interview
Cyrus Shaoul, vice president, andJoichi Ito, president, of Eccosys

Finding Opportunity in Chaos
An interview with Joichi Ito andCyrus Shaoul of Eccosys Co., Ltd.
CJ talks with two of the founders of Eccosys about digital commerce,
trendsin the Japanese Internet, and the emerging opportunities for foreigncompanies
interviewed by Wm. Auckerman
Joichi Ito was born in Kyoto, but moved to the US with his family at age
3. Returning to Japan some years later, Ito graduated from Tokyo's ASIJ(The American School in Japan) in 1984. He attended the University of
Chicago and, following a stint as a night club disk jockey, he came back toJapan to start a disco and a computer
conferencing system
distribution company. Long an active member of Japan's networking
community, Ito started Eccosys in April 1994 to do server installations and
Web design. Ito is also president of TVI (a US-based media negotiationand coordination company), vice president of MacZone Japan, and aboard member and vice president of information and technology for
Energy Conversion Devices (Detroit).
Cyrus Shaoul was born in Alexandria, Va. Because his father worked fora multinational bank, Shaoul lived in Hong Kong, Singapore, and West
Africa before coming to Japan at age 15. He is also an ASIJ alumnus(1989), and a graduate of MIT. While at MIT Shaoul worked on Project
Athena, one of the ﬁrst academic technology-based
networks. After working for about one year at NTT's R&D labs inYokosuka doing
virtual reality research and software development, he left to join Ito instarting Eccosys.

First, tell us a bit about how you came to create Eccosys.
Joichi Ito: About the same time that Intercon was setting up IIKK
(Intercon International Japan, now PSI Japan), we set up one of Japan'sﬁrst Web servers [in the fall of 1993]. The ﬁrst POP [point of presence]that IIKK set up was in my bathroom; we ha d a leased line into a server
there.
I had some clients that I was already working with, consulting, whowanted to do some Internet-related work. They said, "Set up a company,
and we'll give you a contract." So I borrowed some money to set up
Eccosys; we had a contract from the ﬁrst day. On ce we set up, we started
showing our Web page; we had one of the ﬁrst Japanese pages up, so a lotof people saw it.
How quickly has the company grown?
Ito: Our ﬁrst jobs were in the thousands of dollars range. Then we set up
the Shima Media Network and Asahi Shimbun's Open Doors server, andthat went to another scale -- the hundreds of thousands of dollars range.
Now we ﬁnd ourselves bidding in the mi llions of dollars range.
The growth that we've had in the past year has added a digit every threemonths. We've tried not to increase the number of people, though -- we've
developed strategic alliances instead. We're setting up a joint venture withan ad production company, a new company called Digital Garage.
Eccosys is owned by its employees. I don't control the company; I have
only 49%. We have no debt, and we're having a good time; we really don't
want other people telling us what to do. Digital Garage will be doing thelarger deals. Eccosys will continue t o focus on the fun stuff, because thefun stuff always ends up being the stuff that is on the bleeding edge.
We have very little overhead; most of the equipment we have is fromclients. We have strategic alliances with all of the big system integrators,
and we work closely with most of the hardware manufacturers. We also try
to make alliances with other companie s like ourselves. There is deﬁnitely
more work now in Japan than there are people to do the work; it's a seller'smarket.
What are some of the projects you're working on now?
Ito: Next year's online worldwide Internet Expo -- that will be a fairly
substantial thing. Japanese participation seems to be the biggest of any
country right now. NTT is donating 300 128K leased lines and setting up
eight 45MB locations. There will be a JSAT satellite uplink to the Internetthat can be used anywhere. We'll be doing events and other related workfor the Expo all year next year. It's likely that I'll be the technical producerof the events, and Eccosys will be involved in coordinating the tool
development and support, and trying to coordinate all the different people
in Japan that want to work on the project.
It's a pretty substantial project, with participation and donations bycompanies like Bay Networks, Cisco, Quantum.... Most of the big
companies in Japan will have some kind of presence, and it's hoped thatover 5 million people will participate in some w ay. It's like a big omatsuri[festival] that starts January 1 and goes all year. It's all going to happen on
the Net, primarily.
Cyrus Shaoul: That's next year. This year, as a warm-up, we're doing
another global, high-bandwidth video project called the Junior Summit.
We've been asked by this nonproﬁt meeting, the GII Junior Summit 1995,

to set up demonstrations and real uses of I nternet technology at theconference site in Tama in November. Forty kids from around the world,picked by an essay-writing test, will be ﬂown to Japan to discuss theeffects of the GII [Global Information Infrastructure] on the future of war
and peace, and how communications affects that.
How do you see the Internet developing in Japan?
Ito: Right now, most of the money is coming from advertising. Talking
about the Internet in the media is the main way that you can create impact;
currently, that's about the only way for a company to get its money's worthfrom the Internet. We did a big p roject for IBM last year, for OS/2 Warp - a promotional event in Shibuya, and an Internet Cafe. They were sohappy they gave us a bonus, because we got a lot of media coverage.
The next phase will be doing advertising on the Internet. Cyrus justﬁnished hacking out the Ad-Mall for Hakuhodo, the advertising agency.
They're going to be doing sales promotions on the Internet.
Eventually, it will go to ﬁnancial transactions on the Internet, digitalcommerce and so on. But the ﬁrst phase is all advertising money.
I understand that Eccosys did some early experiments with digitalcommerce. What's happening in the realm of electronic cash now?
Ito: I think a lot of people are approaching the discussion about digital
cash a little bit backwards. It's not going to be a technology-driven trend.
It may sometimes look like it at the beginning, but the market-driven trend
is happening in a more subst antial way.
All of the issues associated with digital cash -- anonymity, lower cost oftransactions, security concerns, and so on -- technically, these can becleared without much investment. Companies like DigiCash and Mondex
are bringing new technology to the marke tplace, but in the US, Visa andMasterCard have decided that they're going to have stored-value cards. So
Mondex's value in the marketplace is not clear anymore. And while
DigiCash has a blank signature anonymity patent, it's not clear overall
how much ad vantage that gives them.
What kind of costs are involved in doing online transactions?
Ito: In general, transactions over networks are getting cheaper. NIFTYServe, for example, in some cases used to take an 80% service charge fordoing the billing. That's a pretty high transaction cost. Places like the"cyber malls" that are being set up r ight now are taking 15% to 30%.
Japanese credit card companies want 7%. But some US credit cardcompanies want only 2%, or even 1%. So we're getting to lower and lower
transaction costs.
But as information pieces get smaller, you go into super distribution anddistribution of things where you don't really need credit card companies'
services, like reversibility and account logs. Then you get into acompetition of transaction costs that ar en't in the normal realm of what acredit card can do. Eventually, you'll get to a marketplace where evenkeeping a record of the transaction is going to be too much cost. Then you
go into anonymity as an economic necessity.
So, do you see electronic cash as a viable option for the near future?

Ito: Yes, I think that, economically speaking, there is going to be anecessity for electronic cash. You'll have banks and credit card companies
unable to get into certain niches, and regulatory change to allow thoseniches to increase and become competit ive globally. If you look at it fromthe viewpoint of regulation and the market, you'll see the timing of whenthese things will happen is based on the development of electroniccommerce.
Sure, you'll ﬁnd small markets: there'll be a casino setting up in the
Bahamas, you'll have offshore banking... there will be little pieces of
economies developing. But for world economies, like a brand new foreignexchange system using digital cash, or a new stock market based on digitaltransactions -- those are really great visions that will happen, but they will
happen based on a need.
The most important thing is the timing. When you get the timing right,
you can succeed. But, always, the bleeding edge has a hard time. It will beinteresting to see if Mondex and other front-runner guys are doing
anything more than proof of concept.
What you suggest seems like a good scenario for market-driven
economies like the US. How about Japan, with its regulatory hurdles?
Ito: Japan has only "virtual" hurdles. For one thing, Japan doesn't have any
cryptographic regulations -- doesn't have the know-how. The other thing isthat there's an unused article in Japan's Constitution, one that's not in the
US Constitution, which gu arantees privacy of communications for all
citizens. So, from the cryptographic point of view, Japan is a fairly freeplace right now. It will get pressure from the US to follow in the US's
footsteps, though.
I'm working with some study groups trying to explain to the Japanese thatthey're in a position of advantage right now; the only big hurdle is the costof communication. If Japan can get beyond that, and spend some moremoney creating local cryptography, it could be that Japan gets ahead of
everybody in terms of digital cash -- because it will be globallymarketable, whereas the stuff developed in the US has this whole politics
behind the cryptography export issue.
But, as you say, Japan lacks the know-how.
Ito: There's deﬁnitely not that much know-how here now, but that canchange. Money can buy know-how. Eventually, I think that Japan could beahead. The banks are going through a lot of restructuring, a lot of
problems -- but there's opportunity when ther e's chaos.
MITI [the Ministry of International Trade and Industry] and the MPT[Ministry of Posts and Telecommunications] are ﬁghting over who's going
to be in charge of digital commerce. They're allocating hundreds ofmillions of dollars to that right now. If that money is used in a constructive
way, to come up with some technology, it will be well spent.
Japan is actually OK, even though they've done some really dumb things.
When Mondex came to Japan, it's rumored that the banks asked NTT tocheck on the security of the card, and they said, "A good hacker probably
could ﬁgure out a way to crack it, so th ere's a risk." So the banks said,"Oh, if there's a risk, then we can't do it." As if there isn't a risk in thecurrent banking system!
I think there's a huge gap between perceived risk and actual risk. I cansteal credit card numbers out of a dumpster easier than someone could
steal them off of a Mondex card. A lot of the delay right now is that the
security analysts can't ﬁgure out the cost of the risk of implementing
digital cash. That's global, not just Japan.
That's a good overview of the provider/technical side. What about theconsumer?
Ito: The mail-order trend in Japan is very behind, but it's catching on.
Three years ago, 5% of people said they would use mail order; now, it's
over 50%. Just like the Internet trend in Japan: it starts out slower, but
ends up accelerating faster.
Mail order catalogs, like Sony and Seibu, are getting return rates in the
20% range. In the US, 5% is considered good. Once you get theconsumers on the hook in Japan, they stay there.
There are a couple of hurdles, though. One is the credit card monopoly;credit card rates are up to 7%, which is ridiculous and will dampen the
launch. And the cost of telecommunications is too high. These are real
barriers to entry.
Will online transactions in Japan follow the same trends as in the US?
Ito: A trend you see in the US is that the yuppies are buying a lot of stuff:
outdoor goods, wine, steaks, ﬂowers.... Those sorts of markets, andcomputer parts, are ﬁnally becoming proﬁtable. But yuppies in Japan don't
have money; it's the young girls who have money.
In Japan you have a different target, a different entry rate. I thinkconsumer electronics and goods that appeal to kids may be major markets.
But at the end of all this is the fact that the basic costs of running an
Internet or telecommunications operati on are so high in Japan. For theproviders, you're paying more for leased lines. For the consumer, you're
paying more for the telephone call. In the end, it's a smaller market, so
how proﬁtable it can be is a question.
As you mentioned, in Japan teenage girls and young working womenare often targeted by vendors. Yet nearly 96% of Japanese Internet users
are male, which severely limits the market potential of Internet-based
businesses. What can be done to get more Ja panese women online?
Ito: It's going to be very difﬁcult, but that is important. I think girls inJapan are able to take on new technology faster than girls in the US -- justlook at the use of denshi techo [electronic notebooks], pocket pagers, andcellular phones. O ne thing is to change the interface away from amasculine-looking computer to something women are comfortable with.
Another is changing the perceived image of computers in Japan.
All over the world, but particularly in Japan, cars and computers are
considered "guy things." The general social image against women being infront of computers is fairly strong. Reiko Chiba, a Japanese TV talent who
started using computers, was telling me that when they would do ratingson TV... when she would sit in front of a computer, the ratings would go
down.

Overall, it's a feminism issue that's a very, very deep problem in Japan.
But if you can change the image a bit, and change the marketing forcomputers.... I don't know the answer to your question, but it's a very
important problem.
Isn't one barrier a technical issue: the perceived difﬁculty of setting up
the hardware and using the software?
Ito: Yes, but the technical solutions are coming up very fast. I think that
non-computer-based browsing will be a big deal next year, and that will
really change the barrier to entry. You won't have to be a nerd anymore to
get online.
Shaoul: There is a lot of stuff coming. Sooner or later, people will start
using their game machine, their toaster, to get on the Net.
Overall, how is the Internet in Japan developing differently from theInternet in the US?
Ito: The standard answer is: Japan is behind. Practically speaking, though,the technology is here. Commercial Internet has already exceeded theacademic Internet. The growth curve in Japan is higher than almost
anywhere else.
Even though Japan is behind, we're using all new technology here; so I
think getting Japan online should be very fast. The big problem is the highcost of telecommunications.
Who is to blame for that?
Ito: Everybody blames NTT, but NTT is a player, a product of other things
that are happening. It's a social phenomenon that everybody is responsible
for, from the politicians to the bureaucrats. But breaking up NTT isn't theanswer, either. Without decidi ng what you want to do, and then ﬁguring
out the best organization for it -- just breaking up NTT is going to cause a
lot of damage.
Japan needs to get people into the seats of bureaucracy who understand theissues. Look at the way the FCC is dealing with it: they're delegating a lotof the decisions down to the ranks, because as John Barlow puts it, "Godis in the details." Unless you know what the routing issues are of a speciﬁc
point, you can't make the right decision on regulatory issues.
Everybody knows what the real answer is: compete, move forward -- anybozo politician can tell you that. But it's the technical guys in the ﬁeld thathave to know. The solutions NTT is coming up with -- in terms of how
they want to do routing, or that th ey want to be in charge of this or that -are really dingbat ideas.
I think that if NTT is put in charge of the higher software and routing
layers, it's really going to stall. And there aren't the politicians andbureaucrats in power who understand that issue. The problem is going to
be to get some smart people into the s ystem of bureaucracy, give themlonger than two-year terms so that they can learn something, and delegate
the decisionmaking to them rather than making broad sweeping decisions
like, "Oh, NTT seems to know what they're doing. Let's let them do it."How likely is that?
Ito: It's going to be outside forces. If you look at the callback system -- theITC came in and said, "It's illegal for you to force these guys out of Japan;
this is a legitimate practice." What will happen is that American
telecommunications companies wi ll come in with all kinds of newtechnologies. And American regulators are going to tell NTT, "You'reengaging in unfair trade practices." The guys that come in are going tobeat up NTT in terms of technical ability, and then NTT is going to haveto rearr ange themselves. So, I would warn NTT not to waste its energy
trying to take too much vertical space, but to focus on doing better leasedlines and working with outside technical people more.
Will the Internet phenomenon in Japan be sustained, or is it just a fadthat will pass in another year?
Ito: I think there's a possibility. To go back to that model of talking about
the Internet in the media being the main business, what's going to happenis that media interest will die down. Soon that won't be a viable businessanymore. If the market incre ases enough by then, so that talking aboutsomething on the Internet is enough, then I think we'll succeed. That's why
we're putting so much energy into the Internet Expo next year -- trying to
get the public user base, the market, to a size that's sustai nable in itself,
without relying on the mass media. There's a risk that it won't happen here
right away, though. It may slump once.
From a publishing point of view, the United States has broken through,and electronic magazines are making money. But in Japan, you still can't
get enough hits on a commercial site, considering the cost of putting thatsite up, to pay for it.
How feasible would it be for a Japanese company to set up its Internet
server site in the US?
Shaoul: Technically, you save a lot of money. And maintenance-wise,
there is software available already that will let you automatically mirror
the contents of a site in Japan, daily or hourly to the States.
Are there beneﬁts for doing it all in Japan?
Shaoul: The beneﬁts of doing it here are many; that's why we're still inbusiness. First of all, if there is a problem with the machine, instead ofbeing in a dark closet somewhere in California connected to a T1 line, it's
here where you can get access to it. Sure, there are service providers in theStates who will charge you a lot of money to have 24-hour surveillance ofyour machine, but if you just want a low-budget, no-frills server in theStates, you lose a lot on the security and robustness of the system.
The other thing is getting your content made. Content isn't just the text andpictures and sounds; the content is also the software that is running. Most
Web servers use custom CGI scripts, or Java scripts. Trying to do softwaredevelopment online with th e server a few hundred milliseconds away on
the Net is inconvenient; you want to be able to check the server ofﬂine andback it up yourself.
There's also the routing issue. If your server is in the States, and most of
your clients are on Bekkoame, they have to go across the ocean. If they'regoing into a Japanese metropolitan area network that's going to beupgraded next year, to say 10MB, ins tead, then your Japanese audience
gets better performance.
Ito: The main issue is that there is a bandwidth limit to the US. When you
get into higher bandwidth applications, there'll be a scale of economy
where it will be cheaper to have it here.
The biggest cost of sitting up a Web site is sitting down with the technicalpeople and ﬁguring out what you want your scripts to do. It's a pain to try
and do it with somebody in the States. If you have a Web page that you
wrote in Word 6 and just want it uploaded somewhere so people can see
your resume, then putting it on Netcom is ﬁne. But if you want to do somestatistical analysis on a user database, then it's not going to work.
How will the Internet change Japanese culture and society? Will there
be resistance to the technology, like the argument that word processors
mean young Japanese are forgetting how to "write" kanji?
Ito: I think that's ﬁne. I mean, the soroban [abacus] and all that are nice -and maybe if you get thrown into a jungle, you're going to need certain
skills -- but we have to move forward. How necessary is kanji, and how
much do you gain g etting out of kanji? I doubt anybody in Japan would
buy it, but I think giving up certain older sets of tools and leaving them ascrafts is OK. Instead of worrying about that, people should spend theirtime learning new things. If you have a scient iﬁc calculator, you can solve
bigger problems than you can on a soroban.
Shaoul: As someone who started learning Japanese at 15, I remember the
difﬁculties. I wish that I'd had computer-based learning tools, like now.
There are CD-ROMs that really do a great job, and the Internet has theability to teach everyone everything -- including Japanese. Because 80%
to 90% of the information on the Net is in English, it also can provide aknowledge base to make learning English interesting for everybody. Why
can't everybody be bilingual, right?
Ito: A lot of Japanese say, "We need to protect our culture." But I say, "No,you want to distribute your culture." You want everybody to be able tolearn Japanese. If you can spread it out, and ﬁnd people who are reallyinterested in keeping up with kanji, you don't have to force people to do it
to protect it anymore. I know it's a difﬁcult "sell," but if you look at virtual
Japan rather than physical Japan, you don't see it diminishing because of
the Internet.
Do you see opportunities for foreign companies in Japan?
Ito: Yes. Overall in Japan -- if you look at the banks falling apart, at the
auto industry, at any industry in Japan -- there's going to be a shakedown.
The market is there, and there will be opportunities for everybody fromforeign investors to technical companies to jump into Japan and play arole. The smart Japanese and the bankers understand this, so they're going
to be reaching out for help. It's not going to be a closed thing.
A lot of this is happening behind closed doors, still, but the Japanese knowthat they can't sustain the present situation. Even though the bubble is said
to have burst, you still have one more false bottom to go.
Do you have any closing advice for foreign companies seeking to enter
the Japanese market?

Shaoul: If you're a foreign company and you don't yet have any marketinginvestment, consider the Internet. I think Japanese people, when they wantto know something, will go on the Net and say, for example, "I want toﬁnd companies who are selling log h omes." So if you're a log homemaker importing into Japan from Seattle, you should put something on theNet. People in Japan will be looking for it.
Ito: Right now, everybody is focused on the Internet, so there is a lot ofvalue in doing Internet-based stuff in Japan. A lot of Japanese material is
ﬁnally coming online, but there isn't a whole lot of content yet, so you will
stick out as well.
There's also the big, big market of enterprise networking, for which theInternet can still be cheaper -- you're using the same leased lines, but more
efﬁciently. The Swiss banks are using public networks with cryptography
for their exchange now; the Int ernet with cryptography has become
relatively safe. And the cryptography that the Swiss are using is legal in
Japan, so that's something to look into.
If you want to hit certain segments of people that are on the Internet, thisis a good time, because next year's Internet Expo is going to blow the hypeout of proportion before it dies.ç
Article 21 of theConstitution of Japan
Freedom of assembly and association as well as speech, press and allother forms of expression are guaranteed. 2) No censorship shall bemaintained, nor shall the secrecy of any means of communication beviolated.

Eccosys Co., Ltd., can be reached at phone 03-5454-7213, fax 03-54547218. To access the Eccosys Web pages, point your browser at
http://www.eccosys.com/. The interviewees can be contacted by e-mail as
jito@eccosys.com and cyrus@eccosys.com.

(c) Copyright 1996 by Computing Japan magazine