According to Sony, the May 15 service restoration applied to the United States, Europe, Australia, New Zealand, and the Middle East. Service for customers based in Asia was scheduled to be restored by the end of May.

The trouble all started on April 20, just a couple of weeks after Sony had appointed Kazuo Hirai to be the CEO of its Sony Computer Entertainment group, which includes the popular PlayStation Network. On that day, the PlayStation Network suffered a major security breach initiated by anonymous hackers affecting 77 million users worldwide.

On April 21, Sony closed off the network while it endeavored to discover the true nature of the security breach, as well as determine if credit card information had been stolen. On April 23, Sony announced the breach to the public, a delay in notification that drew criticism from some quarters.

On April 26, Hirai assembled the Japanese media in Japan to unveil the company’s new tablet computers while the company struggled to repair the network damage behind the scenes. Then, on April 27, the company produced an exhaustive statement regarding the incident saying:

“We believe that an unauthorized person has obtained the following information that you provided: name, address (city, state, zip), country, email address, birthdate, PlayStation Network/Qriocity password and login, and handle/PSN online ID. It is also possible that your profile data, including purchase history and billing address (city, state, zip), and your PlayStation Network/Qriocity password security answers may have been obtained.”

In the wake of the breach, the company was faced with a class action lawsuit filed by American Kristopher Johns claiming that the company “failed to encrypt data and establish adequate firewalls to handle server intrusion contingency, failed to provide prompt and adequate warnings of security breaches, and unreasonably delayed in bringing the PSN service back on line.”

Meanwhile, in Tokyo Hirai addressed the Japanese media via an hour long press conference and fielded questions from reporters. Not long after, group CEO Howard Stringer stepped forward to address the matter with a short statement directed toward American customers.

Finally, on May 15, Hirai posted a video speech delivered from his office, in English, expressing his apologies for the data breach and detailing initiatives designed to protect consumers from identity theft. Presented with the charm Hirai has become known for, the video message afforded Hirai the opportunity to give customers and stockholders alike the chance to see what the new corporate face of Sony might look like (Hirai has been rumored to be the top candidate to one day succeed Stringer as the group CEO).

To be sure, having such a historic product glitch occur just after the tragic and horribly disruptive Great East Japan Earthquake was a true test of Hirai’s mettle. The disaster rocked Japan’s economy and has set some in the financial world to wondering if the damage to some of Japan’s corporate heavyweights will take a toll that lasts beyond 2011. Sony’s factories in the northeast were impacted by the disaster, and many games were either delayed or simply cancelled for various reasons.

Indeed, the recent international trend of opining on the fate of corporate Japan, affected by the earthquake, might have very well given the company pause before revealing the breach as it tried to assess and repair what it could before making public statements.

Another side effect of the PlayStation breach has been a move by many gaming fans to the rival Xbox 360 system and its accompanying online network. While no statistics have been cited by any gaming authority, anecdotally I can confirm much new interest via inquiries fielded by my own circle of tech experts, writers and consultants regarding the viability of switching to the Microsoft platform.

Launched back in 2001 in the U.S. and in 2002 in Japan, the original Xbox was carefully developed and launched by a special team within Microsoft and talked up by Bill Gates as a pivotal move for the company that had until then been known more for its conservative offerings in the business software world. Although the Xbox 360 is a comparative newcomer in the gaming space, in just a few short years the console and network has become not only competitive, but often the first choice ahead of longstanding gaming icons like Nintendo and Sony.

Much like the PC and Macintosh platforms wars of old, one of the primary factors consumers use to determine which console is the right fit for their gaming needs is the availability of various software titles. In its initial stages, Xbox 360 launched with a few strong titles, but was essentially no real match for the long developed catalogue of Sony’s PlayStation. But that is ancient history in terms of computing years, and now Xbox 360 boasts one of the richest gaming catalogues including titles such as “Beautiful Katamari,” “Gears of War 3,” “Halo: Reach,” “Dead or Alive 4,” and “Fable III.” And while the console has not been without its own share of ups and downs in the market place, at this point it reigns as the number one competitor to Sony’s veteran PlayStation console.

Although most savvy consumers will understand that any network can be breached by determined hackers, Sony’s temporary stumble may end up inadvertently benefitting Microsoft’s already robust Xbox 360 network as it welcomes hacker-weary Sony switchers.

Sony has a number of major decisions to make this year, and so far it seems to have fared well in the face of an ill-timed security breach. Nevertheless, its next steps in the coming months could very well determine the company’s fortunes for the foreseeable future.

Illustration by Phil Couzens

In recent months the term known as the “Galapagos Effect” has once again been thrust into the spotlight in regards to describing Japan’s separate and often rarified manner of business, cultural and technological development. With China being hailed as the new hot spot in Asia, as well as the new number two economy, some Japanese interests have decided that a cultural jujitsu approach may be in order. Sharp defiantly released a tablet computer recently called the Galapagos, and in January the Asahi Shimbun’s editorial ranks optimistically coined the phrase “Cool Galapagos” (i.e. Japan’s differences born of isolation are what make Japan cool, and thus still globally relevant).

In truth, the isolation-fed “only in Japan” gadgets, cultural quirks, and wholly unique approaches to all manner of areas are often the very things that attract so many Westerners to the shores of Japan either as wide-eyed visitors, or intrepid transplants hoping to experience what life on “another planet” might be like. But in practice, these differences in execution and expression often make it difficult for Japan to connect to the rest of the business community and consumers around the world.

But even in the face of such globalization crippling cultural perspectives, for the local expat living in Japan, this Galapagos Effect actually serves as an invaluable opportunity to witness a number of uncommon sociological and business experiments that one would never have the chance to witness anywhere else. One such Japan business experiment that recently drew my attention was the Only Free Paper store (www.onlyfreepaper.com) based in Shibuya, Tokyo.

Located on the edge of one of Tokyo’s priciest shopping districts (Omotesando) the shop lives up to its name by displaying a variety of print publications—all available free of charge. Created by former salaryman Kouta Ishizaki, the shop’s website indicates that there will be occasional events at the shop and guests can rent out a section of the tiny store as a kind of gallery display space, but nothing indicates that this will be the shop’s primary source of revenue. Perhaps the most amazing thing about the Only Free Paper shop is the fact that on its website the owner states that the publications distributed at the shop are meant to primarily service the teenager to 30-year-old demographic—a group seen by many as having already passed print by for more tech-savvy content delivery options like iPads and smartphones.

Fascinated by the prospect of such a counterintuitive move in these days of “print is dead” nay-saying by many tech pundits in the West, I had to visit the store in-person to try to get a sense of what Ishizaki was trying to do with this shop. As the website states, most of the free magazines seemed geared toward a younger demographic, there were no flyers or racy publications on display, and most of the magazines I saw were in Japanese.

Despite the apparent lack of a revenue model, the shop has been largely greeted with enthusiasm, which tells me two things that I had already suspected: 1. In Japan, print is far from dead, and 2. Although it may not be readily apparent, there is valuable business intel to glean from this experiment that may be relevant to Japanese (and Western) publishers attempting make sense of the new digitally disrupted publishing landscape.

In some ways the Only Free Paper store reminds me of the startups in Silicon Valley, a place where many services are launched with no revenue model in place, as the founders bet their time and money that their unique offering will somehow reveal its inherent value as it comes into heavy public use. Immediate examples that come to mind are Twitter (currently valued at $4 billion) and Facebook (currently valued at $50 billion), services that seemed to most pundits, at least initially, to be interesting curio businesses with no real future in the way of profitability.

The difference with Only Free Paper is that the experiment involves a medium that is so universally tagged as obsolete, one could be excused for using the “only in Japan” trope to describe why this shop even exists. But therein lies the value for the observant non-Japanese business person. Although Japanese business may still suffer from the Galapagos Effect, as they watch their Korean and Chinese neighbors more rapidly and effectively embrace Asia’s new status as a global business leader, the unique business offerings and experiments present in Japan offer the local, open-minded non-Japanese business person priceless data on new business models and approaches that might not be available outside of the country. “Cool Japan” and “Cool Galapagos” may be a hard sell for infrequent visitors attempting to pierce the business culture of Japan, but for the experienced Japan observer, the isolated business experiments buttressed by the country’s so-called Galapagos Effect are probably one of the most attractive aspects of doing business in Japan.

Illustration by Phil Couzens

The year 2010 was possibly one of the most eventful in the entire history of the tech industry as we know it. In particular, Japan was subject to new attention as venture capitalists from around the world once again turned their attention toward Asia. The following is a quick look at some the more significant trends and developments from last year that may help us map a tech strategy for the year ahead.

1. Facebook is the new Google, Google is the new Microsoft

There’s no rule that one or two tech companies should always command the spotlight, but that seems to be the way things work out. In 2010, the two companies competing head-to-head for your attention were Google and Facebook. But the cool tech cachet that once characterized the simplicity and user-first ethos of Google has been replaced by a company boasting a high stock price and billions in cash reserves begging to be used for major acquisition attempts (first Twitter, and then Groupon, both failed), expensive experiments (robotic cars), and mega real estate purchases (it recently purchased the building housing its New York office for $1.9 billion). Meanwhile, as the company’s Android OS successfully penetrates the mobile space in the same way Windows once spread like a hardware-agnostic virus, Google’s primary product, search, appears to be burdened by newly complicated features to such an extent that now simple search seems more like a test to see if you’re as smart as the company’s engineers at managing complexity, rather than the simple information discovery tool it once was.

On the other side of Silicon Valley, Facebook continues its march toward one billion users, and its CEO has captured the imagination of the mainstream with sticky user experiences and relevant services consumers can use “now” rather than an endless array of Google “beta” products designed for engineers to love and end-users to largely ignore (with the rare exception of tools like Gmail). At this point it seems clear that Google’s lack of focus, ironically fueled largely by its success and growth, has put it into the conservative, and largely generalist position once occupied by industry staple Microsoft (which itself seems to be undergoing a bit of a renaissance with the successful launch of the Windows Phone 7).

2. Zuckerberg foolishly buys into the China hype

Facebook founder Mark Zuckerberg is smart to brush up on his Mandarin, and his recent visit to China will likely help him to understand what the competition in Asia looks like on a much better level. But while China is undoubtedly Asia’s biggest growth engine in terms of pure numbers, the more transparent and easier to penetrate markets of Japan and South Korea offer far more near-term opportunity for the likes of Zuck.

3. Clone Wars: Groupon may be more feature than product

Groupon’s group buying model is a hit. The problem is that the company’s business model contains little in the way of “secret sauce.” The easily copied model has been cloned many times over in Japan, Korea and China, and the clones are doing quite well. It’s not that Groupon lacks Asia-market-savvy, it’s just that its business is too easy to replicate. Historically, in the tech business this means that a company’s strength is more of a feature than a full-fledged product (which is why Google came knocking). Groupon should enjoy these halcyon days, because the clone wars won’t end any time soon.

4. Japan isn’t ready to take over the internationalization spotlight, yet

Despite the public pitches to internationalize and use more English in Japan by the CEOs of Rakuten, Softbank, and Uniqlo, based on the lukewarm response domestically, it now seems clear that the majority of the domestic Japanese business community is quite content to continue operating in Japanese, secure in a warm Galapagos bubble of predictability and process. The situation may seem static, but Japan will change its position when the pain point becomes unbearable. Which leads us to…

5. South Korea, not China, is Japan’s top business rival

If you’re South Korea, you’re more than happy for the world to tout China as the major Asian tiger to be on the watch for—all the better to give the ascendant giant time to gather more strength. In almost every respect—culturally (movies, music, fashion), language (Korean students seem to have a knack, that far surpasses their neighbors, for attaining near native-levels of English proficiency), and technology (the list of wins is quite long)—South Korea is poised to become the new fresh faced dynamo of Asia, a position that Japan has enjoyed for some time, at least in the eyes of the West. From automobiles, to software, to hardware, if Japan intends to keep its position as the region’s tech leader, it would do well to focus more attention on South Korea than China.

Illustration by Phil Couzens

“雉も鳴かずば撃たれまい”
“Kiji mo nakazuba utaremai.”
(The bird that does not sing will not be hit.)
-Japanese proverb

“What are you doing?”
-original Twitter motto

The success of social networking services in nearly every major global market with reliable Internet connectivity has put to rest any argument about the significance of the medium. From the astounding rumors that social shopping discounter Groupon recently turned down a $6 billion acquisition offer from Google, to the reports that Accel Partners sold shares in Facebook at a $35 billion valuation, to the mega-acquisition of social gaming company ngmoco by Japan’s DeNa for $400 million, social media is clearly where the action is in terms of Internet growth and innovation.

But while the companies fueling this latest turn in the evolution of analog-to-digital business stand to benefit from this social media boom, the consumers being presented with this vast array of attention-sucking options are inexorably being overwhelmed. Today’s social media menu is so packed with competitively diverse applications and customizable tools that the signal to noise ratio threatens to obscure some of the subtle benefits of this new medium.

In this respect, it may be useful for Western companies and consumers alike to embrace what I call the art of “strategic silence” practiced by Japanese social media enterprises as well as the domestic end-users who patronize them. Like the local izakaya owners who happily (stubbornly?) seat a mere eight customers a day, focusing on quality of customer—and service to that customer—rather than volume, there exists in Japan a resolute commitment to doing things a certain way that values process and customer retention over the end result of simple profit. A close examination of Japanese social media sites like Mixi, Japan’s largest SNS-player next to Gree and Mobage Town, offers valuable insight into how the Japanese method of social and business interaction differs so vastly from that of Western concerns.

Coming from a Western perspective, it may be difficult to discern the immediate benefits of taking a step back from being always on and always connected to the digital hive mind, but there are examples of this ethos even in American culture.

America’s current fascination with the advertising industry television soap opera known as “Mad Men” is likely rooted in the show’s deft use of refreshing silence. Despite the 60s sartorial splendor and dramatic flourishes, the production’s rhythm of unfinished sentences and well-placed quiet moments serve as remarkably accurate echoes of the real world. But this world is somehow a bit sexier because the relatively pedestrian characters, unencumbered by the transparency dictates of social media, exude a kind of mystery that is undeniably beguiling. What intrigue would exist if advertising executive Don Draper tweeted, “On my third bourbon and it’s only noon, nap time!” Then, just hours later, a tweet from the natty British office accountant Lane Pryce, “Oh dear, walked in on our creative director in flagrante delicto, need a Lucky Strike, post haste!” This is not the “Mad Men” I want to see. It’s the dark spots and silences that undergird the interesting staccato beats of plot that drive the show, as well as some of the more interesting lives in our real world.

In one of the latest episodes of the show, the feline perspicacity of Draper again saved the day as a competing advertising firm blundered into a trap, fueled by a kind of clever obfuscation made impossible by today’s oversharing social media matrix. Fittingly, the prize was a fictional contract with Japanese auto maker Honda, fronted by a group of Japanese executives looking more for tact and quiet aplomb, rather than expediency and bombast. The parable—a dramatic nod to the successful, real world pairing in 1963 of American Honda and Grey Advertising—served as a reminder that the leading business minds of the East and West have long been engaged in an often awkward, yet willing dance bending toward strategic, if not philosophical, congruence in the boardroom. More importantly, the retro anecdote puts the difference between the fuzzy edges of corporate intrigue’s past in stark relief against the razor’s edge of today’s frequently subtextless business machinations.

Indeed, for all the online connections, SNS friending, and productivity-hindering office texting, the reality is that meeting in-person—whether at a packed industry conference or over a cup of coffee at some nondescript cafe between appointments—remains the vital glue that binds human interaction, fosters trust and ultimately results in stronger business relationships. So the next time you look at your Twitter feed and realize that one of your favorite people on the planet is a pithy square avatar whom you’ve never actually met, rather than continuing the social networking conversation in public, consider a bit of strategic digital silence, and see if your “friend” is available to discuss business over a bit of sake, in-person.

Photograph by Phil Couzens

The past decade was an era in which the Internet radically transformed the entire media industry. Just look at the sectors that have been affected by the rise of the Web: newspapers, magazines, books, movies, music, and TV shows are all increasingly accessed online—often free of charge. Now video games are poised to make a similar impact. The video game market was worth $60 billion worldwide in 2009, according to market research firm DFC Intelligence. A combination of new gaming concepts and attractive economics means that many, if not most, of them will soon be played entirely on the Web.

However, online gaming isn’t a new phenomenon, especially in Asia where millions of players have been indulging in “massively multiplayer role-playing online games” for many years now, using a PC with a Web connection and a keyboard. Console makers reacted to the new trend by adding online functionalities (i.e. downloadable extra levels) to their physical, boxed products. In a few years, players won’t need to buy shrink-wrapped software at all, new games will be offered as downloadable content from the Web, directly accessible via their console, PC or smartphone.

The newest gaming industry trend has arrived in the form of so-called social games, which are played inside of social networks, with friends. Hundreds of titles are already available on sites like Facebook or MySpace, dealing a massive blow to the traditional video game industry. Chances are quite high that more than a few gamers will show the next versions of Sony’s PlayStation or Nintendo’s portable DS console the cold shoulder. Why should you buy expensive gaming hardware and software when you can visit a social network every time you want to kill a few minutes? After all, social games are casual in nature, require no downloads (they are played directly in the browser), and are designed to be played with multiple people. Even though the vast majority of titles are free to play, quite a few social game providers are making big bucks by selling virtual items that can be used to enhance the game play. For example, the over 60 million users worldwide playing “Farmville,” a farm simulation game, on Facebook can pay real cash to get more efficient gardening tools or send digital gifts like flowers or greeting cards to friends.

The market valuation of Zynga, the San Francisco-based company behind Farmville and a host of other hit social games, ballooned to $5.5 billion by October 2010, and competition in the space is heating up quickly. Earlier this year, Disney acquired Zynga’s biggest competitor, Mountain View-based Playdom, for a whopping $763 million. In 2009, American video game giant Electronic Arts paid up to $400 million for Playfish, another social games developer. These three companies have used the money to internationalize quickly in the past few months, with Zynga being the biggest and most aggressive player.

Fueled by over half a billion dollars in funding, the company appears to be especially bullish on Japan, one of the biggest game markets in the world. Zynga used part of the $150 million it raised in a spectacular deal with telecommunications powerhouse SoftBank this summer to acquire Tokyo-based game developer Unoh. The joint venture, dubbed Zynga Japan, will localize the company’s existing games and develop new games—especially for use on mobile phones. But in Japan, the Americans should be ready for a serious uphill battle, at least in the mobile space.

Local users have been playing social games since 2006, when Tokyo-based Web company DeNA launched a mobile gaming community called Mobage-town (Zynga was founded one year later). The site now has roughly 21 million members, as many as its main competitor GREE. While GREE expects sales of up to $700 million this fiscal year, sales for DeNA are reportedly on track to reach $1 billion. Both companies currently boast market caps of over $3 billion at the Tokyo Stock Exchange.

The Japanese gaming giants have been solely focusing on their home market so far, but DeNA seems to be determined to make a full-fledged entry into the U.S. and other markets sooner rather than later. Tomoko Namba, DeNA’s Harvard-educated CEO and one of the very few women in a leading position in this industry, went on an unparalleled overseas buying spree in recent months. A total of four gaming startups in the U.S. are now under her company’s umbrella, including San Francisco-based iPhone game maker ngmoco, which DeNA bought for a staggering $400 million in October. GREE has announced the launch of a subsidiary in the U.S. and China by the end of the fiscal year. America’s social gaming juggernaut Zynga would be well advised to watch what its cash-rich Japanese counterparts are going to do next very closely.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

In the 1990s, computer-generated worlds in which people could completely immerse themselves were believed to be the next big thing in technology. But the concept of virtual reality (VR) never quite lived up to its hype. The artificial worlds never felt like reality, and VR required too many peripherals, i.e. head sets or gloves, to gain a foothold in the mainstream. Fast forward to 2010, and nobody talks about VR anymore. The “it” technology of the moment is called Augmented Reality (AR). AR doesn’t create entirely simulated environments, but merges virtual objects and real-world images seen via a mobile phone’s camera or a webcam on a PC.

How does AR work? Imagine yourself as a lost tourist in Tokyo looking for the nearest subway station. Start the AR program on your smartphone, hold it up, and slowly turn around while watching the camera image on the display. As you pan your handset around, you will see digital annotations, graphics, and other information about your immediate surroundings superimposed on the images—hopefully including a Tokyo Metro icon that indicates where the closest subway station is. AR makes it possible to see the names and distances of buildings on a city skyline or get information when pointing your phone to a landmark in the form of text, pictures, or even voice recordings and videos. The camera generates the images, the phone’s GPS module determines the user’s location, and a built-in compass detects the direction in which the phone is pointed. AR has been around for more than two decades, but has so far been limited to a few areas, for example, industrial design. However, the advent of smartphones, more computational power in PCs, and faster Internet connections have made the technology available to more and more end consumers in recent years.

AR today is applied in areas as diverse as mapping, video games, medicine, military applications, and advertising. Marketing research firm ABI Research predicts the market for AR to balloon to $350 million in 2014, up from just $6 million in 2008. Juniper Research says the market could even hit $732 million in the next five years. Against this backdrop, it’s not really surprising that big brands worldwide are starting to jump on the AR bandwagon.

Microsoft, Nokia, and IBM are among the many tech powerhouses currently working on cell phone-and PC-based AR software and services. In Japan, KDDI is experimenting in this space and recently invested in Tokyo-based startup Tonchidot, which provides AR services to e-commerce giant Rakuten, retail chain Tokyu Hands, and coupon magazine Hot Pepper. Tonchidot’s own AR application “Sekai Camera,” which lets users attach digital post-its to the real world, is installed on about one in three iPhones sold in Japan. The technology has also made its way into the U.S. and Europe. Toy maker Lego, for example, is currently offering an AR system called “Lego Digital Box” at points of sale worldwide. The system allows any Lego package to be held up to a screen installed in the store to view a virtual 3D model of the completed set sitting on top of the box in real-time. Popular American review site Yelp’s iPhone application helps users to choose the right restaurant on a busy street: just click on the icons that pop up on your phone’s display when waving your phone around to read reviews from other users. On its website, the U.S. Postal Service’s so-called “Virtual Box Simulator” projects box holograms onto the image from your webcam to check if the item to be shipped fits. Other major brands, including Burger King, Nissan, and Wal-Mart, have run AR-powered marketing campaigns worldwide, such as handing out virtual coupons to participating customers.

For businesses, AR is an inexpensive and relatively fresh marketing tool, but technically, the concept still leaves a lot to be desired—especially in the mobile area. For example, the use case in most cell phone-based AR applications for mapping is physically uncomfortable. Why constantly look at a handset display at eye-level to see AR information instead of simply using a map? Other problems include data inaccuracy (especially regarding GPS data), the reliance on fast, stable Internet connections, and the quick battery drain caused by running AR applications. Most of the existing applications for consumers suggest AR is a technology still looking for widely useful executions. It’s just a matter of time until the novelty factor wears off, and in the meantime, AR providers must prove if there is more behind the concept than just gimmickry.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

The way its proponents spin it, 3D will be the next big thing not only in movie theaters, but in home electronics as well. One trigger for the 3D craze that is currently taking the entire electronics industry by storm was the smash success of “Avatar,” the Hollywood blockbuster released in 2009. “Avatar” grossed $2.7 billion in theaters worldwide (marking the highest grossing film of all time), with 80 percent of viewers paying a premium for 3D tickets. Hammered by the recession and facing a rapidly shrinking domestic market, Japan’s big electronics makers were the first to take notice. 3D is now widely seen as the savior of the television industry. Panasonic, for example, recently unveiled the world’s first 3D consumer-use camcorder. Toshiba, NEC and Fujitsu are already selling 3D-enabled computers. Nintendo is currently readying the 3DS, the first portable console game with a 3D screen (which is due out later this year). Buyers in Japan and elsewhere can already lay their hands on a number of 3D-capable movie projectors, cell phones, Blu-ray disc players, cameras, and TVs.

For years the industry talked up the arrival of 3D TV in the home to little effect. But now nearly all Japanese electronics brands have declared 2010 to be the breakthrough year for the technology. In fact, there are indeed a few signs of hope that 3D at home isn’t just a pipe dream. First and foremost, 2010 marks the first year in which 3D TVs are actually widely commercially available, and consumers can now choose between a few dozen models. All eyes in the industry are on the U.S., the world’s most lucrative TV market, where the first 3D TVs seemed to enjoy brisk sales. In March, Panasonic was the first company to enter the U.S. 3D TV market and subsequently announced that American customers snatched up the first batch of their 3D TVs in the first week. Samsung and Sony quickly followed suit with their own offerings. U.S.-based market research firm DisplaySearch is especially bullish about the 3D TV segment, recording 3.4 million units sold worldwide in fiscal 2010. While this number translates to just five percent of the entire flat panel TV market in that time period, DisplaySearch expects 3D TVs to reach a whopping 43 million shipments as early as 2014 (or, 37 percent of the global flat panel TV market).

But not all industry pundits agree that 3D is the next big thing, at least in the foreseeable future. Just consider the steps it takes to view three-dimensional content, due to the fact that merely buying a compatible TV is usually not enough. Some makers, for example Sony, require users to also acquire 3D glasses (one for each family member). Sony’s 3D “synchro transmitter,” which ensures that the 3D glasses stay synced with the TV, must be purchased separately as well. On top of that, different glasses from different brands aren’t always compatible with each other. In other words, Sony’s Bravia 3D glasses won’t work with 3D TVs manufactured by Samsung or 3D-capable PCs, for example.

Another factor is price. Currently, there is little-to-no discussion surrounding the very real notion that 3D-powered electronics are currently too expensive for mass-market adoption. A 50-inch Panasonic 3D TV in the USA, for example, carries a price tag of $2,900. The MSRP for Samsung’s 55-inch model is a whopping $3,300, considerably more than for a comparable 2D model. In Japan, Sony is selling each pair of 3D glasses for $140 (the synchro transmitter costs another $60). Depending on the number of family members, making a living room theater 3D-capable can easily cost upwards of $4,000. But even the early adopters have trouble enjoying their equipment. The reason is simple: There’s almost no 3D content available at this point. It will probably take years for TV stations to broadcast programs in 3D, even though some channels, for example ESPN in the U.S., have already launched experimental 3D networks. There are a few 3D movies scheduled to come out on Blu-ray discs soon, but consumers will need to buy a special player to watch them (3D-compatible Blu-ray players currently cost, on average, $1,200 or more).

Despite these drawbacks, 3D TVs and other 3D-enabled devices will keep coming, whether there is a demand for them or not. After all, 3D is the sole viable option electronics manufacturers have to justify their massive investments in the technology while encouraging consumers to upgrade from their recently-purchased flat panel TVs. Samsung, Sony, LG and Panasonic in particular are betting a huge chunk of the bank on 3D. Sony, for example, expects 3D TVs to account for up to 50 percent of its total TV sales in fiscal 2012, up from zero percent this year. For consumers, however, the best strategy is to wait until prices drop, technical standards get hammered out, and more 3D content becomes available.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

While consumers in the U.S. and Europe mainly visit Amazon or eBay to shop online, the “800-pound gorilla” in Japan’s e-commerce market is Rakuten. Established in 1997, the eponymous company behind the service has evolved into the country’s biggest online shopping mall operator. Over 33,000 merchants opened shop at Rakuten Ichiba, the company’s B2B2C market place, so far, serving a staggering 60 million registered members. The company has 6,000 employees, generated over $3 billion in revenue last year and boasts a $10 billion market capitalization. Amazon doesn’t break down country-specific financials, but industry experts believe its Japan branch doesn’t even come close to Rakuten’s numbers.

Illustration by Phil Couzens

But how exactly did Rakuten manage to keep the American retail juggernaut, one of the world’s iconic web companies, at arm’s length for so long? The main reason for its success can be found in the strong entrepreneurial spirit of Rakuten’s founder, Hiroshi Mikitani. It was he who first saw a business opportunity in supporting Japanese brick and mortar stores by setting up customized storefronts on the web. Toward the end of the 1990s, building and maintaining websites was costly and usually needed to be outsourced to specialized IT vendors. Mikitani disrupted Japan’s e-commerce sector by undercutting fees of existing vendors by up to 80 percent, hiring an aggressive sales force, and providing every merchant who opened a Rakuten store with individual service (i.e. phone support, seminars etc.). In return, retailers had to pay their virtual real estate fees upfront, which not only helped the startup reduce risk, but also maintain cash flow. This basic charge model still applies today, with Rakuten also pocketing around 3 percent of the revenue each retailer generates as commission fees. Today the site offers everything from groceries, fashion items, electronics, books, software to automobiles—around 60 million different items in total. Rakuten established itself a quasi-monopolist in Japan’s e-commerce space, even though Amazon entered the country as early as 2000.

However, the early success wasn’t enough for Mikitani, a Harvard graduate and offspring of a wealthy family from Kobe. Rakuten’s next goal was massive horizontal diversification, and that endeavor worked well, too. The company is now active in fields as diverse as credit, online payments, travel, securities, auction services, TV and even professional sports. In most of these sectors, Rakuten holds a leadership position.

Amazon Japan, on the other hand, is still mainly positioned as a B2C platform. But even without the synergy effects Rakuten has thanks to its wide ranging business segments, Amazon’s operations in Japan are said to be profitable. In fact, the company has been continuously expanding its business in this country in recent months. For example, the company has begun building additional distribution centers and offering “cloud computing” services to local IT firms. The Americans should be warned, however, as Mikitani is ready to shift gears yet again. Rakuten currently plans to set up its own distribution centers and offer same-day shipping, putting itself in direct competition with Amazon. The first such center, to be opened in Chiba this fall, is expected to ship up to 100,000 products (offered by Rakuten itself) per day. Rakuten will set up at least five more centers of this size by 2013. Simultaneously, the company is rapidly deploying its globalization strategy, more so than any other Japanese Internet firm in the past.

Mikitani never made a secret of his plan to eventually challenge Amazon even outside Japan, and recent developments have shown there can be no doubt he means it. In May, Rakuten acquired California-based shopping portal Buy.com for $250 million and paid the same sum for France’s leading e-commerce platform PriceMinister just one month later. The company has built up subsidiaries in Taiwan, Korea, Thailand and other markets, too. At present, however, just 8 percent of online transactions come from overseas. Rakuten aims at raising the rate to 70 percent by expanding into 27 different countries in the next few years. Mikitani also showed how serious he is about transforming his company into a global player by making it the first large Japanese company to ordain English as the official in-house language, even among local staff. Industry observers will be watching closely for clues as to how Rakuten will transplant its know-how to countries steeped in very different cultures.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

Sharp, Toshiba, Panasonic, and other makers had a good run until around 2008, when Japan’s third-largest cell phone carrier, SoftBank, brought Apple’s iPhone to Japan. The American “smartphone” not only took the once impenetrable Japanese mobile market by storm, it disrupted the industry as a whole. According to estimates, Apple has managed to sell well over three million iPhones in Japan so far, now boasting an impressive 72 percent of the domestic smartphone market.

The iPhone is now the nation’s must-have personal companion, thanks to SoftBank’s marketing acumen, the quality of the device itself, and (most importantly) the year-long complacency shown by domestic carriers and phone manufacturers in a continuously expanding, high-margin market.

But growth, which began in the late 1990s and continued through the mid 2000s, has come to an end. Hit by the recession and a rapidly graying user base, domestic shipments of handsets fell 12.3 percent year on year to a 12-year low of 31 million units in fiscal 2009. Exports have been historically weak. Worldwide, only London-based Sony Ericsson (a joint venture between Sony and Sweden’s biggest telecommunications firm), commands a noteworthy market share of 5.1 percent.

The mobile sector in Japan is often referred to as the “Galapagos Islands” for its unique, practically closed mobile phone infrastructure. The most prominent explanation for the Galapagos syndrome is i-mode, a mobile web service tailor-made for handsets, which NTT DoCoMo launched in 1998. Japan’s top telecommunications firm practically kick-started the mobile Internet as a whole, but failed to export it to the U.S. and other markets. SoftBank and KDDI, Japan’s second-largest telco, never even tried to take their proprietary web technologies abroad. Another example is 1Seg, an industry-wide mobile TV standard that’s supported by most of Japan’s cell phones but has so far been adopted by just a handful countries in South America. As a result, many Japanese phones had (and still have) a number of unique features that miss the mark in other countries.

And it’s not just the hardware. The success of the iPhone has shown the Japanese mobile industry that it has to quickly catch up in terms of software and usability, too. iPhone users can download about 200,000 apps, or small software programs (games, productivity tools, e-books, etc.), many of which are Apple-exclusive. As a gaming device, the iPhone has become so popular that video game behemoth Nintendo recently said it now regards Apple as its main future rival.

The American company also has an edge in terms of user-friendliness, an area in which Japan’s handset makers haven’t been innovating for years. Whereas the iPhone is designed to be extra-easy to use and comes with just a handful of functions out of the box, most of today’s Japanese cell phones feature a plethora of gratuitous features and clunky user interfaces that have remained practically unchanged in over a decade.

Beaten at their own game, Japan’s once proud, but now dethroned cell phone makers are ready to strike back with new software, massive consolidation and aggressive internationalization. Japan’s carriers are slowly starting to embrace Android, an operating system for cell phones which was developed by Google and has two distinct advantages: It is open source (license-free) software, and it’s already being used in millions of handsets worldwide.

DoCoMo recently announced that it intends to develop (and export) its own mobile operating system. The goal of the software, which is backed by four of Japan’s top handset makers, is to reduce development costs and boost international competitiveness. Last year, NEC, Casio and Hitachi decided to merge their cell phone operations to become the nation’s second-biggest manufacturer (following Sharp). The new company, dubbed NEC Casio Mobile, has already set its sights outside Japan. Four of the twelve million cell phones it plans to ship in 2012 are expected to go to the U.S. and other foreign markets. Overall, it now seems clear the iPhone sounded a loud wake-up call for Japan’s mobile players to finally leave the coziness of their Galapagos ecosystem.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

So far, Japan’s web users have embraced just a handful of foreign Internet brands such as Yahoo, Google, and Twitter. Social networking services such as Facebook and MySpace, mega-popular in the U.S. and elsewhere, have largely been given the cold shoulder. Facebook, a mere online yearbook just four years ago, has emerged as the web’s social networking juggernaut, now connecting well over 400 million members worldwide. The site has become so big so quickly that it seems to be just a question of time as to when it will overtake Google as the leading destination on the web.

The number of Facebook users in Japan, however, hovers at just one million, a far cry from the 20 million people who have flocked to the country’s biggest social network, Mixi, so far. Facebook has also been outpaced by Mobage-town and GREE, two social networks optimized for use with mobile phones, which count 18 million members each. The America-born site is iconic in regions as diverse as Germany, Taiwan, and Indonesia. So what makes Japan different?

Industry experts sometimes argue that the reason for Facebook’s struggle in Japan is that social networking is a winner-takes-all business, and that the American startup was simply too late to market in Japan. In fact, Facebook started offering a translated version as late as 2008, giving the homegrown competitors a head start of four years (an eternity in Internet time). Adding to its late start, Facebook never adapted its design to Japanese interface tastes, refused to spend a single yen on marketing and never bothered finding a local partner. So, the reasoning goes, how could they truly expect to win in Japan with such an approach?

Nevertheless, this is exactly how Facebook has tackled almost every foreign market in the past. Its gradual, strictly hands-off expansion strategy isn’t unusual for a web startup with limited resources, and it did pay off in most parts of the world. The main reason for Facebook’s failure in Japan so far lies deep in the country’s unique web culture. It’s not primarily about Facebook’s timing, design, or functionality. The American startup needs to trigger nothing short of a paradigm shift in how Japanese users socialize on the web, especially regarding communication, safety and privacy.

Social networks, by their very nature, need to properly reflect real-life communication patterns, but these significantly differ from country to country. Facebook’s U.S.-focused positioning as a platform for self-expression and matchmaking is diametrically opposed to Mixi’s, its direct domestic competitor. Mixi encourages members to communicate at a distance, for example by writing diaries friends can comment on, which often leads to indirect conversations. A chat function, one of Facebook’s core elements, is absent on Mixi, as is the “poking” feature that enables Facebook users to contact and flirt with strangers.

Mixi, abiding by the preference of Japanese people to generally stay anonymous online, allows members to use nicknames and fake profile pictures. And, until recently, the site required an invitation from a current user and a Japanese mobile mail address for registration, making it harder for potential evil-doers to enter one’s network. These are just a few of the many Japan-specific communication tools and security features that Facebook doesn’t offer, but are embedded within the very fabric of the digital culture of Mixi. As a result, the site is seen as a safe, hermetically closed and high-trust destination by most Japanese users. But even as Mixi adds thousands of new members each month, Facebook is far from giving up on Japan. In fact, the American Internet concern has just established a development base in Tokyo, the first of its kind outside Silicon Valley.

Japan’s social network war isn’t over yet, and two specific factors should give Facebook cause for hope. Firstly, Mixi has so far managed to penetrate just 15.7 percent of the Japanese population, putting it far behind Facebook’s performance in the U.S. (Facebook’s 116 million-strong American user base translates to roughly 37.5 percent of the population). Secondly, Facebook has yet to break into Japan’s huge mobile web, a factor that was the catalyst for the explosive growth experienced by its domestic competitors over the last years. The American startup is already working on an optimized version for Japanese mobile phones. This first dent into Facebook’s Model T approach to internationalization is a significant step, but making it easier and safer for Japanese people to socialize on the site should be the next.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

When it comes to saving energy, Japan has a lot to teach other industrialized countries. The resource-poor nation was swept up in energy conservation fever right after the oil shocks of the 1970s, and managed to quickly turn into one of the world’s “green” role models.

America, for example, leads the world in renewable energy capacity (in absolute terms), but has had trouble keeping pace. By some measures, Japanese companies use half as much energy per dollar of economic activity when compared with their counterparts in the U.S.

An average American household consumes about twice as much energy as a Japanese home. Despite its large economy, energy-thrifty Japan holds a respectable fifth place in the UN carbon dioxide emissions ranking (trailing the United States, China, Russia and India).

These numbers don’t come out of nowhere. Living in a country with no domestic sources of fossil fuel, many Japanese people are wired to save energy from birth. Japan’s companies, though not completely ecologically sin-free, have been churning out eco-friendly products for decades, backed by relatively green-minded governments. And of all the clean technologies available, solar energy and electric vehicles are increasingly being thrust before the public eye.

Last year, the government singled out these sectors as especially critical to staying on the path to achieving a low-carbon-emission society. Japanese households are promised handsome incentives when installing solar panels at home or purchasing an electric car. Consequently, the country’s biggest corporations have been pouring a lot of money into eco-innovations in recent years. In general terms, Japan considers weaning itself off oil a collective, national mission.

In the solar energy space, however, domestic companies have been treading water in recent years. A case in point is Sharp. The company was the world’s biggest maker of solar panels a decade ago, but now ranks just fourth behind Q-Cells from Germany, Arizona-based First Solar and China’s Suntech. In terms of total solar power capacity, however, Japan still is the world’s number three, trailing Germany and Spain (in 2008, Japan produced almost twice as much solar energy as the U.S., which ranks fourth in the list).

Virtually every Japanese tech company has solar-related products in its portfolio, with Sanyo and Sharp leading the pack in terms of innovation. Take Sharp’s SH6230C, for example, a cell phone that’s partially powered by a tiny solar panel hidden under the lid. Released in Japan last year, the handset is already on sale in China and is scheduled for distribution in other international markets in the coming months.

Sharp also owns the bragging rights for the solar cell with the world’s highest conversion efficiency (36 percent). The cell can even withstand conditions in outer space, making it an option for powering satellites and other space applications one day.

Sanyo’s three-year “Sanyo Evolution Project” launched in 2005 and designed to turn the company into an environmentally friendly company worked so well that it now probably boasts the greenest image among all of Japan’s tech powerhouses. Some of Sanyo’s bestselling products today are rechargeable batteries, solar chargers and panels. The latest innovation from the company is a prototype solar cell, which is thinner than a human hair and flexible enough for use on uneven surfaces.

Electric vehicle development has been picking up steam in recent months as well, triggered by higher demand, a number of groundbreaking industry alliances and intensified research and development.

Toyota and Tohoku University, for example, are working on a graphite-free battery that allows electric cars to travel ten times farther than today. Toyota is also part of a consortium of 158 companies and organizations that focus on turning CHAdeMO (short for “charge and move”)—a charging system developed by Tokyo Electric Power— into a global standard for electric cars.

Another potential export hit is Sim-Drive, a four-motor vehicle backed by a total of 34 Japanese companies and municipalities, including Mitsubishi Motors and Isuzu Motors. Mass-production for the futuristic electric car, whose driving range (186km) is about twice that of current models, is scheduled to begin as early as 2013.

Japan is betting high on clean technologies. The government is expecting the solar sector alone to generate up to $105 billion of “economic benefits” in the year 2020 (up from the current $1 billion). But the road to a greener economy is littered with pitfalls. It’s not just that renewable power and most green products, i.e. electric vehicles, are still too expensive for mass adoption. Other countries are catching up rapidly in the green tech race as well.

Especially in China, conservation efforts are about to go into overdrive. According to a recent industry report, China spent $34.6 billion on clean energy in 2009, about forty times more than Japan and twice as much as the U.S. Using these figures as a yardstick, it seems the green sector in both Japan and America still has a lot of room for growth.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

Japan’s technology sector is currently in the process of transforming itself once again. But this time, there is no bubble economy to burst, no Y2K overhang presenting innovative perspective, and no dot-com bust to offer context and guidance. It’s the global recession that has many of the country’s tech companies at their postwar nadir.

And the iconic electronics brands, the epitome of corporate Japan, are ailing in particular.

In early 2009, industry experts watched in awe as Sony announced a radical restructuring program after the company projected its first annual operating loss since the mid-nineties.

It took months for Pioneer, a company that posted $9 billion in revenue just three years ago, to raise a relatively modest $360 million through an overseas stock offering. In fiscal 2008, one of Pioneers’ top shareholders, Sharp, had to report its first net loss since it went public. Fujitsu even felt the need to call upon all of its employees to buy as many goods of their company as possible.

And these are by no means the only proud firms that have been hurting lately. Panasonic, Hitachi, NEC, and Toshiba have felt the economic shift as well. The recession, exacerbated by the strong yen that crippled exports, dealt a massive blow to all of Japan’s technology powerhouses.

But there is a curveball. The companies seem to be eager to defy the ‘doom-and-gloom’ of the world economy. In fact, the downturn might turn out to be the best thing to happen to the industry in decades, accelerating structural renovation some players had been putting off for years. The new focus is on producing higher-margin goods, reducing new investments and tapping less cyclical businesses. And to accomplish this, the once too-big-to-move-too-fast high tech giants have resorted to measures almost unthinkable just a few years ago.

Many have begun to divest themselves of business units that were once part of their corporate DNA, with Pioneer standing out as one of the most prominent examples in recent months. Once renowned for making some of the best televisions in the industry, Pioneer reacted to weakened demand for its high-priced TV sets by shutting down its entire money-losing display segment last year. The company is now trying to carve out a new future as a manufacturer of car-related equipment.

Cross-shareholdings aren’t unusual in Japan’s technology sector, but today’s harsh market environment forces even former opponents to overcome decade-long rivalries. The several new alliances, mergers and acquisitions that have emerged in the past few months are poised to change the electronics landscape forever.

Key industry areas that are currently being turned upside down include mobile devices, clean technologies and displays. Three of Japan’s eight top cell phone makers, namely NEC, Casio and Hitachi, merged their cell phone businesses this year. The new company, dubbed NEC Casio Mobile, is now the country’s second biggest manufacturer of cell phones.

In late 2009, Panasonic acquired a majority stake in Sanyo because of its leading position in rechargeable batteries and solar cells. The move put Panasonic on par with Hitachi as Japan’s biggest electronics firm. In the TV business, Sony and Sharp have been battling each other for decades, only to watch Samsung and LG take over the number 1 and 2 positions in the global LCD market in the mid-2000s. The former arch rivals reacted by forging a spectacular alliance, which includes the joint production of LCDs and consolidation of R&D for next-generation TV technologies. And the list goes on and on, as virtually every major Japanese electronics company has suddenly opted to team up with domestic competitors in one way or the other.

These efforts are beginning to slowly bear fruit, especially for the bigger players. Sony, for example, lost money five quarters in a row before reporting a handsome $1.6 billion operating profit for the last quarter of 2009. Panasonic’s profit nearly quadrupled to $1.1 billion year-on-year in the same time frame, while Hitachi managed to swing back into positive territory with $245 million in profit (after a year-earlier net loss of $4.2 billion).

It seems the first steps for a structural makeover have been taken, but there’s still a rocky road ahead. The long-term prospects ride not only on how Japan’s electronics firms will weather the after-effects of the recession, but also on how well they will stack up against their powerful Asian competitors. A case in point is Samsung, whose operating profit in the third quarter of 2009 was more than twice the size of the quarterly profits of nine major Japanese rivals (including Sony, Hitachi and Panasonic) combined. Against this backdrop, all eyes are on whether Japan’s electronics can regain their “mojo” in the future.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Illustration by Phil Couzens

There is one thing three of America’s biggest web services—Ebay, MySpace and Facebook—have in common: Despite being household names in large parts of the world, almost nobody in Japan knows about them.

It’s not that they (and many other foreign web startups) have never tried. After all, the Japanese online market is one of the most attractive in the world. With 100 million web users, the county’s Internet population is the third largest on the planet (trailing only China and the U.S.).

And there’s a lot of money to be made here, too. Take e-commerce, for example. The B2C e-commerce sector alone grew by 13.9 percent to $67 billion in 2008 on a year-to-year basis, according to the Japanese government. The country currently boasts about 10 web-related, high-cap companies that are listed on the Tokyo Stock Exchange.

Yet only a handful of foreign Internet startups have ever managed to gain significant market share in Japan, i.e. Yahoo, Google, Twitter, and Wikipedia.

The majority, large web brands and niche players alike, are either shying away, struggling or failing. The problem for those startups centers around the fact that the web is frictionless and inherently global only “in theory.” In reality, there are plenty of barriers standing in the way.

One of the most common recipes for failure when attempting to globalize an Internet brand is underestimating the importance of localization, especially on the heavily mobile-centric Japanese web.

According to Japan’s governmental assessment, the general assumption is that more Japanese are accessing the web through their mobile phone handsets than through PCs. In other words, getting Japanese eyeballs without offering a special mobile website that’s tailor-made for Japanese cell phones is next to impossible.

But platform fragmentation is just one reason why Japan isn’t among the low-hanging fruit for foreign web startups.

Localization in general requires translating the site, tweaking its design, setting up international customer support, and other tasks.

Every localization process incurs sizable costs for young Internet ventures, the majority of which are run by just a handful of people with limited capital.

And most web entrepreneurs in the West consider the Japanese market in particular as being too geographically and culturally distant to bother creating a localized version (at least initially).

Even sufficient resources and flawless localization aren’t necessarily prerequisites for success.

One case in point is Facebook, an SNS startup funded with over $700 million, which still doesn’t offer an optimized version for Japanese mobile users. For the fixed PC site, the Facebook “crowd-sourced” the translation work to its Japanese users and received a localized (translated) version for free.

That was two years ago, and Facebook still has only about 1 million users in this country—a far cry from the 18 million members Japan’s homegrown social network, Mixi, boasts. The primary reason Facebook continues to struggle in Japan is the same reason Ebay pulled out of Japan after just a few months of trial and error: They were too late.

Facebook launched its Japanese version in 2008, four years after Mixi (which became Japan’s largest social network without the slightest competition from abroad).

Ebay entered Japan as early as 2000, but a five-month head start was enough for Yahoo Japan, by then widely regarded as a local brand, to establish Yahoo Auctions as the country’s leading online auction platform.

Next to missing the right timing, certain differences in online user behavior can be stumbling blocks, too. The way online identities are handled, as just one of many examples, is the reason why America’s biggest business networking site, LinkedIn, has been holding off on entering Japan for years now.

Unlike their American counterparts, Japanese white-collar employees usually shy away from posting resumes online for everyone to see. This Japan-specific phenomenon can also be observed on Mixi where member profiles are usually kept anonymous. Most Facebook or MySpace users, on the other hand, reveal their real names.

In some cases, foreign web companies that are aware of those cultural pitfalls opt to enter Japan with a local partner. But even this strategy has led to mixed results in the past.

Yahoo Japan incorporated as early as 1996 and partnered up with SoftBank to become Japan’s biggest website. MySpace, on the other hand, still struggles to build traction even though it was the world’s largest social network when it entered Japan through a joint venture with SoftBank in 2006.

Currently, all eyes in the Japanese web industry are on the next major foreign player to establish a physical presence in the country. As its first major foreign market target, Facebook has decided to come to Japan with a full team that consists of both business and technical staff. The world’s biggest social network counts over 400 million members now but, in Japan, it might be too late again to depose the local leader.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Despite being the world’s second largest economy, Japan’s VC market can, at best, be described as fledgling when compared to that of the United States–and the year just passed, one best forgotten.

VC refers to private equity capital that institutional investors or wealthy individuals pump into promising startups, usually in the technology sector, with the aim of reaping a profit through a sale of the business, or an initial public offering (IPO).

IPOs account for 90 percent of yearly profits for Japanese VCs, but in the aftermath of the global credit crunch, Japan’s equity capital market managed a mere 20 public listings in 2009–60 percent less than the year before, and the lowest level in decades.

Despite a historically lackluster exit environment, Japanese VCs have managed to ride on a relatively robust decade of IPOs–compared to the post-dotcom bubble U.S.–which saw a total of 1,200 public listings, or an average of 120 a year.

Japan is renowned for its innovation and technology, so why is its VC market so far behind that of the U.S., which boasts the biggest VC market in the world? The Japan Venture Capital Association now counts around 100 members, compared to some 400 member firms in its American counterpart, The National Venture Capital Association.

Of Risks And Returns

One may argue that the U.S. had a head start in the industry. Whereas the American government paved the way for the birth of the industry by passing the Small Business Investment Act as early as 1958, Japan’s first private VCs date back to the early 1970s. But the answer likely lies behind some stark differences between the way VC firms operate in the U.S. versus Japan.

Take for a start, the modus operandi of Japanese venture capitalists themselves. VCs in the U.S. usually lend both financial brawn and business brains to the companies they invest in, for example by having one team member join the startup’s board of directors. Japanese VCs, on the other hand, usually adopt a hands-off approach.

However, a different legal and corporate governance framework gives Japanese VCs less control in a startup than American ones. Already risk-adverse financiers in Japan thus invest less money, resulting in lower returns. Japanese VCs average an Internal Rate of Return of 3.9 percent over 20 years of management, as opposed to 16.5 percent typically earned by American VCs.

Japanese VCs usually have less entrepreneurial experience than their American counterparts – if any at all. This may explain their lower risk appetite, tending to avoid early-stage startups in favor of companies that appear to be on the cusp of success.

In fact, a common complaint amongst Japanese entrepreneurs is that what VCs in Japan do is just essentially non-bank financing.

That said, a lot of Japanese VCs are affiliates of large securities companies and banks. For example, financial powerhouse Nomura owns a 35 percent stake in JAFCO, one of the biggest–and publicly listed–VCs in this country. In the same vein, Daiwa Securities Group has a large VC arm in Daiwa SMBC Capital. This makes for a vastly uneven playing field where a handful of big players dominate, in turn stifling growth.

And when Japan VCs do invest, they do so overseas – understandable given Japan’s relatively smaller and shrinking market. JAFCO has invested in over 3,500 startups in Japan and elsewhere since its establishment in 1973. Its U.S. subsidiary, JAFCO Ventures, currently manages a $350 million fund and has a portfolio of around 40 American companies. JAIC, a sizeable listed VC, has done 77 IPOs outside Japan so far.

Conversely, American venture capital activity in Japan is extremely limited with a few exceptions, such as DCM, a VC based out of Silicon Valley that has funded 13 Japanese startups and established an office in Tokyo last year. Another example is Globespan Capital Partners, a venture capital firm that manages over $1 billion and has offices in the U.S. and Tokyo.

Add to that the fact that deals that do take place in Japan tend to be a lot smaller. A recent cross-country study from Stanford University shows that in 2006, Japanese venture capitalists pumped $2.8 billion into 1,500 deals, while their American colleagues invested $23.5 billion into 3,080 deals.

It seems that Japan’s entrepreneurs, the people who are supposed to drive innovation and create jobs, will have to fight harder for venture capital in the future than ever before. The choices now left for most of Japan’s VCs, on the other hand, are radical transformation, merging with competitors or an unceremonious market exit.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.

Whereas robots in the West are mainly used for industrial and military applications, they have long found their way into the fabric of Japanese society. Some prototypes can even prepare sushi and pancakes. Robots are also entertaining children, replacing pets and gathering oceanographic data in the form of mechanized snappers.

KEIKO, a female humanoid, simulates neurological disorders for students at Gifu University’s Graduate School of Medicine. HAL-5, a robot suit sold by Tsukuba-based venture Cyberdyne helps paralyzed people walk by converting brain signals into motion. A Fuji Heavy Industries robot autonomously uses elevators to change floors and clean corridors in skyscrapers. The list could go on and on.

Illustration by Phil Couzens

These robots are being used right here and now, with even more of the electromechanical marvels scheduled to join our society very soon. According to a prediction by the Japanese government, the domestic robot industry will be worth $67 billion in 2025. And no other country seems to be able to keep up. North America-based companies sold industrial robots worth $979.4 million in 2008, while the Japan Robot Association says the domestic market for those machines is currently sized at about $6.7 billion. The best-known American player in the industry is iRobot, maker of the autonomous vacuum cleaner Roomba. The company reported $307 million in revenue last year and successfully sells their Roombas in Tokyo’s department stores, too.

But how did Japan come to attain such a dominant position in the field of robotics?

Most of the theories attempting to shine light on this phenomenon center on religion, society and culture. Shintoism, Japan’s homegrown, animist faith, assumes even inanimate objects can possess a transcendent spirit. As a consequence, robots with a “personality” aren’t viewed as threatening as they are in monotheist religions that dictate that no one should try to play god by creating human-like machines. Socially, the acceptance of robots could partly be explained by their potential to help avoid awkward human interactions. Something as simple as asking someone for directions, for example, might lead to an embarrassing situation for both parties – so why not ask a friendly machine to maintain harmony?

Pop culture plays an important part, too, as robots have been heroes in Japanese manga, anime and video games for decades. Professor Yoshiyuki Sankai, the mastermind behind HAL-5, regularly says his inspiration came from reading the cyborg manga “Atom Boy” during his childhood. Another reason for Japan’s love of robots may lie in the long tradition of skillful craftsmanship many people see reflected in the country’s robotics sector today. The Karakuri Ningyo, a tea-carrying mechanized puppet widely regarded to be the first Japanese “robot,” was constructed as early as the 17th century. And in sharp contrast to the West, many universities all over Japan today give their students the chance to research, build and commercialize robots in special robotics facilities.

But perhaps the most important factor is Japan’s strategic economic planning in this field, which is heavily influenced by demographic development. The government actively supports private companies to make sure Japan keeps spearheading the robotics industry, one of its key sectors targeted for promotion. To name just a few initiatives: In 2006, the Ministry of Economy, Trade and Industry set aside over 2 billion yen in its 2007 budget to support R&D in robotics. At the same time, it established the so-called Robot Award competition that now takes place every year to promote R&D in universities and companies. This August, Japan started developing legally-binding standards for the safety of home-use robots. Specific projects deemed important for the nation’s future are being handpicked as well. For example, most of the $15 million it took to develop Paro, a therapeutic robot baby harp seal for use in nursing homes, came from the Japanese taxpayers.

The government makes no secret that it sees intelligent robots playing a key role in coping with the rapidly aging population. In 2007, the Japanese government announced that it wants to see one million industrial robots installed in the country by 2025. It seems not immigrants but machines will be employed to solve the problems that come with the country’s shrinking workforce. And the government has already done the math: When that workforce of one million robots is in place, they are calculated to be as efficient as ten million human workers. Whether this scenario becomes reality or not, Japan’s robotics revolution surely has just begun.

Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.