in Japan, 90% have domain names registered with our services and 54% of the websites are hosted on our web hosting services. In other words, 54% of the data on the internet in Japan is stored on our servers. We have become the standard for Japanese internet.
Internet IT investment is closely linked with the overall state of the economy and because of Abenomics, the state of the economy has improved, which has impacted us positively in that there are more IT investors. This has led to an increase in clients as well.
The second point is that we have 86 group companies, of which nine are listed companies. In fact in the last two years, three of our companies became listed. With the stock market becoming healthier, it means that we have more opportunities to obtain capital through the stock market, and because of Abenomics’ success, stock prices have gone up as well. With our group company having nine listed companies, we have gained benefits that unlisted companies wouldn’t be getting. We’re in a very positive cycle at the moment with our nine listed companies positively impacted by Abenomics, and it’s accelerating the growth of our business. We have seen a significant positive impact from Abenomics in those two areas.
When we interviewed Taizo Son, he talked about a “paradigm shift in technology” and his desire to create a Silicon Valley here in Tokyo. GMO has also recently become an active investor in regional start-ups with your GMO Venture Partners, so what do you think needs to be done to achieve this? What is Japan missing?
It’s not just Japan. The whole world is experiencing a paradigm shift in the IT sector. What Japan must do in comparison to the rest of the world is this. In the area of the speed of connectivity or service performance, Japan is at the very forefront. Regarding whether or not we’re exploiting the full potential of IT, we are behind compared to other countries. This is due to the very strict regulations put in place by the Japanese government. At the same time, Japan has this kind of mentality of valuing face-to-face exchange, as well as the importance of stamping the seal on official documents. We’re not fully exploiting the possibilities of the internet.
For example, in real estate you may look through the different properties on the internet, but when you finally come to making the deal, you have to meet the broker who’s going to explain the details and you have to press the seal in front of him. We’re not doing as much as what we could be doing. I feel strongly that relaxing of regulations by the government is required in order to exploit IT to its full potential. If we want to make Japan like Silicon Valley, a free place like that, the government’s help is essential.
Since you shifted your focus to internet services in 1995, GMO has continually responded to the needs of the digital market and provided value-added and unique internet services to its customers providing a one-stop shop for establishing an online presence. Indeed, your net sales and operating profit increased by almost 20% in 2014 to a record 109 billion JPY and 12.9 billion JPY respectively. What would you attribute your impressive growth to?
Well, there are complex combinations of factors that have led to our success. If I was to mention the most important one, it would be that we have consistently invested in the development of technology. We create all of our services in-house. Out of our 4,435 employees, at the moment 40% are engineers or creators, but I actually feel that this is still not enough. In the near future, I’m hoping that over 50% of our employees will be engaged in the task of “creating”. I believe that a major reason for our success has been working to enhance our technology. I foresee that we will continue to invest in technology in that way in the future.
What are some of the next businesses or uses that will spring up because of the internet and how are you positioning GMO to capitalize on these trends?
I did once speak about the railroad business being similar to the internet business, but I’d like to explain how I now perceive the internet industry. I don’t think anybody doubts that the internet revolution is another industrial revolution. If you look at the past industrial revolutions, they’ve operated on a cycle of 55 years. This is called the Kondratiev cycle. Since we started our internet business in Japan it’s been 20 years. Fifty-five minus 20 is 35, which means we have 35 years left of the IT revolution.
What will happen within the next 35 years of the IT revolution? There are two things. One is that everything that uses electricity will be connected to the internet, including for example the lighting we have here or even our brains, which after all operate on electric impulses. All of these things will be connected to the internet.
The second point is what happens once all these electrical things are connected to the internet, which is that there are going to be two phenomena. One is that data will be optimalized. The second is that everything will become “smart”, become like a smartphone. To give you an example of data optimization, cars are now often connected to the internet, and we see services like Uber capturing this potential. Accommodation is also connected to the internet through services like Airbnb for example. To give you another example of how things are becoming like smartphones, Tesla is creating cars that are like smartphones. These examples, like Uber, Airbnb, and Tesla, this kind of thing will eventually apply to all fields. At the moment, it’s just being applied to big things like houses and cars. Within the next 35 years, I believe it will pervade everything.
You’ve also spoken about the need for GMO to look outside of Japan more and more; I believe the recently launched Z.com is designed to leverage your expertise here in Japan to the world. I know that one of your long-term goals is to generate 50% of your revenue from outside of Japan. Can you tell us about your priories for international expansion?
While we’re looking to expand more seriously abroad from next year, at the moment out of our 120 billion yen sales, only 3.9% comes from our overseas operations. Out of our 4,550 employees, 700 are employees abroad. Our overseas business as a proportion of our entire operation at the moment is still small. Starting this year, we’re going to step up the marketing in various parts of the world using the Z.com brand.
About how we envision the expansion of Z.com abroad, there are various companies that are very experienced in expanding abroad, like Toyota or Suzuki, or Panasonic – maybe not so much Sony these days. But all of these companies that have gone before us, they’re well respected abroad. We hope that within 10 to 20 years, Z.com will also gain the same kind of respect and be able to contribute to the growth of those local economies and improve the life of the people living in those countries and grow our brand by becoming a respected brand. In order to achieve that, we like to come up with the best and number one products around the world at reasonable prices. By the way, can I explain why we call it Z.com?
This is just a bit of trivia, but in the world, there are actually only three one-lettered .com domain names.
We purchased Z.com from Nissan who had actually bought this domain previously when it was created by mistake. Then we purchased it for 800 million yen. Why did we spend 800 million yen to purchase this? It was after this experience of when I went to Las Vegas a few years ago and I landed in the airport. People were having protests holding up placards that said we hate GMO (‘genetically modified organisms’). In Japan, the company name GMO is well known as us.
Actually the English-speaking world is not our immediate priority. We’d like to start out with non-English speaking Asian countries because the English region consists of 14.6 times our population and so there is a lot of strong competition and a possibility that we might lose out. We plan to start out with Asia. And even in countries where they don’t speak English, they will still understand Z.com. We’d like to cement our share of the market there, and then eventually go to the English-speaking world.
When we interviewed Kazuki Morishita, CEO of Gungho recently, he said that innovation is still lacking in the mobile gaming sector. How are you working to differentiate your newest business segment from the already highly competitive industry of mobile entertainment?
Out of our domains, the mobile entertainment segment is the last one we have entered. We’ve only been at it for four to five years. We’ve traditionally focused on infrastructure, media, finance, and then mobile entertainment. In infrastructure, we started 20 years ago. Media, 17 to 18 years ago; finance, 10 years ago; and mobile, five years ago. We have not been successful in the segment and only next year do we expect to go into the black on this segment. This is a very difficult area, and yet if you hit it big, you get a massive return. Companies like GungHo, when they hit it big, they gained massive profits and gained massive numbers of customers and were able to put smiles on all these customers’ faces.
We have a dream and that’s why we’re continuing to invest. I’m not sure what will happen, but watch us this year.
Two elements of your corporate culture that I really wanted to stress in this interview, because not only is it quite Japanese but I think it will also surprise and interest our US audience. First, your almost obsessive focus on the customer, and second is this concept of giving back to society, which you’ve encapsulated with the “Internet for Everyone” slogan. Why are these two elements so important to your corporate culture?
I’d like to make this company into a company that lasts for centuries. In the entire world, there are only about 8,000 companies that have lasted 200 years. Out of those 8,000 companies that have lasted 200 years, 4,000 of them are Japanese, and the other country that has a lot is Germany – they have a little over 1,000. In other countries, there are only tens or a few hundred such companies. Japan can be considered a country with a low life expectancy for companies. Out of those Japanese companies that have lasted 200 years, 80-90% of them have a very clear company motto or vision which is either in writing or something that has been passed on. A lot of them consist of things like a customer focus or technology focus to create the best products. That’s all very clearly stated. I’ve learned from this and because I want our company also to last for centuries, I have taken this policy
GMO has not only single-handedly transformed and exponentially increased the amount of internet usage here in Japan, but also you have an amazing story that’s really tangible and relatable to our American audience. You’ve dropped out of school to found this company, along the way writing three books about how to be successful at a young age and how to be driven. You could even be called the Steve Jobs of Japan. What advice would you give to other young entrepreneurs who want to follow in your footsteps and create successful global companies such as you have?
What I would like to say is that dreams can be realized and it’s the most important thing to have a dream. Actually there is this quote that I love which maybe you can include is that where there is a dream there is action, and where there is action there is habit, and when there is habit there’s personality, and when there’s personality there is faith. That’s my favorite quote. I want to advise everyone to have faith and to tell others of your beliefs, and if your dream puts smiles on people’s faces, then it can be realized.
What final message would you like to send to G7 leaders?
That all the heads of state of the various countries should promote even more the potential the internet has for the world, and look at how the internet could bring more smiles to people around the world. Because at the moment, as far as we can see, the internet is crucial for the world’s economy to continue to thrive. I’d like to ask these leaders to promote the use of the internet further.