As Japan’s most popular messaging app proudly and excitedly plans a dual listing in Tokyo and New York, many Wall Street folks are turning to Google, typing “What is Line?”
This question says more about the state of even Japan’s most innovative industries than fans of Prime Minister Shinzo Abe’s revival scheme want to admit. Line’s business of selling emojis and cartoon stickers to Japan’s texting-crazed masses is wildly popular at home. But even with 218 million users, it’s still a bit player globally. That’s where a messaging product needs to be focused to make a dent versus WhatsApp, Facebook Messenger, China’s WeChat and any new players to emerge in the months and years ahead.
Finance types are currently marveling at the $4 billion Line is leaving on the table. That’s how much in valuation two years’ worth of hesitation in timing this initial public offering on the part of Chief Executive Officer Takeshi Idezawa and his staff may have cost the company. As they dithered, Mark Zuckerberg’s colossus made huge inroads on Line’s turf as investors cooled on tech IPOs. Also, the Nikkei 225 has since stumbled into bear-market territory, as evidenced by a recent 582-point plunge.
But Line’s real problem is Galapagos. Japan has a long, painful history of devising highly evolved, game-changing products that thrive at home but have trouble surviving beyond the water’s edge. Sharp and NTT DoCoMo offer pristine case studies of how Japan has long been the corporate equivalent of the rare species Charles Darwin encountered off Ecuador’s coast. In the 1990s, long before Steve Jobs’s iPhone nearly killed the camera industry and invented the selfie, Sharp was producing commercial camera phones. DoCoMo was offering internet access and messaging services. It just never occurred to Japan Inc. to go global.
Line may suffer from vestiges of this “Galapagos Syndrome” dynamic. Granted, its IPO structure points toward bigger geographical ambitions, selling almost two-thirds of shares in the U.S. Line also is big in both Taiwan and Thailand, and Idezawa says he’s determined to tap regions that don’t yet have dominating messaging services. Trouble is, so is everyone else, not least of which Facebook and its 1.6 billion-plus active users.
China? That’ll be quite the uphill battle given the ubiquity of Tencent’s WeChat offering, one to which Line is playing catchup to build an ecosystem for everything from shopping to payments to restaurant bookings to music streaming to Uber-like car services. Facebook, meanwhile, is stepping up efforts to enter President Xi Jinping’s burgeoning marketplace. Ditto for every other booming Asia market like the Philippines and Indonesia.
I use Line regularly and I also like its backstory. It debuted in 2011 in part as a response to the Great East Japan Earthquake that killed more than 18,000 people. Amid the chaos, it was nearly impossible for Japanese to reach out to family members by phone. That prompted developers at NHN Japan, a unit of South Korea’s Naver, to fill the void. Line Messenger was their solution, and its growth has been a source of pride in a nation watching once-proud names like Sharp, Sony and Toshiba become also-rans. Line also pioneered a business strategy of riding the emoji wave, selling cute graphic characters, or stickers, and other digital knickknacks users work into their chats. That earned it the top ranking in Japan for smartphone revenue.
Whether it will resonate more globally, though, is the $1 billion (the amount of Line’s July offering) question facing investors. One troubling omen: growth in users has stalled largely because of spotty progress bringing Line beyond Japan’s borders. In the last quarter of 2015, roughly 70 percent of revenue came from Japan. That’s why, as of Friday, Line was valued at just 4.9 times last year’s sales, compared with 11.3 times for Facebook and 8.9 for Tencent.
Given Japan’s shrinking and aging population, it’s vital that Line break into the big leagues of overseas markets. Aside from bad timing, the IPO also is haunted by the growing crowd of messaging apps. By delaying bigger forays abroad, Line may have ceded even more market share to bigger rivals.
Line may also suffer from that dud of a recovery plan called Abenomics. When Japan Post pulled off the nation’s biggest IPO in almost 30 years last November, some investors still held out hope for an economic rebound. But a dearth of structural reform and signs deflationary pressures are intensifying have increased the number of Nikkei “sell” recommendations. Scandals at Toshiba (accounting), Takata (deadly air bags), Mitsubishi Motors (fuel economy data) and others are denting the Japan Inc. brand.
Abe, to his credit, has tried to address this insularity by prodding companies to name outside directors and female board members. But his weak-yen policy worked at cross purposes, reducing the urgency for many executives to escape the island. For every globally minded CEO — like Fast Retailing’s Tadashi Yanai, Toyota’s Akio Toyoda and SoftBank’s Masayoshi Son — there are hundreds sitting back complacently and letting the currency do their jobs.
Line’s moment in the spotlight, you can argue, comes at an ideal moment for Japan — just as its once formidable tech industry needs a pick-me-up. Sadly, global conditions aren’t cooperating with a company that may have been too slow to the punch — or to get off Galapagos.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com
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