PROFITS SEEN FROM ACTIVE SURFING HABITS

Tsutaya eyes ads on cellphone Web sites

by Ryan Nakashima

A graphic small enough to be hidden under your thumb is expected to bring in millions of yen in revenues for Japan’s biggest rental video chain, Tsutaya.

CEO Takehiko Ogi (left) sits with Takashi Miya, general manager of corporate strategies, in Tsutaya Online’s office in Tokyo’s Ebisu district.

Tsutaya Online is to start making money this fall on advertisements placed on its cellphone Web sites, which can be accessed by i-mode, J-Sky and EZ-Web handsets. One analyst expects the move to help the loss-making company turn a profit in two years.

Results from a test of the ads have surprised the company because they show a high click-through rate — around 7 percent — 17 times higher than the average for ads on the personal-computer-accessed Internet in the United States, which is about 0.4 percent.

“We knew that kind of market existed, but not so hugely,” said Takashi Miya, Tsutaya Online’s general manager of corporate strategies.

He attributes the high rate to mobile customers’ active surfing habits.

“You bring your mobile everyday everywhere,” he said. “You can access it any time. So the user is quite active.”

He said the company will be able to charge many times what PC-accessed ads cost because of the high rate and the large proportion of the cellphone screen the ads take up, though the final price is still under negotiation.

Raising mobile ad revenues will help Tsutaya Online’s hard-hit parent company, Culture Convenience Club, which posted a 558 million yen loss from April to June this year.

Almost half that loss, or 226 million yen, came from Tsutaya Online, a wholly owned subsidiary.

CCC shares, at 2,150 yen recently, are less than half the closing price of 4,800 yen the day they debuted on the Mothers market this April.

Minoru Tayama, senior analyst with HSBC Securities in Tokyo, said investors are unhappy with President Muneaki Masuda’s apparent lack of concern with cost control.

But he has high hopes for the miniature ads.

Tsutaya Online’s mobile membership is ballooning by 100,000 a month, and the site, with 1.2 million page views a day, is ranked No. 1 in NTT DoCoMo’s official i-mode menu in the entertainment category, Tayama said.

One year after starting up in July 1999, Tsutaya Online already had 700,000 mobile members.

If it manages a click-through rate of just 2 percent the first year and 1.7 percent the second year, and charges 80 yen per click, Tayama predicts that if the system starts in September, the ads will bring in 500 million yen by next March and 1.2 billion yen by March 2002.

“They have quite good potential,” Tayama said.

He expects a profit for CCC by next March, and for Tsutaya Online by March 2002.

Analysts also say advertisers will benefit from the integration of data on mobile clients’ habits with the 5-year-old database on the rental chain’s 13 million total members, one in 10 Japanese people.

George Ruiz, cofounder of market research company Internet Think Tank, said it is a boon to advertisers to place mobile ads that match users’ carefully tracked purchasing history.

In a broad sense, Hitachi Ltd. took advantage of Tsutaya’s DVD movie rentals and sales by placing a test banner for a DVD player on the mobile site.

But Ruiz said more carefully defining Tsutaya’s market has benefits.

“The better you can predict services, the more likely you’re going to offer them something they will buy.”

Besides the prospect of ballooning ad revenues, the franchise chain has found its mobile site draws more customers to its stores, from which parent CCC reaps a small cut of sales.

The company found that 7 percent of mobile members used digital coupons sent to their handsets, compared with 1 percent for members who receive direct mail coupons or flyers.

Mobile members can check online to see if a video is in stock at their nearest store, then show the coupon on their cellphone screen to a clerk at the counter for the discount.

According to an experiment conducted May 25 to 31, the company found members who used the coupons not only visited Tsutaya stores more often, but spent more on their trips.

Compared with their activity in April, the coupon users visited Tsutaya outlets 70 percent more often, and spent 59 percent more on rental videos. They also spent 29 percent more than regular members on CD purchases.

The company attributed the increased expenditures to the fact that customers, once in the store for a certain video or CD, were tempted by other products.

When consumption was measured over six months, mobile members spent 7.3 percent more at stores than regular members.

“We feel the power of this browser form,” said Tsutaya Online CEO Takehiko Ogi. “We send some message or coupon or some value through our Web browser form and people move to our stores.”

Allen Miner, president and founder of the Internet venture capital company Sunbridge Corp., predicted Tsutaya’s cellphone coupons could even be individually tailored.

“They know this person always rents horror movies or this person always rents comedies, or every Julia Roberts thing that comes out . . . or this person’s bought a lot of Madonna CDs,” Miner said. “So when a new Madonna CD comes out, send them a coupon.”

Miner said Tsutaya Online’s mobile system is more effective than that of a major competitor in the books arena, Kinokuniya, which does not have a member database.

Isize, a mobile Web magazine, offers mobile coupons, but has no stores.

Ogi stressed the importance of having both.

“The ‘Clicks and Mortar’ model is quite applicable in Japan,” Ogi said. “We believe the real power of the real store is quite important in order to make a profit using the Internet, which is quite a huge investment.”