PLAYING CATCH UP IN THE CYBER RACE

By EDWARD W. DESMOND KOBE

For the past four decades, Japan has been showing the world how to take technological innovation and turn it into gold. Examples abound: the transistor radio, the color television, the portable cassette player, the videocassette recorder. The basic technology in these products was invented elsewhere--the transistor and the vcr were born in the U.S.--but superior engineering expertise and marketing flair gave Japan clear dominance of the world of high tech.

But suddenly, puzzlingly, Japan finds itself well behind in the race to catch the next big technological wave: the intersection of computers, telephones and cable television as well as the electronic services by which information travels across these networks. Americans call it multimedia; the Japanese call it ``maruchimedia.'' By whatever name, it encompasses everything from CD-ROM games to two-way television to the Internet, and quite a bit more. While foreign companies, most of them in the U.S., are zipping ahead along this frontier, Japan is way behind, clueless in cyberspace. What's going on?

Japan's technology giants--Hitachi, Matsushita, Toshiba, Sony, NEC-- listened for years as their U.S. competitors talked enthusiastically about multimedia but remained skeptical: after all, they had come to believe the Americans were the has-beens of the electronics business. Besides, Japan's strength lay in hardware, not fuzzy concepts. For Japanese firms, the real battle would be for the next big gadget to follow the vcr, which in 1993 was worth $7.7 billion to Japanese firms alone. As a Sony executive scoffed two years ago, ``Multimedia is just a pot of gold at the end of the rainbow. Nobody knows where it is.''

Now he, and others, at least have the rainbow in sight. During the past year, U.S. companies have been streaming into the multimedia business, and the optimists among them expect to see gold glittering soon. By one U.S. estimate, business on the information highway--from providing video-on-demand to building fiber-optic trunk lines--will in 10 to 15 years generate $300 billion annually for software and computer makers, cable-TV and telephone companies, publishers and catalog houses. ``The Japanese want to get in on it, but they are a bit confused,'' says Roger Mathus, executive director of the U.S. Semiconductor Association in Japan. They don't know how.''

A few Japanese firms are on the inside track with such specialized technologies as flat-panel displays--the screens of laptop computers--and other components, but big names are on the sidelines or tagging along in joint ventures with American partners. In crucial areas such as telecommunications, software and online services, Japan is barely in view. ``The multimedia markets in America are mostly sewn up by American companies,'' says John Ratliff, a researcher at the University of Tokyo, ``so it makes the domestic market critical for the Japanese.''

That poses a problem: Japan's home field is too small to give its technology titans enough space to train for the new game. Nearly all the key elements in the multimedia market are underdeveloped--the consequence of over-regulation, high prices and other innovation-stunting problems. Cable television, a major part of the info-highway infrastructure, is within reach of 96% of American homes, but only 19% of those in Japan. In the U.S. 52% of all personal computers are hooked into a network of some kind vs. only 8.6% in Japan. Commercial online services such as Prodigy, CompuServe and America Online, as well as the Internet, have millions of U.S. users; their counterparts in Japan are just catching on.

Apprehension about slipping behind in a crucial technology race is rising to the level of panic in Japan. Newspapers and magazines have produced countless articles on the ``crisis,'' and publishers have rushed out at least 20 books, among them such alarmist titles as The Threat of the Superhighway: The Danger of Annihilation Facing the Japanese Information Industry. In his New Year's message, Prime Minister Tomiichi Murayama encouraged his countrymen to take up the challenge. ``The new technology,'' he said, ``will give us a completely new, richer and more convenient way to live.''

Last year government ministries began proposing a number of info-highway-friendly measures, from substantive deregulation such as allowing cable-TV companies to offer phone service to such promotions as a ``national E-mail day.'' Advisory panels were set up to ponder technical as well as theatrical issues--like asking pop stars to perform songs about multimedia. The wake-up call really came about a year and half ago--and from an unlikely source: U.S. Vice President Al Gore, who called on American industry and government to work together to create a ``national information infrastructure'' that would ``enable U.S. firms to compete and win in the global economy.'' This was language Japanese bureaucrats understood all too well. In the fall of 1993, Mitsuo Igarashi, director general of the telecommunications bureau at the Ministry of Posts and Telecommunications (MPT), visited Washington. On the plane ride home, he read a copy of the Clinton Administration's ``Agenda for Action,'' which laid out plans to accelerate the creation of an information superhighway. Convinced that Japan was being left behind, Igarashi ordered up an action plan of his own.

For starters, his ministry twisted arms at Nippon Telegraph & Telephone Corp. (NTT), a near monopoly in Japanese telecommunications, to turn its powerful research efforts toward multimedia. Then last May the ministry proposed a project to install fiber-optic cable to most homes by the year 2010, at an estimated cost of more than $500 billion. The ministry proposed offering zero-interest loans to companies to do the work and promised the investment would yield 2.4 million jobs and add $1.23 trillion a year to the economy by 2010. Last week the Murayama government officially endorsed a version of the plan. Meanwhile, other ministries have jumped in. Education, for example, has committed $950 million to install computer networks with Internet links at 71 universities; previously it had funded only one such network a year.

The problem is that Japanese bureaucrats have a spotty record as nurturers of technology. In one of several fiascoes, the government in the 1980s encouraged Japanese firms to develop analog high-definition TV, an effort since rendered virtually obsolete by the arrival of digital formats. In the info-highway arena, the bureaucrats are especially weak. They are typically trained in law and economics rather than computer science. At a press conference last year introducing MPT's plan for an ``info- communications infrastructure,'' a foreign reporter asked a senior MPT official for his E-mail address. Not only did the official lack one, but he did not even know what an electronic mailbox was.

Another problem is that government officials often pursue self-serving agendas. The MPT is considered a second-rank post, less prestigious than Finance or International Trade and Industry (MITI), the so-called policy ministries that take the pick of university graduates. The MPT no doubt hopes to use its grand fiber-optic plan to vault into the top rank of government agencies--and in the process establish sinecures in the business world for its retirees, a longtime tradition accorded to the majority of Japanese bureaucrats who retire in their early 50s. But the MPT's ambitions have met with sharp resistance from the MITI, which also has a crucial stake in multimedia because of its control of the computer industry. ``The MPT made its fiber proposal in order to boost its power,'' gripes a MITI official. ``It's a waste of taxpayers' money.'' Behind the MPT-vs.-MITI power struggle, however, lies a genuine debate over policy. While the MPT advocates a national fiber-optic network, the MITI wants to introduce incentives and deregulatory measures to stir market interest in multimedia. MITI officials are openly critical of the MPT's emphasis on solving the problem by spending billions on a fiber-optic network, an idea that in the U.S. is considered a task for private enterprise and a technology that is needlessly expensive, given such cheaper alternatives as ``hybrid'' systems, which combine fiber and old-fashioned coaxial cable.

So far, the contest looks like a draw. The budget approved last December provided for a nationwide fiber-optic network but gave the MPT only half the $600 million it requested. It also allocated at least $2.3 billion for pet multimedia projects of the MITI and other ministries, as well as tax incentives for high-tech companies.

Even if the government leads the way, who will follow? When a consultant tried to find 100 schools willing to participate in a MITI-sponsored pilot program to provide Internet-linked computers, he found no takers. Teachers said they were eager to participate but could not do so without a change in the Ministry of Education manuals, which dictate every minute of their daily routine. Education officials were not helpful. Says the consultant: ``They told me it would take 5 to 10 years to rewrite the manuals.'' It took the consultant several months to come up with schools willing to join the experiment.

A visit to almost any government office demonstrates how ill prepared Japan is for the information age. Desks are barely visible under mountains of paper that should have disappeared into data banks long ago. MITI officials were issued computers only last November, and it took them until last month to get an Internet-linked E-mail system. The MPT is online, and other ministries are gradually waking up to the info age.

Government regulations, however, remain geared to an era when trees were plentiful and floppy disks unknown. The tax authorities, for example, require all businesses to print out and store their records for seven years. Business is equally out of step. In the U.S., where computers and networks were introduced to improve efficiency, corporate restructuring over the past decade swept out entire layers of management, with information technology sometimes helping to fill the gap. In Japan, where lifetime employment is still a tradition, the 30-month recession has not resulted in companies turning to technology as a way to increase white-collar productivity. Less than 10% of offices are computerized, in contrast to 42% in the U.S; only about 17% of personal computers in Japanese businesses are linked by networks, vs. 66% in the U.S.

The hardest challenge facing Japan in the multimedia sector is exercising the entrepreneurial spirit that has accounted for the success of so many U.S. companies based in a garage with a good idea. Japanese financial markets discriminate in favor of big firms, making it virtually impossible for little start-up firms to find capital. ``The Japanese have great technology,'' says Joichi Ito, president of ECCOSYS an Internet consulting company in Tokyo, ``and they are spending millions on an information infrastructure. But they are going to suffer because they have no content or commerce to put on the systems. We need a lot more innovation.''

Deregulation should help. For all their diverse ambitions, the MITI, MPT and other ministries agreed to cooperate in a special conference led by Prime Minister Murayama to sort out such anachronisms as a prohibition on teleconferencing for medical consultations. The MPT's original cable-industry regulations were designed chiefly to protect NHK, the national broadcasting organization, as well as the five private TV companies, against further competition. Cable-TV companies were restricted to operating in a single city ward each, a requirement that led to slow growth and big losses. In December 1993, the MPT eliminated the size restriction and made it possible for foreign firms to enter the business.

Japanese trading companies jumped at the opportunity, with Sumitomo leading the way in a joint venture with the U.S. cable giant TCI. Sumitomo is wiring Tokyo's well-to-do Suginami ward, but even with the MPT's blessing, the project is entangled in red tape. To string cable across a street requires separate approvals from ward, city and national authorities. ``We have waited up to six months to get permission to cross a single street,'' says Yasuo Kosugi, president of Suginami Cable Television, a part of the Sumitomo-TCI joint venture. ``They never say no in the end, but we have to whine a lot and tell them we will be ruined unless they agree.''

Japanese cable executives admit theirs is still a risky business. Because of the high cost of installation, service is expensive--$40 a month for the average household--and no one expects that cable TV on its own will be a big draw, despite clever new features such as a karaoke station. Says Minoru Akimoto, president of Titus Communications, a cable-TV joint venture involving Itochu, Toshiba, Time Warner and U.S. West: ``In Japan, where housewives have the final say on financial matters, they won't like it. They'll say, `You want me to buy a service that gets my husband to watch more TV? He hardly even talks to me as it is. And you want me to pay more for that?' ''

The key to success, Akimoto and other cable executives maintain, is to provide customers with local telephone service practically free of charge, a come-on that has worked well for cable companies in Britain. While the MPT is willing to allow cable firms to provide phone service, a big question remains: NTT, until now the monopoly provider of local phone service, is not eager to let the cable companies connect to its network. Its basic phone service already loses about $1.3 billion a year because the government sets the rates. In several recent decisions, the MPT has forced NTT to give its competitors a break; the cable ventures are crossing their fingers that the pattern will hold. Whatever the ministries and their industry clients decide, there is a deepening popular enthusiasm for one part of the multimedia world: cyberspace. Though the graphics are a bit primitve, and there are almost no magazines available online, subscribers to NIFTY-Serve and PC Van, the two largest online services, now total 1.7 million, up 42% from a year earlier. Online forums, where groups of people can exchange ideas and comments, are especially popular. Says Tomoo Okada, NIFTY's president: ``Many Japanese are shy in face-to-face conversation. But they seem to derive confidence from the anonymity of online forums and E-mail.''

Computer-magazine racks are full of advice on how to hook up to the Internet. After a long, pointless wrangle, the government last year finally granted licenses to companies that provide commercial, as opposed to academic, access to the Net. While language remains a barrier--English dominates the Internet--Japanese students around the world are using the Net to chat in a mixture of Japanese and English that their parents would never understand. Shortly after the Kobe quake, Tomoji Ohta, a college student whose parents' home had collapsed, approached TIME reporters on the rubble-strewn streets with an urgent request: ``Please get on the Internet and notify the Baker Street Irregulars that all our members in Kobe are all right.'' Sherlock Holmes fans around the world were reassured. Indeed, some enthusiasts compare the Internet with the kurofune, the 19th century ``black ships'' of U.S. Commodore Oliver Perry that forced Japan to open up to the world.

Masanori Fujimori, a former IBM software engineer, thinks the metaphor is apt. He left IBM two years ago to launch a firm that produces software for multimedia. Cruising the Internet has been good for his business, with newfound friends in the field passing along specialized software tools and lining up profitable interviews for him with U.S. entertainment-industry figures. Now, in a small, smoke-filled room in Kawasaki, Fujimori is at his keyboard nearly around the clock. ``By meeting other people on the Internet,'' he says, ``you find out who you really are.'' For Japan's multimedia industry, that search has just begun.