Yahoo Japan operator Z Holdings Corp. and Line Corp. reached a basic merger agreement this week that will give birth to Japan’s largest internet company, even exceeding the size of e-commerce giant Rakuten Inc.

At a news conference, Kentaro Kawabe, president and CEO of Z Holdings and Line CEO Takeshi Idezawa said that through the merger they hope to create a third force capable of better competing with GAFA (Google, Apple, Facebook and Amazon.com) and Chinese online behemoths BAT (Baidu, Alibaba and Tencent). But as the global competition intensifies, it won’t be easy for Japanese online firms to catch up with the overseas giants. Nonetheless, it’s better late than never to challenge them, and the attempt by Japanese firms to create a bigger online platform is good news for Japan, which lags far behind other countries in this area.

Yahoo and Line aim to complete the merger by the end of 2020. Yahoo’s strength is its strong search engine and online shopping services, while Line’s message app has a huge number of active users in Japan and other Asian countries, such as Taiwan, Thailand and Indonesia. If they can utilize their complementary strengths to counter their rivals overseas, their chance of surviving in the rapidly changing global market will improve.

“There tends to be concentration of wealth in the global online market. Those who have data, human resources and money will get even bigger and bigger,” Line’s Idezawa stated at the news conference. “The most terrifying fact in the online service market is that it is often too late to do anything by the time we realize that our rivals have already benefited from such a concentration of resources.” This comment reveals his sense of crisis and the truth about this market. And it is this sense of crisis that led the two Japanese companies to join hands.

Economies of scale and speed matter even more for the online market than other industries. However, looking at the market landscape, the consolidated size of the two companies is dwarfed by that of GAFA and BAT.

Apple boasts the world’s largest sales revenue among IT firms at ¥28 trillion a year, followed by Amazon’s ¥25 trillion and Alibaba group’s ¥5.8 trillion. The combined sales of Yahoo and Line will be about ¥1.16 trillion. In terms of users, hundreds of millions of online searches take place on Google every day by people around the world, while Facebook boasts 2.38 billion users a month. Even with the merger, the number of users of Yahoo and Line services will only reach 240 million.

The leaders of Yahoo and Line pointed out that the strength of the merged company will be its human resources. The number of employees will reach 20,000 and it will have several thousand engineers, designers and data scientists. They will also invest ¥100 billion annually in AI-related projects.

Meanwhile, GAFA and BAT have been making huge investments in research and development, with Amazon spending more than ¥2 trillion a year and Google and Apple each investing around ¥1 trillion annually.

Since speed matters in the digital age, how quickly the merged entity can churn out innovative new services using massive amounts of data collected through AI would appear to be the key to success.

Their immediate challenges, however, will be to consolidate or reduce their overlapping services. The two leaders have only stated that the merger will have to be scrutinized by the Fair Trade Commission and they need to await its decision before they can comment on specifics. Because of their dominant positions in Japan, it’s believed their businesses overlap in many sectors. One such area is smartphone payment services — Line’s Line Pay and Yahoo’s PayPay. In China, Alipay and WeChat Pay already control more than 90 percent of all mobile payments, but Japan’s online payment market currently has too many players, including Mercari, Rakuten, Origami, Suica and convenient store operators like FamilyMart.

Among them, Line Pay has a dominant position with 36.9 million users in Japan. But PayPay has rapidly expanded its user base recently to more than 20 million users. Since it’s too early to determine which payment service will be the winner in this fierce battleground, any decision by Yahoo and Line is likely to affect the future course of this market.

It remains uncertain whether the FTC will allow their dominance in the domestic market, but to better compete with their rivals both domestically and internationally, one thing is clear: The merged entity needs to take advantage of all synergies between Line and Yahoo, and offer truly convenient services for users. Their presence in the market will certainly grow with the merger, but if they fail to gain support from users, the odds of survival will be slim.

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