Investor's Business Daily
A Spurt By Net Firms Fails To Spark Japan
By Doug Tsuruoka

When you poke a crayfish in a pond, it flicks its tail and takes off.

And that is what happened recently with Japanese Internet company Crayfish Co.

Its stock had been poked down so long that a spray of good news sent it darting up in June and early July. The same can be said for two other Asian Internet companies, Internet Initiative Japan Inc. and Singapore's Pacific Internet Ltd.

Crayfish's lightly traded American depositary receipts have more than doubled since early June to about 25. IIJI rose from 3 in May to 14 early this month, and now its ADRs trade near 9. From less than 5 in April, Pacific Internet's ADRs almost hit 15 earlier this month and now trade near 10.

But while the recent uptick for the three companies might foreshadow better days ahead, analysts say, they quickly note it's a shaky "might." None is about to forecast a rise in Japanese Internet companies or the Japanese economy in general.

"There are strengths, but chances for a near-term turnaround in Japan are very bleak," said Steven Clemons, a Japan policy expert and executive vice president of the New America Foundation.

"We see some bright signs for Japan's economy, but the situation is still murky," said Satoshi Miyamoto, executive director at the Japanese government-backed Japan External Trade Organization.

For Crayfish, which provides e-mail, Web site hosting and related services to small and midsize firms, the recent stock boost stems in large part to the fact it settled a shareholder suit related to the earlier collapse of its stock. It and other defendants agreed to pay plaintiffs $9 million.

Subscriber Count Way Down

The company's main product is a custom e-mail service called Deskwing. It provides other services under the name Osama Desk.

Its services all suffered after the dot-com bust three years ago. In June 2002, Deskwing's subscribers numbered 15,800, the latest figure available. That's down from a peak of over 70,000 in May 2000.

Crayfish's sales fell to $24 million last year from $63 million in 2000. Last month it said it's considering delisting its ADRs from the Nasdaq because it's no longer pursuing expansion in the U.S.

While the company seems to be gaining market share, some observers are skeptical.

"I don't think that a company with annual sales of $24 million has much of a market impact," said Tim Clark, a columnist with the Tokyo-based Japan Internet Report.

Nor is Clark bullish on Japan's other Internet services companies, such as IIJI, though it recently said its March-quarter sales rose 21% from the year-ago period to $110.4 million. That was its fiscal fourth quarter. For the year, it said sales rose 18% to $368 million.

Clark notes that while Japan has 60 million to 70 million Internet users, a "great many" get limited access through Web-enabled cell phones. Internet services are gaining hold in Japan's business culture, but a U.S.-style stampede to the Internet isn't happening, Clark says.

"IIJI is recognized as having good technology skills," said Kenshi Tazaki, an analyst with research firm Gartner Group in Japan. "But it's struggling to increase its capital."

Investors Eye Asia

The company is cutting costs, and it added several big clients last quarter, such as office equipment maker Ricoh Group. But Tazaki, Clark and others question whether Japan is on the verge of an e-business revolution that will spill over into the general economy.

Crayfish and IIJI didn't respond to requests for an interview. Singapore's Pacific Internet did respond, through spokesman Mark Kollar.

"Investors are looking at Asia as an investment opportunity," he said.

Pacific Internet has made money for five straight quarters. It reported a profit of 5 cents per share in the first quarter, and said sales rose 8% to $22.2 million. It said its high-speed Internet service revenue rose 80.3% to $8.2 million.

The company says it had 417,700 subscriber as of March 21, up from 102,400 a year earlier.

For years, investors have been looking for the companies that will lead Asia, and especially Japan, out of its economic snooze.

Despite an economic slump that goes back 13 years, Japan remains the world's second largest economy, after the U.S.

Japanese businesses are expected to boost capital spending by 4.9% this year, says a quarterly economic survey by the Bank of Japan in June. It would be the first increase in three years, and is roughly in line with U.S. projections. Japan's Nikkei index surged in July to a 10-month high, though after hitting 20-year lows.

Some U.S. tech firms, such as IBM Corp. and Hewlett-Packard Co., have seen a spark in Asia.