|

Mixi faces challenges as competition grows

by

Early last month, Mixi CEO Kenji Kasahara came under intense pressure. That was on the day that his company, Japan’s biggest social-networking operator, announced its financial results and forecast for the year: Its profit would fall by 15 percent from the previous year, the first such decline in growth since the company went public. To be sure, the worst recession in decades is hitting hard. Yet, investors were not happy over the company’s uncertain prospects. “The message was disappointing,” said Hiroshi Yamashina, an analyst at Nikko Citigroup.

This is a watershed moment for Mixi, one of Japan’s most successful “Web 2.0” darlings. But lately its profit has been flat, while its growth in the number of page views and members is slowing. Acknowledging the need for new sources of revenue, Kasahara recently unveiled a landmark plan, calling it “Mixi’s biggest change since its launch.” The company is now opening its PC and mobile platform to third-party developers, and new applications created by them are expected to become available this summer on its site. It will also lift its invitation-only system later this year.

“We have grown as a communication service with the online diary tool in the main. But will that be sufficient (for our growth) in the next five years? We do not think so. We will offer a variety of applications for communication, (and try to appeal to a wider audience),” he told The Japan Times earlier this month. With this shift, Mixi is aiming to rely less on ad revenues and more on fees people pay for the use of new applications.

Will the open platform strategy, which has drawn so many users to Facebook, work for Mixi as well?

There is little doubt Mixi has a significant medium-term potential for growth, given its 17 million users and its high percentage of active users. Most of them log on from their mobile phones. And Japanese mobile users are accustomed to pay for the online content that they like largely because of its ease. So if Mixi succeeds, its sales could double in a few years’ time, according to some estimates.

It may not be so straightforward, however. One big challenge, it seems, is to get developers including established gaming and office-software makers to become familiar with what is yet unfamiliar in Japan. “The toughest part is to get developers to understand exactly what we mean by ‘social applications,’ ” says Akinori Harada, the man behind the new strategy, who became director of the company June 18. “There are some who misunderstand social applications as news or weather sites.”

Despite the daunting task, Harada, who was instrumental in establishing NTT DoCoMo’s highly successful Web portal in his previous job, is confident that Mixi’s open approach will work as well. “By nature, what we are trying to do now is the same. Remember how so many (mobile-specific content providers) did well?”

Indeed, Mixi’s opening of its platform, including its mobile version, has already prompted hundreds of developers into trying to develop applications. “This is a huge opportunity for a company like us because Mixi has a huge traffic we could not get alone,” says Hironao Kunimitsu, the CEO of Gumi, a Tokyo-based mobile social-networking venture. His company plans to release several applications this summer. The good news, perhaps, for Mixi is that several of Facebook’s popular application makers have shown interest in adapting their products for release on Mixi. Their participation at the outset could pave the way for the Japanese companies that are currently trying to learn how to develop software for Mixi. RockYou, for instance, is preparing to release the Mixi-version of its hit applications, including “Super Pets.”

Despite the momentum, some experts remain cautious. The biggest risk is a possibility that quite a few users would not take to what Mixi is trying to offer, beyond what is available now, Ichiro Kiyota, Six Apart Japan’s director and expert on technology, observes.

“What has worked for social networking services in the U.S. may not necessarily work for Mixi,” noted Masato Araki, a senior analyst at Mitsubishi UFJ Securities. In any case, Mixi’s success will depend a lot on third parties and how it can facilitate the scheme.

Mixi’s move comes amid the mobile-gaming boom among Japan’s young generation. GREE, Japan’s third largest social-networking operator, saw the number of users to its site more than double to nearly 10 million, and its profit increased multiple times over the past year on the back of popular mobile games created in house. The phenomenon underscores how social games, if they catch on, could lead to a huge profit. The GREE games are generally available for free, but users are willing to pay for virtual goods to play. Mixi will need to move fast to secure its own place in this mobile gaming sphere, considered one of the boom areas of the social-application industry.

Until now, the 5-year-old Mixi, which has been embraced in particular by young Japanese women, has shown remarkable stability as the nation’s dominant social-networking site. The reason? “Mixi has become as natural a communication tool as my mobile,” says 29-year old Yusuke Matsuoka, one of the millions of active users. He glances at some of his 70 Mixi friends’ diaries on his way to work every morning. Such loyalty to Mixi, or rather Mixi’s characteristic tightknit circle of friends, partly explains why neither Facebook nor MySpace has made many inroads into Japan despite the establishment of a local-language version. Even so, will Mixi continue to be immune to outside challenges?

Perhaps not. To be sure, Mixi’s diary-focused social networking will be around for years to come, many observers say. And yet, the global competitive picture — especially in the mobile environment — is evolving so rapidly that it could begin to complicate Mixi’s effort to promote its open platform policy in the coming years. After all, this is a time when Mixi devotees are also watching YouTube on their cell phones. “Even in Japan, where mobile-Internet services are considered unique, there are signs of consolidation,” says Nikko’s Yamashina. Moreover, scores of new tools of communication — from iPhone applications to Twitter — are now sweeping across borders, changing the way people socialize and changing the shape of consumer-generated media.

“Social-networking services (as we know them) may not necessarily stay as the standard tool for online communication,” given the intensifying competition over applications and platforms, says Shinichi Takamiya, a venture capitalist at Globis Capital Partners, which has a stake in GREE and another company related to Mixi, ngi group.

“There is no doubt we will get to see new forms of virtual communication, be it instant or location-based,” he adds. If so, Twitter’s popularity, even if it is concentrated for now among tech-savvy Japanese, would be a cause for concern for Mixi, if not immediately.

Kasahara says his company will move swiftly to provide good applications in the face of an intensifying global challenge. He also intends to beef up Mixi’s existing functions, including its micro-blogging platform, which is similar to Twitter’s. How does he then see the future for Mixi as a result? “I think we can reach 30 million users, probably after three years,” as more sophisticated applications will become available and that in turn will attract new users, including those in their 40s and 50s.

For all the pressure, Japan’s 40th richest man by Forbes’ ranking expresses his confidence in his characteristic monotone voice. “I think we have an advantage. We have built our expertise over the years, providing a place to communicate for 17 million users. At the same time, I cannot afford to let my guard off against (foreign competition), be it Twitter, Google Wave or Facebook. Because I think globalization (of social platforms) is possible.”