Stephen Givens is a corporate lawyer based in Tokyo.
Internet platform businesses like Google and Amazon, you would think, necessarily compete in a global market that spans national boundaries.
A look at geographic market segments by revenue of some of the leading internet platforms confirms the hunch: 54% of Google's revenue comes from outside North America; 30% for Amazon, 60% for eBay; and 54% for Netflix.
The logical corollary would seem to be that internet businesses that serve a single geographic market only -- say, a Japan-only e-commerce site -- are doomed to be swallowed up by their larger global rivals.
How Japan's leading domestic internet platforms, Rakuten and SoftBank Group company Z Holdings, formerly Yahoo Japan, are faring against Google and Amazon offers evidence to test this hypothesis.
Spoiler alert: Cultural barriers and network effects from a legacy position in the local market can delay, but not prevent ultimate defeat. Rakuten, Japan's online shopping mall, provides the starkest data.
In 2015, Rakuten and Amazon Japan had a roughly equal market share. By 2020 Amazon Japan commanded twice the market share of Rakuten, 25.7% to 12.6%. During that period, Amazon's scale enabled it to integrate vertically when it comes to logistics and distribution, with delivery trucks adorned with the signature smile-shaped A to Z arrow now a common sight in Japan.
Rakuten started with the advantage of a native Japanese language interface and a critical mass of loyal Japanese sellers and customers. But Amazon overcame Rakuten's initial local advantage by leveraging its global scale and assets.
Accumulated experience in markets around the world helped the Seattle-headquartered company localize its user interface to suit Japanese tastes and sensibilities.
Further, Amazon's global network offered Japanese users the ability to compare products and prices from all over the world, not just within Japan. On top of this, Amazon began to offer new categories like Amazon Prime Video, Alexa and Kindle that vault over Rakuten's menu of conventional physical products.
Rakuten is now facing a spiral of failure: net operating losses two years running and a stock price half what it was in 2015. A path to recovery is not obvious.
When it comes to Z Holdings, a cluster of internet and e-commerce platforms whose customer and revenue base is almost completely Japanese, while the picture is more complicated, there are grounds for possible optimism.
The good news: local boutique platforms in the right niches can survive global behemoths.
Z Holdings' portfolio includes the Yahoo Japan search engine and e-commerce site; the LINE chat app; the PayPay digital payment app; fashion platform Zozo; office supply seller Askul; and the Ikkyu restaurant and hotel booking site.
While Yahoo Japan currently holds a 15% market share compared to 75% for Google, 10 years ago Yahoo had 30%, compared to Google's 60%, confirming the local player's vulnerability to inroads by the global giant.
Interestingly, however, Google's market share in Japan is still less than it is worldwide, where it commands a 90% market share or more. Yahoo Japan's grip on its 15% share seems to be reasonably persistent and secure.
The reason seems to be cultural. The Yahoo Japan portal is densely loaded with content in a format that most Westerners would find clunky and inelegant. But many Japanese prefer the dense look-and-feel that has nurtured a hard-core minority audience for the Yahoo product.
And unlike the Rakuten shopping mall, Z Holdings' e-commerce sites are carefully curated for Japanese audiences and tastes, while the LINE chat app is the near-universal messaging app for younger Japanese. Askul and Ikkyu offer a Japanese menu of domestic office supplies and hotel and restaurant destinations distinct from offerings at sites such as Office Depot and Expedia.
SoftBank, Z Holdings' controlling shareholder, is itself putting to the test the viability of country-specific internet platforms outside Japan, with 40% of its value is attributable to its stake in Chinese e-commerce giant Alibaba Group Holding, a single country platform whose presence outside China is minimal.
SoftBank founder Masayoshi Son has spent recent years trying to replicate the spectacular success of his early-stage $20 million investment in Alibaba twenty years ago.
But Alibaba's success in its home country is an outlier, impossible to replicate outside a centrally controlled economy where Google is legally banned and Amazon has effectively been forced to withdraw as a result of heavy-handed protective policies favoring local players.
The SoftBank Vision Fund's parallel investments in ride-hailing platforms Uber and Didi show that Son does understand that China is unique in its ability to function effectively as a freestanding market -- at least as long as the authorities are on your side. Uber has effectively ceded the China market to Didi in exchange for a share of Didi's equity.
The real test will be the future trajectories of Son's investments in country-specific e-commerce platforms in smaller, more or less free-market countries such as South Korea's Coupang, Flipkart in India, Indonesia's Goto and Trendyol in Turkey. So too its investments in Southeast Asian ride-hailing platform Grab and India's Ola
Unless these local platforms can develop and defend lasting culture-specific niches too small and bothersome to attract a predator's attention, it will only be a matter of time before they meet Rakuten's fate.