Japan's Masayoshi Son Picks a Fight With U.S. Phone Giants

By

Daisuke Wakabayashi and

Anton Troianovski

Updated Nov. 23, 2012 10:49 p.m. ET

In Japan, Masayoshi Son is known as the eccentric Internet billionaire who upended the country's telecom industry. In the U.S., he is about to become the cash-strapped underdog who picked a fight with two corporate giants—AT&T Inc. and Verizon Wireless.

"It's like the poor kids fighting against the rich kids," Mr. Son said recently about the coming showdown. "Sometimes, the poor kids have more guts to fight the uphill battle."

On Oct. 15, Tokyo-based Softbank Corp., announced a $20 billion deal to acquire 70% of Sprint Nextel Corp., currently a distant No. 3 to AT&T and Verizon. Although the deal hasn't yet been approved by regulators or Sprint shareholders, Mr. Son, Softbank's chief executive and largest shareholder, already has pledged to try to break the market dominance of the industry titans.

In an interview with The Wall Street Journal, he said Verizon and AT&T—which together account for two-thirds of the U.S. wireless industry's customers and nearly all of its profits—are burdened with the need to keep shareholders "rich and happy" with healthy profit margins and big dividends.

In Japan, Mr. Son went after his telecom rivals with a scorched-earth strategy of cutting prices that forced them to choose between profits and customers. He suggested he would use a similar strategy to take on Verizon and AT&T, while spending billions of dollars to improve Sprint's network. Verizon and AT&T together have about 160 million contract customers, compared with 32 million at Sprint.

Win or lose, Mr. Son is emerging as a fierce and unpredictable rival at exactly the wrong time for the biggest U.S. carriers. After years of battling each other for subscribers, Verizon and AT&T have been rolling out new pricing plans and stingier upgrade policies to squeeze more profit out of their customer bases. Mr. Son's arrival could compel them to keep price increases in check—but only if he succeeds in his long-shot bet that he can make Sprint's nationwide network better than what its rivals offer.

Mr. Son, a short, slight 55-year-old, is one of Japan's best-known chief executives. He owns 20.9% of Softbank, which holds big stakes in Yahoo Japan and China's Alibaba Group and is anchored by Japan's third-largest wireless carrier, which he bought six years ago from Vodafone Group PLC.

Japan's Telecom Giant

See some key dates in the life of Masayoshi Son, Softbank's chief executive and largest shareholder.

He speaks often about growing up in an impoverished, ethnically Korean family crammed into a shack with no official address in Kyushu, the southernmost of Japan's four main islands. His father was a pig farmer who illegally brewed alcohol before settling into a more comfortable life in later years as owner of a pachinko parlor.

Worried that his Korean heritage would make it harder to succeed in Japan, Mr. Son struck out at the age of 16 for the U.S. He has said his family, friends and teachers didn't want him to go, in part because his father was ill. But he was resolute. America, he said, was the only place he could escape discrimination and make himself a success. His father eventually relented.

ENLARGE

Mr. Son as University of California, Berkeley, student.
Associated Press

He attended Serramonte High School near San Francisco, then got an economics degree from the University of California at Berkeley.

His commercial instincts surfaced early. One of his first ideas was for a voice-operated translation device to be sold at airport kiosks. He tracked down Berkeley professor Forrest Mozer, who had done work on the intersection of machines and human speech, and persuaded him to build a prototype. Mr. Son licensed it to Sharp Electronics for about $500,000.

A Softbank spokesman said Mr. Son recalled paying Mr. Mozer for his work, but declined to provide details.

An older Berkeley student named Hong Lu met Mr. Son when the future CEO walked into the ice-cream shop Mr. Lu managed. Mr. Son ordered a milkshake and said it had better be extra thick or he wouldn't pay, according to Mr. Lu.

Mr. Lu says Mr. Son soon hired him, giving him the title of "handyman." His tasks included booking plane tickets and making sure Mr. Son could still graduate from college despite his business pursuits. Once or twice, when Mr. Son was on business trips to Japan, Mr. Lu went to classes in his place, sat in the back of the lecture hall and pretended to be Mr. Son, according to Mr. Lu.

"I am where I am today because of them," Mr. Son says of Messrs. Mozer and Lu. "I'm grateful to both of them from the bottom of my heart."

Timeline: Sprint's History

A network of video-arcade machines run by Mr. Son brought in tens of thousands of dollars a month, Mr. Lu says. There was also the voice-operated translator project, a dining magazine that never launched, and a videogame arcade acquired with a loan secured by Mr. Lu's house.

Mr. Son returned to Japan and founded Softbank in 1981. The company distributed software to retailers and eventually became a middleman for U.S. technology companies including Cisco Systems Inc. and Lotus Development Corp.

Mr. Son bet on the Internet early on, eventually plowing money into some 600 technology companies, including GeoCities Inc. and E*Trade Financial Corp. Softbank acquired the operator of Comdex computer show for $800 million in 1995, then bought Ziff-Davis Publishing Co., the publisher of PC Week magazine, for $2.1 billion a year later.

The publisher's chief executive, Eric Hippeau, introduced Mr. Son to a fledgling search-engine company called Yahoo Inc. Ziff-Davis had a handshake agreement to invest $5 million in the startup, which at the time was barely two years old, was losing money and had only a dozen employees.

After meeting in Yahoo's offices with founders Jerry Yang and David Filo, Mr. Son said he wanted to boost Ziff-Davis's investment to $100 million. According to Mr. Hippeau, who was at the meeting, Mr. Yang replied that he was flattered but he didn't need $100 million. "Jerry," Mr. Hippeau recalls Mr. Son saying, "everyone needs $100 million." Mr. Yang declined to comment for this article.

In the end, Yahoo took the $100 million, and Softbank owned more than one-third of Yahoo when the Sunnyvale, Calif.-based company went public in April 1996. Mr. Son also persuaded Messrs. Yang and Filo to let him set up as a joint venture a Japanese branch of Yahoo.

Softbank and Sprint

Jack Ma, chief executive of Chinese Internet retailer Alibaba, tells a similar story. In 1999, shortly after completing a $5 million investment round, Mr. Ma presented his business plan to Mr. Son. Six minutes into the presentation, Mr. Son interrupted him, saying he should take a big investment from Softbank as well.

"You should spend money more quickly," Mr. Ma recalls being told by Mr. Son. Softbank now owns about one-third of Alibaba.

The investments helped make Mr. Son one of the dot-com era's richest men. At the height of the Internet-stock bubble, Softbank was valued at as much as ¥20 trillion, or $243 billion at current exchange rates. Mr. Son owned 37% of the stock at the time.

When the bubble burst, Softbank's shares plunged. By 2002, the company's market value was down 98% from its peak two years earlier, wiping out more than ¥7 trillion—$85 billion at current rates—of Mr. Son's personal wealth.

Softbank sold most of its holdings in Yahoo and E*Trade to raise money and steered into telecom, a business with hard assets and more predictable revenue than the high-risk startups it had bet on during the boom.

ENLARGE

Mr. Son started by offering fast Internet access in 2001 under the Yahoo brand. Softbank lured customers with tactics such as offering free modems, but it struggled to overcome technical problems and poor customer service.

The problems at the broadband unit contributed to losses for the entire company for four consecutive years. Mr. Son set up an office in a meeting room 13 floors below his executive suite to be closer to the problem unit.

He slept in the office at times and routinely summoned executives and partners for meetings late at night, says Mr. Lu, who at the time ran a U.S.-based company that supplied equipment for Mr. Son's broadband business. "He would ask our people to go to his office at three o'clock in the morning," says Mr. Lu. "You cannot think of him as a normal businessperson."

The gatherings often lasted more than eight hours, and at times Mr. Son would run on a treadmill while holding court, according to former employees. He worked out of the meeting room for 18 months, until the broadband unit had cut enough costs and moved enough customers to more lucrative plans.

Softbank and its broadband business returned to an annual profit in March 2006. That same month, Mr. Son loaded up Softbank with debt to buy the Japanese mobile-phone business of U.K.-based Vodafone for ¥1.75 trillion—$22 billion at current exchange rates. Investors, nervous that a company whose debt already was below investment grade was making such a big bet, sent Softbank's stock down 40%.

SoftBank Mobile's bizarre, award-winning TV commercials - featuring a mixed-race family with a talking white dog as the father - have helped grow the company's mobile-phone business.

Japan Vodafone had been losing money and subscribers and needed to upgrade its network. Rivals NTT DoCoMo and KDDI controlled 80% of the Japanese market.

Mr. Son cut prices, reducing monthly charges to about one-fourth of what competitors were collecting. He also was involved in the creation of a series of amusing TV commercials featuring a mixed-race family with a talking white dog as the father. The bizarre, award-winning spots helped the mobile-phone business, then a distant No. 3, add more new customers than Japan's market leaders for quarter after quarter.

Mr. Son monitored the progress almost obsessively. He had proprietary systems to collect data from cash registers at Softbank's retail stores and fed it into a display he could monitor from his desk—and, more recently, his iPad. He regularly phoned executives whose sales weren't tracking their targets, one former executive says.

After building Softbank's subscriber base and paying down debt, Mr. Son started itching for another deal. More than a year ago, he convinced Softbank's board that he needed to look outside Japan to achieve his "30-year vision" of turning Softbank into a global giant, director Ron Fisher recalls.

For months, Mr. Son and his team looked at wireless carriers in Asia, where fast-growing emerging markets promised big returns, according to people close to Softbank. Earlier this year, he decided to look closely at the U.S., which had the advantage of a stable economy and political system and consumer-spending patterns by cellphone users similar to those in Japan, these people say.

Mr. Fisher, the Softbank board member, had known Sprint Chief Executive Dan Hesse for more than a decade, ever since Mr. Hesse was running a startup, Terabeam Networks. Softbank had invested in Terabeam and Mr. Fisher has served on the board. Around summer, Mr. Fisher got in touch with Mr. Hesse, and deal negotiations—code-named Project Columbus—soon began.

When Mr. Son announced the deal last month in Tokyo, he didn't mince words about his ambitions: "I'm a man, and I think every man wants to be No. 1."

That is easier said than done. Sprint is struggling with an expensive network upgrade, a $15.5 billion commitment to subsidize iPhones for customers and a heavy debt load. Sprint also is well behind the market leaders in its so-called spectrum holdings—its right to use chunks of the airwaves to transmit phone calls, Internet traffic and other data. AT&T and Verizon Wireless—a joint venture between Verizon Communications Inc. and Vodafone—have the most valuable spectrum holdings in the U.S., with more than 100 megahertz each. Sprint holds 56 megahertz, a deficit that isn't as bad as it looks given Sprint's lower subscriber count. The company is using funds injected by Softbank to acquire more, including a deal this month with U.S. Cellular.

Softbank's acquisition would inject $8 billion directly into Sprint and give the carrier more flexibility to buy spectrum or acquire smaller rivals. The money also could help Sprint to continue offering plans that let subscribers use as much data as they desire for a flat rate—the kind of appealing deal for customers that AT&T and Verizon have all but dropped.

When asked about Softbank's deal with Sprint, AT&T Chief Financial Officer John Stephens said the U.S. wireless industry poses huge hurdles for newcomers, because of the enormous territory networks have to cover and the need for constant upgrades to handle soaring wireless data use. Verizon Wireless declined to comment.

Sprint reported a $767 loss million in the third quarter and lost 456,000 contract customers, while acknowledging delays in its costly and complicated network overhaul. In the same time period, AT&T reported a $3.64 billion profit, and Verizon, a $1.59 billion profit. Both gained customers.

When news of the Softbank/Sprint deal leaked in early October, Softbank's shares fell more than 20% in a few days. They have since rebounded and are now up 9% since before the deal became known.

Mr. Son says he will be heavily involved in Sprint's operations and in decisions about pricing plans, devices offered by the company and the creative details of its advertisements. He says he plans to check in with Sprint via teleconference once a week and visit the U.S. once a month, joking that he already visits the U.S. more than the nearby city of Osaka.

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