Japan’s had it hard. After nearly a decade of stock market doldrums and an economy on the brink of disaster – just as the rest of Asia struggled too – Japan bounced back. Growth happened. Its economy is still a tad slow, but there are many industries looking way up. Online marketing is one of them.
Of Japan’s 130 million people, about 88 million are online. That’s about 68 percent of the population, according to Internet World Stats (Asia), compared with 210 million of the U.S.’s 300 million and 137 million of China’s 1.4 billion residents. Japan’s may seem like small numbers, but the momentum of online marketing and the ever-growing popularity of affiliate marketing in Japan make it a region everyone’s talking about.
Blogging, for example, in Japan is a popular way of getting products in front of the masses. Technorati Japan says that more than 85 percent of Japan’s bloggers write about companies and their products – and that over half of these bloggers have been contacted by companies to extol their wares. Japan’s Ministry of Internal Affairs and Communications says that bloggers totaled about 8 million in that country, making for an in-blog ad market of about $60 million last year.
Expansion on the Way
In the 1990s, the Japanese did not use credit cards much for online purchases, as bank transfers and postal transfers made e-commerce slow and a waiting game. But by 1999, a tech-hungry culture emerged and online spending came with it. Pay-per-performance business models were not far behind.
A leader in this space is online retailer Rakuten and its affiliates – managed through LinkShare Japan, a U.S.-led affiliate company acquired by Rakuten in 2005. Rakuten is the leader in online shopping destinations in Japan, so their penetration made them a default major player. In fact, Rakuten plans to be in about 27 more markets by 2012, according to Atsushi Kunishige, a vice president at Rakuten. He says they will use LinkShare, for example, as a way to "expand our business into the international market. We want to open a full-fledged Internet mall [abroad]."
Rakuten’s 20,000-plus online stores and merchants did about $66 million in operating profit in the second quarter of 2007. With the company traded publicly on the Japanese stock market, that’s a market capitalization of more than $5 billion.
LinkShare Japan has about 68 percent of the top-selling merchants in Japan and is the leader in customer satisfaction, according to a survey by Japan’s Affiliate Marketing Association. Atsuko Umemura, director, corporate planning, of LinkShare Japan, says that their focus on per-sales kinds of merchants has helped make them a leader. "Affiliate marketing has proven to have the best ROI for us," she says.
Late Bloomers
While the U.S. affiliate industry can trace its beginnings to the mid-1990s, the first affiliate providers in Japan didn’t start up until 1999. The U.S. market has had a few years to evolve and grow, whereas the Japanese affiliate space is still considered a "juvenile." There are more than 80 affiliate networks in Japan that cover both Web and mobile platforms. Some of the more high-profile affiliate networks include Adways, Access Trade, LinkShare Japan, Fan Communications (A8), TrafficGate, ValueCommerce and Zanox Japan.
Anthony Torres, president of affiliate marketing program management company MetaFlo Marketing, which is based in Japan, points out that the key difference between the U.S. market and the Japanese market is that the "Japanese affiliate networks can service only Japanese sites. U.S. networks such as Commission Junction operate worldwide due to English being the most popular language for Web content. So, no matter how large the Japanese affiliate industry gets, it will never be as big as the English-speaking networks," Torres says.
He also notes that Japan is still behind the curve in tracking technology and commission sophistication. For example, U.S. advertisers have more choices in how they reward affiliates. Generally, U.S. affiliate networks allow merchants to pay affiliates based on subscription status of digital content and, of course, future sales even if buyer clicks go directly to a merchant store. The U.S. networks also have more payout choices. A small CPA, plus a larger percentage of future sales generated by the lead is a method that hasn’t made it to Japanese network platforms.
Torres notes that the cost of acquisition of a typical online customer is high in Japan. "When you add in customer service and all of the accumulated costs in the sale cycle, you are left with a lower margin per sale," he says. Merchants in Japan are just not used to paying high commissions or lifetime commissions on a customer, he adds. "As the industry matures here and the ability to attract online buyers becomes more challenging, we may see online merchants less reluctant to try more aggressive commission terms." Unique to the Japanese market seems to be the cross-investment of media sites and affiliate networks. In order to increase media coverage, many networks invest in or make their own in-house media sites.
Considered the real pioneer in Japanese affiliate marketing is ValueCommerce (Yahoo Japan took a sizable stake in the company in 2005), started by a New Zealander named Tim Williams. ValueCommerce has more than 50,000 websites and blogs in its network, with about 2,000 advertisers. The company has about $43 million in annual revenue and trades on the Tokyo Stock Exchange. Goldman Sachs veteran Brian Nelson is now CEO, having come on in 2000 as COO. Nelson says that "we focused on our strengths, continued to hire great people, and launched new products and services that kept new customers, especially large brand name customers, coming in to work with us."
Consolidation is Coming
Nelson says that a large product database for shopping and their Web 2.0 applications have kept them in the No. 1 spot. It also doesn’t hurt that there is some consolidation going on in the Japan online marketing space now. "I have been telling people in the market for a long time that consolidation is coming " and it is in full swing now," Nelson says. LinkShare’s Umemura says, "It is a very saturated market right now. There is not enough room for everyone to survive."
Online marketing observers in Japan note that there are just too many networks trying to service the same advertisers. With about 1.3 million affiliates registered with the major networks and the majority of transactions driven by a group of search affiliates and "incentive media sites," there are not enough "quality" affiliates to take on all the offers out there. This means the networks are starting to look at new channels for ads.
One of those new channels is mobile, a platform that has performed very well for Japan. Because the Japanese adopted 3G standards fairly early, more than three-quarters of all cell phones in Japan have smooth Internet access. This means delivery of interactive content and ads to about 86 million cell phones (compared with 31 million in the U.S.). There are more than 48 mobile affiliate networks in Japan, with names such as Moba8, Pocket Affiliate and Smart-C. In 2005, the Japanese spent more than $3.8 billion on purchases over cell phones – 57 percent over the previous year. In addition, the CPA-based mobile affiliate provider model does much better in Japan than in the U.S., where CPC or CPM models prevail. It’s been said the culture in Japan plays a role in this since there are so many more commuters in Japan – leaving more travel time for the Japanese to experiment with their cell phones.
And with greater mobile traffic comes the opportunity to serve more Internet phone search advertising. Local search engines like Goo, Nifty and BigGlobe get a share of those eyeballs, but the leaders are Yahoo Japan (with about 63 percent of searches), Google Japan at 23 percent and about 14 percent left to split between MSN and the regional engines. Yahoo Japan is also the biggest local player in Internet auctions, Web email, mobile content and broadband.
Search Challenges
Japanese online marketing agency and search specialist Sozon sees challenges in the search marketing arena. One area in SEO that is unique to Japan culturally speaking, says Andy Radovic, VP of strategy and planning at Sozon, "is its variety in language used. Essentially, there are four methods of writing – kanji, the character system borrowed from China; hiragana, a more simplified form of kanji; katakana, the Japanese expression for foreign words; and romaji, which is the alphabet," he says. "Depending on what you intend to communicate, you may use just one or a combination of these. This greatly impacts the keyword planning stage of your SEO program. Another major difference is Japan’s reliance on Yahoo as the search engine of choice."
Radovic notes that Japanese-run companies are the leaders in services and customized solutions. "There are very few successful, market-leading international companies in the online space," he says. The international companies that operate in Japan tend to do so with a local partner. The exceptions, he says, are technology- dependent products, where some U.S. companies are in the lead, such as in search (Google) and bid management and Web analytics tools (like Omniture). "Some of the Japanese homegrown companies in the mobile, travel and insurance space are getting more sophisticated in their online marketing programs and are tracking to off-line sales," he says.
Scott Neville, COO of Sozon, says that, creatively speaking, ad messages need to really know their audience. "International ad concepts simply will not work most of the time," he says. "Text is definitely king here. More information is better and creative is often very busy with multiple propositions." He says you will need to provide as much detail as possible in your campaigns – that Japanese users will definitely read your privacy policy. He says that text email is the standard and somewhat limiting in terms of email marketing campaigns that may rely on HTML. Flash and graphic-centric sites tend not to work that well at either an advertising or a site-campaign level. He says that Flash campaigns "are not really supported by major portals for media buying and tend to be not that well received." Also, comparison campaigns are not generally used in Japan and "culturally not respectable to run."
While online ad agencies in the U.S. are slowly starting to synergize their off-line traditional ways and the brave new web of interactive display advertising, the Japanese banner ad companies are not doing too well. Two online ad agency leaders, Cyber Communications and D.A. Consortium, actually had negative growth in recent years.
The Network View
Aside from the few U.S. companies acquired or now run by Japanese companies, there are few pure U.S. players in this market and there are not likely to be more anytime soon. Observers note that U.S. networks just don’t have the Japanese-language support. While LinkShare and ValueCommerce have a bilingual platform interface, they are the only two out of dozens. One of the U.S. networks to gain a measurable foothold in Japan is DTI. They host affiliate programs for Japanese adult sites, but since most networks in Japan won’t handle porn ads, DTI has found its niche in this area. Some experts point out that one opportunity for U.S. companies would be to acquire small- to medium-sized networks and re-brand. LinkShare’s Umemura says that in Japan, U.S. companies could have come in at an earlier stage, but that "starting now from scratch would be pretty difficult whether you are a U.S. or European company. There are some smaller U.S. networks that do quite well here."
In terms of what hasn’t been popular in Japan’s affiliate programs are third-party management vendors. Currently, only a handful of the affiliate networks have management services, mainly because they are pushing their own media. However, experts say, tool and service vendors could eventually find a market in Japan. Keywords tools such as Wordtracker, recruiting tools such as Syntryx Executive Solutions and competitive keyword research tools such as the makers of KeyCompete could enter the market fairly easily.
Perhaps the best indicator that the online marketing landscape in Japan is maturing is the formation in May of 2006 of the Japan Affiliate Service Kyokai, an association that started to draw up guidelines, educate the public and monitor ethical behavior in online marketing. The six major networks in Japan founded the association when they felt that "shady affiliates" were starting to encroach on the growth of the business.
A learning curve, however, still applies. Sozon’s Radovic says that "everyone is struggling with how to market in a Web 2.0 environment. The Japanese blog and peer consumer trust are major drivers of consumer purchase. So this is an ongoing challenge." And solutions to the challenge will certainly add up to a better marketing landscape.