[NOMURA] I have been given the honor of serving as the moderator for the panel discussion. Once again, my name is Nomura, as was introduced.

I'd like to introduce the panelists very briefly.

To your very right we have Mr. Nishimuro who is the president and CEO of Toshiba Corporation. Then we have Mr. Robert Glaser, chairman, CEO, RealNetworks Inc., and here we have Mr. Randall Whiting who is the president and CEO of CommerceNet Inc.

We have had quite an extended day since early in the morning. I am sure you must be quite exhausted, thus, probably the presentations are going to wake you up. And Mr. Glaser is going to take the first 15 to 20 minutes to kick off. Please, Mr. Glaser.

[GLASER] Thank you very much. It's an honor to be here this afternoon.

I'm going to talk today about the Internet as part of the revolution in global communications, and I will talk about two parts. First, how the Internet truly is a unique mass medium that is as much of a revolution as radio or television was before it. Then I'm going to talk about some of the lessons from the early successes on the Internet from our company and other Internet companies such as Amazon.com and Yahoo! and how those lessons could be applied not only to Internet-based companies, but to any company that would want to use the Internet for competitive advantage here in Japan or anywhere in the world.

Now I said in the beginning that the Internet is as big a revolution as radio was in the 1920s or television in the 1940s, that the Internet in the 1990s is as much of a change in how we communicate as either of these two media. In fact, in the first five years of their commercial growth, each of these media grew very quickly, almost overnight, and created a big change in how people communicated. Now why is the Internet a unique medium? What is it about it that is so special?

First, it's a global medium. It's the first audio-visual medium that allows people to watch or listen to programming from anywhere in the world, no matter where in the world they are. Second, anybody can be a programmer. Unlike radio or television, where there are a limited number of channels and spectrum is given out by the government, or even cable or satellite where there are a limited number of channels, there are no limits to the number of channels that are available for Internet broadcasting. In fact, broadcasting on the Internet can be something that goes not only around the world but within an organization or to another group that want to just communicate within its own group. Third, programs on the Internet can be personalized and customized, because the network is intelligent, and because the personal computer is intelligent, the Internet programming experience allows the user to watch what he or she wants in whatever sequence he or she wants to. Then finally, programs can be delivered either live, like a broadcast, or on demand. They can be regular linear programs, or they can be interactive programs; indeed, they can combine text, graphics, web pages, and all kinds of other experiences to create new kinds of programming.

The Internet as a medium has grown very rapidly. In fact, we now have over 100 million users of the Internet internationally. Electronic commerce is over $8 billion over the Internet, and advertising revenue crossed $2 billion last year. These are very large numbers, very rapid growth, in a short period of time, and just the beginning.

Here in Japan, the market is also growing rapidly. Internet users will be up to 20 million users, it is estimated, by the end of this year. Advertising revenue is not growing as quickly, but it is certainly growing compared to other markets in a healthy way and we think it will also begin to grow even faster in the years ahead.

Now in Internet broadcasting, we started with the first version of Real Audio four and a half years ago in April of 1995. And we were very pleased that in just two years we were up to 14 million users. But since then, it's continued to accelerate, and now we have over 79 million unique registered users that have our Real Player software, and according to surveys these are active users who watch video, at least a third of them, once a week, and at least three quarters of them listen to audio at least once a week.

The reason that they watch and listen to so much is that there is so much choice on the Internet. Over 2,000 live radio and television stations broadcasting 24 hours a day, 7 days a week; that's over 350,000 unique hours of programming on the Internet, and that gives more choice for programming than any other medium in the world.

Well, what can we learn from the successes of the companies like Realnetworks and others? What are the general principles that apply from this?

The first point I will make is the incredible importance of first-mover advantage, of being the first person to introduce a product, a service, or an idea on the Internet. The second is the focus on ubiquity on a global basis. The Internet has developed this concept called viral marketing; that is the notion of using the network as a way to propagate something very quickly like a virus. Now a virus is a bad thing, but viral marketing is a very good thing because it allows for a new idea, a new product, or new service to become deployed very, very, very quickly all around the world. The approach that most of the successful companies have taken is to get their products out there broadly available, and once they are ubiquitous, that will lead to revenue later.

A third point is that the Internet allows any company to build a relationship that is direct with each of their customers, be they customers in business or be they consumers. And the fourth is to balance, taking advantage of how the technology will work in the future, but also making sure that the technology works well today. Because there is so much technical change, many people often make the mistake of betting on the future completely, and this is a mistake. It is very important to make sure that products and services work well based on the real world condition of the Internet, even as one plans for the future.

Let's look at three companies based on these attributes of first-mover advantage, global focus on ubiquity, direct relationship with consumers, and how the products work in the real world.

First is Amazon. It started out as the leading book company and has now become the leading seller of everything on the Internet. They had the first-mover advantage of being the first major bookseller and one of the very first online resellers. In terms of global ubiquity, because they have been not yet come to Japan, you only can give them one of two checkmarks here, but they have been very smart about ubiquity in terms of growing their business, going from books to many other products, and they have also entered into markets in Europe. They have built a direct relationship with their customers -- over 12 million customers -- and they've created a service and a product that works very well today.

The second is Yahoo! Yahoo! has done all four of these very well. They were the first popular Internet search service; they built a global brand here in Japan and other parts of the world as well; they built a strong, direct, personal relationship with customers; and their product has been very practical; it has always worked fast and worked well based on the current Internet.

And third is Realnetworks, and let me talk in a little more detail about our experience and how it might apply to other companies. When we introduced Real Audio in April of '95, just four and a half years ago, it was the first realtime streaming system for the Internet. Our success there led to the introduction of Real Video, a general system for streaming called Real System G2, and then just six months ago, a product called Real Jukebox, that is the way for consumers to experience all kinds of music from their CDs and also download it from the Internet.

Our approach with viral marketing has been a very central part of what we do. Consumers see all the content on the web, over 500,000 unique web pages, that have audio or video. In all those places the web site tells the consumer to click here for the Real Player, and that drives the consumer to download. Consumers download the Real Player over 150,000 times a day. When we introduced Real Jukebox, we used that viral power to include it with the Real Player as well as make it available at other music sites; as a result, over 80,000 Real Jukeboxes were download a day, and in just five months have delivered over 10 million copies of our free Real Jukebox product on the Internet.

This is an approach that we have taken in Japan as well as in the U.S. Even though we are headquartered in the United States in Seattle, we have had offices here in Japan for about three years and have been very focused on being an international company and a strong participant in Japan. We have a user-base here in Japan of over 6 million registered users, and this is, as a company, where we have 25 people on staff here in Japan. Using the power of the Internet, we deliver over 140,000 players a week just in Japan, just to Japanese consumers and users. We also sell an advanced player called Player-Plus over 1,000 copies a week in Japan. And in our player there are programs to play, and Japanese consumers play them over 180,000 times every week.

The next point about the importance of building a business is having a direct relationship with the customer. As I said, we have 79 million registered users of the Real Player. 90 percent of them have given us their permission to contact them directly with e-mail when we have a new player or another new product for them. Additionally, since we introduced Real Player G2, we can contact them directly through the player, so we now have 45 million users who get software updates or information from us about content directly in their player.

Then finally, the point about working well today and also planning for the future has also been a core part of our strategy. When we started in 1995, we first started with audio, and mostly voice audio because the quality of the Internet for music was not quite good enough. Then one year later, we added music audio, music streaming. Then in 1997, video -- small video, but video. And then this year, we entered the market for digital distribution of music with Real Jukebox. At each point, we made a product that worked well for the Internet, as it existed in that day, but that also planned for the future. Now we are preparing for a broadband video where the quality of the video will be good enough for broadcast or VHS-level of quality, where we will both broadcast it and do digital distribution of that video.

And right before closing, I'd like to show you a quick sample of what that kind of video experience looks like. (video played)

So.... Since I don't speak Japanese, I had to demonstrate some Japanese there.

So to summarize, the Internet is truly a new mass medium that will have as much of an impact as television or radio before it. The Internet is a global force that does not obey geographic boundaries. Internet success requires moving very fast and ideally being the first into a business, into a category. And if you don't jump into the Internet now, you can be sure that your competitors will, not just a competitor that's a traditional competitor, but because the Internet is global, a competitor from anywhere else in the world. Thank you very much.

[NOMURA] Thank you very much. Next is Mr. Nishimuro. Please.

[NISHIMURO ] It was only 15 minutes ago that I met Mr. Glaser for the first time. He praised me for one thing, but also he criticized me for another. He praised me because I had an e-mail address on my card. He's met 15 people since his arrival in Japan with whom he's exchanged business cards, but for him my business card was the first one with the e-mail address on it. I asked what the situation was like in the United States. And in the corporate America environment, it's only started. So he was able to believe me. He was disappointed, however. He asked whether I ever experienced RealNetworks' sound, and I said no. So that must have been a disappointment. But I just discovered the platform he was using for his presentation; it was Toshiba's notebook PC. Thank you very much for using our product.

Now, for myself, I'd like to speak to the principles, the society which is based on network usage, what are the features of this society and what will be the consequential impact of usage of the network on global management?

Use of the Internet -- in other words, use of information technology. Well, information technology can be said to be a trigger or detonator of all change, because it is a force that drives speed up; it is a driving force behind acceleration of things. In other words, it shrinks distance and time; it transcends, actually, distances and time. So the speed becomes crucial, and that's one feature or characteristic of a networked society. And simultaneousness, or synchronization, is another feature of Internet society, because a large amount of information can be sent realtime; messages can be retrieved realtime. So everything can be done at the same time, realtime. Another aspect of network society is virtualization. Whereas before, we needed a physical space to be shared, and now we can share virtual space. Indeed, we have such virtual space in existence today. It is different, therefore, from established society, because this virtual society creates a new community, which again transcends traditional notions of time or distances. These are some of the features of the Internet society, or networked society.

In this society, the value of information only grows larger. Of course there is a question of whether all information is indeed valuable, but it is true in that collection and storage and retrieval or screening and analysis of information becomes much easier and can be done at a greater speed, which means that the access from mass to the individual, or from individual getting access to the mass or general public becomes much easier. And now, therefore, we can communicate in terms of one-on-one access.

And another aspect of networked society is this borderlessness. This has been discussed already. Existing frameworks are being destroyed or broken down, and this is affecting and impacting existing legal systems and culture, taxation, or business practices. And existing legal systems and tax systems are not able to cope with this change of loss of borders. And traditional order or discipline that we used to see in industry is being lost, and the boundaries between industries are now more blurred. But at the same time, there are more frequent fusions or convergences occurring between different industries. For instance, communication and broadcasting were considered to be two separate categories of business in the past, though they were similar there was said to be distinct difference between the two, but today communication and broadcasting and newspaper media also are all united. It is very difficult to make a distinction from one to the other.

Another example. PCs used to form one category in the past. But from here on, whether we can maintain the single category of PC -- being a manufacturer of PCs, I may not venture to say this -- but I think the boundaries will change. PCs will become one with television, for instance, which will create a new category altogether. So there's a merger or convergence between different industries and different products. So that's another aspect of the networked community. And another thing in this society is that the excellence becomes very distinctly different from the mediocre.

The fast-mover's advantage was mentioned earlier. Those companies or individual persons who are quick will be the winners in the age of the networked society. But there are sure to be those who will be left behind. And here comes my greatest concern. Whereas we have the north-south problem in terms of the economic affluence, in the access of information as well, there could be a north-south problem, because to be connected to the networked society there are certain fundamental conditions that all have to be met. One is that you must have an energy source; in other words, electricity must be supplied, or there should be a battery to supply electricity to the system that you are trying to connect to. And it also has to be connected to the communication network. Even in wireless systems you have to be connected. And whether you physically have computer terminals or not, this will lead to the question of the gap between the have's and the have-not's or between south and north. Also whether you are capable of using information, whether you're equipped with information literacy. These conditions have to be met. Between those who satisfy these conditions and those who do not, there will be an increasing and growing gap. And those who do not satisfy these conditions will only be the loser in this situation of this game.

And today, we are meeting in Japan, so I'll speak in terms of Japan, or any other country where the native working language is not English. For us to use the Internet to obtain information is difficult, because more than 80 percent of the information that appears on the Internet is English. There are two theories about the future of what will happen to this situation. If the entire world is connected by the network, English will no longer be the dominant language, according to some. But then others would argue, as long as society clearly delineates between excellence and mediocrity, English will continue to be the dominant language. Personally -- and fortunately, I would say, because for me English is not my native tongue, but for the time being -- English will continue to be the dominant language used in the Internet world. So for those for whom English is not the native language, they will be left with a major handicap.

This is the overall picture of the society that we are envisioning. How would a business corporation react to or respond to such a networked society? Let me discuss this question. From a business perspective, what is most important is agility, to be quick on foot. In other words, this will require simplification of the corporate organization, simplification in terms of decision-making structure to accelerate the process of decision-making. And in addition to agility, there will be transformation in terms of companies having to outsource a lot of business activities instead of doing everything inhouse.

All kinds of facilities are now available on the net, in addition to information. It is a mistake to think that everything can be procured by yourself. And therefore, know-how, people, technology; one should be prepared to procure them from outside, from outside vendors, or outsource them. By so doing you will be buying time, which will allow you to accelerate or increase the speed of whatever you are doing. And this will change the business itself as we know it. Instead of doing everything inhouse, if outsourcing is required, there will be greater mergers and acquisitions or alliances or investment for venture capital, and businesses have to be serious about the usage of partners. Or, they must hire services of external specialists on the net or through the net. So business will be graduating from self-sufficiency, so to speak. And this means that a value chain will be created on the net. And in this chain of values, it will no longer be possible for a single business to complete this chain. But when that business comes to terms with this reality that no longer it will be able to complete this circle, then it will be easier for that business to hire services from outside, and there, the entry and exit into and out of the industry or market will become much easier.

In other words, in the era of the network, there will be new business models or new styles of business which will not be bound by specific areas of business. In the past, a company might have been producing simply boxes, but the box maker will now have to think about expanding their business to offer services or new kinds of alternative businesses. That's the kind of networked society that we are thinking of.

And three examples were cited by the previous speaker, one being Amazon.com. My view of Amazon.com is very different from the previous speaker's. It is an example of success in the networked society and it is currently a company which is may be able to create a dominant position, the first to do so, but, unfortunately, they have never realized a profit; they are still running in the red, except for one month, I think. How can they be an ongoing business? It is because of the stock market system in the United States, where funding was very easy. Ease of funding has allowed the existence of Amazon.com, because investors buy into the future of the company. But is this a good idea to allow the existence of such a system?

Today we are living in the era of networks, and this allows the company to enjoy the founders or the first-comer's benefits to obtain funds at a low cost, to enjoy the dominant position, despite their loss. I'm not blaming only Amazon.com, but Dell Computers, for instance, they have their business model. And Mr. Glaser's conditions are all met by the companies where they all realize profit in their day-to-day business and their cashflow is very good, and it is problematic if the companies are trying out a completely different model of business. But whether you like it or not, globalization will be the fact of life going forward.

Personally, I am concerned about this question of market monopoly. Can we allow the situation as it is? If all kinds of information are put on the network, what about those who do not speak English as a native language? Their culture might be undermined at the very foundation. I am not speaking of Japan only, but in all countries of the world they have unique cultures. Don't we have to preserve and cherish those cultures? Even though we may be living in a networked society which allows one-to-one communication or one-to-one access and transmission of information from mass to the individual, because depending on how this is used, one culture might become dominant. Unless one is very careful, all unique cultures might end up being destroyed. This is the concern that I have. Thank you.

[NOMURA] Thank you very much. And now I ask Mr. Whiting to first give a presentation.

[WHITING ] Good afternoon. It is my great pleasure and honor to be here with you today. I'm going to share some of my ideas and some of my words on the Internet.

It's very interesting following my two previous distinguished speakers, to have to follow them on their very interesting comments and perspectives on the Internet. And hopefully I will be able to add some to both of their presentations, because Nishimura-san provided me a great opportunity to talk about the challenges and the opportunities of the networked economy and of the opportunities for us to do business in a new way in that area. And Rob clearly has given me the opportunity to point to his company, I think, as one of the leading new organizations and entities that's taking advantage of the Internet to build and create wealth and build new marketplaces and new opportunities for all of us.

What I hope to do today is not really to focus on the technology of the Internet or of networking as it connects companies together, but really talk with you a little bit about some of the fundamental changes that are happening with business models and structures of organizations around the world that are really driving us to establish a new class of virtual enterprises.

What I hope to do in my presentation in my 20 minutes or so here with you this afternoon, is to cover three very basic things. One is to share with you my feelings on what I believe is a new change that's coming in e-commerce, a fundamental shift, if you will, in the way that we use the Internet and the way that we structure our businesses. Secondly, I would like to give you some views on how I feel that these new Internet companies, if you will, are starting to organize -- and I think Rob's company is a very good example of how they're taking advantage of the Internet in a very different way from the way that we probably have looked at business in the past. And then lastly, I want to share with you a few ideas and a few words on how these organizations around the world are starting to come together to form new supply-webs, if you will, moving from the idea of a supply chain or a value chain to a supply web or a value web and new ways to connect organizations.

The first question I probably should answer, though, is: Why am I here? Why CommerceNet? Some of you may be familiar with our organization. We have offices here in Japan as well as throughout the world. And the key thing I believe that gave me the opportunity and the privilege to be here today is that CommerceNet is an organization that has epitomized the nature of the emerging Internet business and has been really at the center of the flow of new ideas and business concepts as they relate to the Internet. We are a non-profit, non-stock company that is member-driven. We track innovation and new business ideas as they pertain to the Internet. So we're spending a lot of time with our member companies literally all around the world, thinking about what's going to come next.

Now that's a very daunting task, as you can imagine, of trying to predict the future. And one of the key ways that we do it -- luckily we have lots of very innovative companies that we work with -- and we have the opportunity to experiment and try out new ideas. As was once said, the best way to predict the future is to create it. And that's one of the things that we do. We work with lots of companies who have interesting ideas; we bring them together; and we manage the cooperation and collaboration between the organizations.

Now I'll tell you a little bit more about CommerceNet later in my remarks in terms of our future direction and future activities. But suffice it to say that the key things that we do at CommerceNet are: looking at extraordinary change, prediction by invention, and taking action to create that future through collaboration with our members.

Now there's no doubt that the very nature of commerce is changing in our world. Global markets have never been more accessible, the pace of business never faster. And to a very large extent, we have the Internet to either thank or to blame as the case may be for that type of change that we have to deal with on a day-to-day basis. In business, of course, changes are given, nothing like we have experienced though in the past is what we're going through now. Never has there been on such a grand scale the type of change that we're dealing with, and never at such an accelerated pace.

Just thinking of where that transformation might lead is at once exhilarating and terrifying, because it's perfectly clear we're plunging into the unknown. I think the comments that both of the other speakers have made and the speakers you've heard from today have clearly pointed to a future that is very unknown, and the pace of change into that unknown is increasing every moment. Still, we have already witnessed a rapid ascent of fledgling companies that a few years ago were very, very small, if existed at all, and have managed to rapidly parlay innovative web-based business strategies into prominent positions. Rob's company is a perfect example of this, of moving into this.

And who can imagine now what new ideas and businesses are going to emerge in the future? I can probably anticipate that Rob has more than enough other ideas for new businesses and new ideas as I hope that many of you do also that will take advantage of some of these changes in the Internet. For all that uncertainty, at least as much has become perfectly clear, in this hyper-fast world of commerce the companies that are able to recognize those emerging requirements and opportunities and are agile enough to take advantage of it are going to succeed.

Let me first say a few words about the nature of some of these new Internet companies that are starting to emerge and some fundamental changes that are happening in electronic commerce. And it has to do with the concept of interoperability. While we may be in the middle of e-business, I would suggest that many of the business models that are out there today -- and I would probably go along with Nishimura-san as he talked about Amazon; we are seeing that they took what is basically an existing business model, modified it, improved it, changed it using the Internet, but was still a basic concept of retailing. The idea today has been many companies are focusing the Internet on existing processes and existing models of doing business. Today, many companies simply believe by providing content and access anywhere in the world provides an effective e-business solution. Well, I very strongly believe that it doesn't and it won't. It may work today and you may see some values especially in the stock market being created by some of these organizations doing this type of thing, but in the long run we have to find new ways to organize our businesses, new ways to structure marketplaces, create products, and generate wealth that is not simply based on speculation of the stock market, and of course you may be able to argue one way or the other about new models for the stock market, but clearly there's lots of speculation going on, and not real value and wealth has been created yet in many places. I think there are some, like in Rob's company and in some of the other Internet companies that are creating real innovation and coming up with real new products and services that are in fact increasing in creating that kind of wealth.

But where we are at today is that a point of a major new phase in electronic commerce that is marked by an idea of business interoperability. And it's not the idea that simply we have my web site or your web site and that we look at somebody that comes there and looks at some content or brochure, or maybe even places an order for your software or hardware or some other type of a service. But what we're really looking at is a way to connect businesses together in a very new way and in a very dynamic way. And that's this concept of interoperability. And we believe very strongly at CommerceNet and with a lot of our member companies that this concept will revolutionize the fundamental nature of the way that we do business, and the change will be even more profound and dramatic than it has been to date with electronic commerce.

The problem has been -- and most Internet focus -- has been on the single web site. I am going to take a web server or some technology and put it on to my server and allow you to get access to my company. And you may have a web server and people can go to your site and get access to it. But the real idea now is, if we can move to a model where we apply the Internet to the space between our companies -- and this is the concept really of the supply web, or the value web, where we can take these innovative technologies and be able to use them to link our organizations together in dramatic ways. This is an idea that has been emerging literally around the world. We've watched it in Silicon Valley; we've watched in China; we've watched it in Australia, even here in Japan, companies taking unique new ways to link together with their trading partners. And it is a very interesting and a dramatic change from the way that many people have done business.

Now one thing that we have found that you have to think about -- and we were discussing this earlier -- that the idea that there is the Internet company and there is the company that uses the Internet. It may be a subtle difference between the two, but I believe very strongly of how you think about your company; if you're an Internet company like Rob, you move fast, you're agile, you're adaptive, or you could be a company that tries to apply the Internet to your current model. Now I'm not going to sit here and suggest that you should be one or the other. But what I'd like to suggest to you is that you need to think about this because the next new competitor you meet in the marketplace, if you're a manufacturer using the Internet, they maybe an Internet company doing manufacturing. And you have to able to think like they do to effectively compete against them. And I'd like to share with you some ideas of what those Internet companies look like and what they do and how they operate, because they're very open; they're focused on interoperability and they do things basically differently than the way business has been done in the past.

These companies exhibit agility, adaptation, cooperation in community. Let me cover just very quickly each one of these to give you an idea of what I mean by this. Agility that many of these Internet companies are bred upon or are built on the idea of. It's not just the idea of doing something quickly. Again I'll point to Rob's company here because I'm actually one of his customers and use his products and I have always been very impressed by the way that they're able to reach their customers and how fast they move. I would suggest that his company does not move fast by the sheer will of Rob. I mean, a lot of companies out there are able to do something quickly because the CEO or the executive of the company pounds his fist on the table and says, Go, do it! often times at a great expense and cost to the organization.

The new Internet company is one that the idea of agility, the being able to predict changes in the marketplace and easily and effectively shift directions based on where the marketplace is going with a minimal amount of effort and cost is one of the hallmarks of the new Internet organization. Agility is the fundamental aspect of these organizations. It's part of their culture; it's fully enabled by their IT systems, supported by corporate policy, management philosophy, and it is never just simply a mandate by management to go do something quickly.

The second aspect is the ability to adapt to changing market trends and requirements. You may recall how Charles Darwin set forth a scientific credible theory on evolution based on natural selection, focusing on the survival of those species best adapted to the environment. The same can be said for business. A key idea that was suggested often times when you talk about evolution as survival of the fittest -- those organizations that are the strongest, the fastest, and the smartest survive. But clearly I think what we're learning from both biology and from the Internet is that corporate fitness is not necessary the most important thing, but it's how effectively you can change and adapt to new requirements and new opportunities in the marketplace. If you have the ability to make changes better than what your competition does, you will survive better than they can. In fact, worldwide we're seeing examples of how the very strong and stable organizations are literally being shaken to their fundamental core by smaller and conceivably weaker firms that are more agile and have the ability to adapt to the marketplace. This is the kind of thing that an Internet company has somewhat different than what the more traditional firms have. They're agile and they adapt.

Additionally, they have the ability to cooperate. Again a fundamental concept is that they think about working with everybody from their most ardent competitor to their best customers, they actively work with and participate in a variety of activities. This is a form of evolution as well, because when you know how to cooperate with the other species in your ecosystem, you create synergy and you can survive. It's the people who work together, the entities that work together who survive versus the ones who go it alone.

And then lastly, going back to the idea that I started on earlier thinking about the space between the companies, you now start to bring not just one or two companies together, but whole groups of companies forming communities. These communities are really the final step in evolution, where a number of entities and companies can share common infrastructure services allowing them to quickly and easily address greater opportunities.

This concept of a community of commerce or companies that can come together as they need to, or literally plug and play into the supply webs is an enormously powerful concept. What we're seeing today, like I mentioned earlier in China, with the Chinese and international trust investment corporation Sidick working with Chinese manufacturers across China. They don't have the Internet connectivity, but they are going to use the Internet to connect these companies together to allow them to share information on their manufacturing systems and to share content and to build a web presence that goes across multiple manufacturing companies that allows them to compete in to the world market. Another is the example down in Australia. The Australian wine industry, a number of very competitive wine manufacturers have come together and formed a cooperative along with Federal Express to be able to manage a logistics that will allow these wine manufacturers to be more effective and more competitive on the world market all through the Internet. This is the kind of communities that we're starting to see come together using the Internet not as a way to market or sell their product but to create new business processes that allow their companies to work more effectively and efficiently together.

One of the key aspects of this is the formation of what you could probably describe as a digital cooperative. And not dissimilar to other organizations like this in the past, this is clearly not a new concept here in Japan -- and I understand there is the Nokyo, organization cooperative of agricultural activities that are brought together to share infrastructure and services. These are organizations pulled together to create a way of capitalizing on each other's strengths. The same thing is starting to happen on the Internet, and I believe very strongly that we will see very soon the emergence of these digital cooperatives that are helping companies come together in new ways and new trading relationships worldwide.

Now, let me return a little bit to talk about CommerceNet, because that's kind of what is happening with our organization. CommerceNet was originally based on managing collaboration. We were founded to enable our member companies to research and track that new innovation and new changes in the thing called the Internet back in 1994. What happened was that we attracted a number of international companies, both large and small, that wanted to be in that flow of innovation. And this had a very interesting impact on how these organizations participated. Not only did the members share their ideas on new technologies and new business models, but they started to form spontaneous relationships across the world that allowed them to link some of their business processes together and literally create new products, new business models, and new companies that were the combination of multiple existing organizations located in different places around the world. And if you take that idea and start to expand it and make it more broadly applicable, the approach can have an enormous impact on the way wealth is created in the success of businesses.

Think about the idea of a group of companies linked together with a common set of business processes, and not just a single web site that you manage yourself; linking together with your key partners; think about the strength and the capability that it might provide you in terms of the world marketplace. This is exactly what's happening with CommerceNet today. Although we've run into a fundamental problem -- and it is much like, Nishimura-san made the comment about language between Japanese and English on different web sites -- we have the same problem when you look at business processes, because as you find when we try to start connecting companies together, you may run your business slightly different than one of your partners; you may actually have different product numbers for the same product than they may have; you describe your business processes differently; you call your customers by different names or by different product numbers, by customer numbers, and so on. We have the same fundamental problem of having no way to communicate.

CommerceNet started to work on addressing this issue with a number of our members about a year and a half ago, and we started to look at how we could build a fundamental framework and architecture, if you will, in which this diverse world of e-commerce can be represented and we can start to build this interoperability. It's something we call Eco. And this really is a first step to pull together and build a common platform, build on XML, incorporating many of the standards and respecting many of the standards that are out in the marketplace from Microsoft's Biztalk to work done by Edifac at the UN, to a variety of other EDI and other types of trading protocols. We're going to announce this protocol here in a few weeks, so you're getting a little bit of an early view of it. And we think that it is going to be something that will set the stage for really starting to pull these global networks together to allow them to interoperate and to start to build dynamic new spontaneous businesses.

Now to give you an idea, this architecture that we've developed -- again working with many of our companies around the world, from NTT here in Japan to Microsoft, to Sun Microsystems, to Hewlett-Packard, and so on -- we developed a seven-layer model that helped to describe the relationships of various aspects of trading relationships between companies, from the lowest level of trying to determine how you determine a product number, all the way up through describing what a business is and what services you either produce or you consume, a market layer that looks at how companies are grouped together to offer related products and services. And then finally at the top, a network layer that categorizes and locates markets and communities anywhere in the world.

Now what this is going to allow us to do is to start to build capabilities that are very fundamental to the Internet, that will eventually, we hope and believe, could lead to an environment of saying: I'm a manufacturer here in Japan and I want to look for a raw material supplier someplace that has a certain product. I could go out into the Internet and use it as a tool to start to build new trading relationships and new supply chains dynamically, rather than being tied into existing relationships that have existed primarily because they were convenient, maybe not the best price, maybe not the most competitive position. Now we'll be able to use the Internet as a much more effective model, be able to tie some of these capabilities together.

To summarize some of these ideas, let me give you a couple of final thoughts on this. In the new global economy, success is not going to be defined by what you do or what I do individually, but rather, on the impact of combined and collaborative effort of those inter-connected companies. We'll see new forms of interoperability enabling companies to link together in dynamic and spontaneous ways. Or see the Internet applied not just to companies but on the space between the companies that will again enable that cooperation and collaboration. We'll see agility and adaptation and define how companies effectively participate and compete. Not necessarily on who owns the market or who owns the customer, it's who moves the fastest and who can change the easiest. We'll see a world of dynamic and fluid relationships rather than long-term stable ones. We'll see fundamental changes to the nature of our organization models. Our business standards or legal agreements are contractual of commitments and even the legal structure in which we live. And we'll work in new collaborative organizations very similar to the way that CommerceNet is evolving, that will emerge to manage the community space for the participating companies.

You know, I guess in retrospect Darwin as a scientist looking at evolution probably could have made a great Internet entrepreneur, since he clearly understood the basic tenets of success in this economy. Your survival depends on how quickly and easily you can react, how easily you adapt to new requirements, how easy you can be to cooperate with, how you can create a community to spontaneously work together to take advantage of opportunities best exploited by the group. And maybe in the end, it's really not survival of the fittest, but survival of the best connected.

So with that, if you want to learn more about the work that we're doing, our web site; there's my one last advertisement. And thank you very much for the opportunity to address you today.

[NOMURA] Thank you very much. Now I should like to pose some questions, and then open the floor for questions.

Before going into the substantive part of the discussion session, I should like to point to the difference in the proliferation of Internet usage between the U.S. and Japan, and the degree of development of e-commerce. Maybe the cause of the difference is in the difference in the communication infrastructure. In Japan, access charges are still very high.

So Mr. Whiting, if I may, in the U.S. for the general public or general consumers what is the state of the network infrastructure? And especially in connection with broadband, what is the stage of development in your country? How is it spreading?

[WHITING ] Rob may be able to answer some of this as well, but we are seeing a significant investment in networking technology throughout the United States that is dramatically increasing bandwidth and lowering the cost, although I'm sure from Rob's perspective that it's not fast enough yet. But we have seen a significant increase. New broadband technology is starting to be rolled out; we're seeing increases, but probably not as fast as what we would like. There are a lot of challenges in the U.S., just like everywhere else in the world. They may be somewhat different, but we are fighting many similar types of challenges that require us to look at new models, new approaches to implementing broadband or a new networking technology. There's a lot of existing investment in technology and networks out there right now. The new technologies that are much faster potentially challenge some of those business models. So even though we have good access, relatively low cost, we are not moving as fast as we probably could in the U.S. to get some of that bandwidth to everybody who needs it. And Rob, you want to...

[GLASER] Yes. I think there are two answers to the question. There are about a million users today who have cable modems and the broadband access to that method. And that number is probably double what it was one year ago, and next year will be double again. And next year, we may start to see DSL, which today has a very small base of consumers, maybe 100,000, going up dramatically.

The second piece of that is that about one-quarter of our users are directly connected to the Internet from a college campus, from a government office, from business. So that constitutes today a much larger percentage of the users who have broadband access, and that isn't to say that people will be using the broadband Internet at their office to do all the things that they would do at home. But it does mean that the consumer is able to get a taste of what's possible, which we see as growing demand. In most parts of the United States, the reason why cable modems are only going from 500,000 installed to 1 million this year is that the installations still have to be done by hand and an installer can perhaps do two or maybe three households in one day. So it's literally the constraint, not consumer demand; the constraint, in most cases, is not the physical infrastructure; it's the availability of the staff to do the installations for the consumer. Now that will change when PCs, Toshiba and others, are easier to directly connect to the Internet at higher speeds, which require some technical work to make Internet and network access easier. But that's the biggest constraint today in terms of the rate of network growth; not the consumer demand.

[NOMURA] You talked about the first-mover advantage, and you said that speed is important to be the first one out. Up until three, four years ago, Internet phone had low quality and people said that it could not be used. This is a question to Mr. Glaser. And if you talk about distribution of music, in terms of quality we were saying that nobody would be interested because of the quality. At your company, Realnetworks, when you launch a new product how do you go through the decision-making process? There's quality on one hand and there's speediness on the other. At the same time, you need to satisfy the customer. How do you balance the three so that you would be the first one out?

[GLASER] I think that's a very good question, because in an environment where there is so much venture capital, where there is so much enthusiasm and sometimes the enthusiasm turns into hype, there is a real danger to introducing products before they were properly ready or to bring a product to market that does this well and say, "It doesn't just do this. It does everything."

We have a process in our company where when we design a product we always go through a rigorous test of the product in the conditions of the real world as much as we can describe them. And so we don't simply build the product and introduce it. We have a set of users where we try to get the users to have a test-through with the product, and we try to teach our engineers to think about those kinds of users in the real world experience. So, for instance, even as I am here preparing for the speech, yesterday I was taking one of our products that is in the test period and I was trying it, watching something that was being broadcast from Seattle and trying it out here using the Internet itself as a test vehicle. So we've tried to bring that discipline into our company to not just design products that in theory ought to work, but actually force them to be used.

In fact, one of the biggest problems is that the Internet, or Internet businesses, is kind of like a car where the car goes from first gear directly to fifth gear, and there is no middle second, third, or fourth gear. We will create a new product, like Real Jukebox, where we went through this test period and we had 100 or 200 testers, and we knew that the first day we brought it into the market we would have 50,000 people just in that one day who would try the product. So every time we do something new, we try to make sure that we have picked a good 100 or good 200 test people. But it is hard, because if something is popular, immediately everybody jumps to it.

So the last thing we always try to do, in addition to this method of testing and trying the product, is we do a tremendous amount of capacity planning. We always tell ourselves, How many users do we think we will have in the first week or in the first day or the first month? and then we make sure that our systems will work even if there are five times or ten times that many users. We don't always manage that perfectly, but more often than not, I think we have been able to succeed in doing that. But it is not a simple answer. It is almost an organizational engineering challenge.

[NOMURA] My question directed to Mr. Nishimuro. You talked about agile management. And even though the same term agile is used, between consumer electronics and the new type of businesses it means different things. But do you have any comment?

[NISHIMURO ] Listening to Mr. Whiting earlier, mention was made that between Internet companies and users of the Internet there are differences. For our part, in order to ensure an agile response, we would have to become an Internet company ourselves. Although we cannot do it immediately, how quickly we can do it, or how quickly we can transform ourselves would be the form of competition among the big companies. Mr. Welch of GE, who talked this morning, said that GE is undergoing major internal restructuring very rapidly to become an Internet company. So it is a major challenge for almost all companies, and recognized as such and how to go about this is another challenge, testing the wisdom and agility of all companies.

[NOMURA] Mr. Whiting, you said there are the Internet companies and the users of the Internet. That's a big distinction. Let's look at a newspaper company like ourselves. We publish public newspapers and we also are participants in the Internet. If we look at ordinary banks in Japan, they have the regular outlets of banks. And that's the main focus, although they do have a presence on the Internet on top of the physical banks and branches. In the days of digitalization there are analog players on one part, and at the same time, are we going to have a replacement by totally a new set of players? Or, will a newspaper company that used to live in the days of analog era somehow be able to introduce digitalization so that we can compete in the world of networks? If you have any views, would you let us know what they may be?

[WHITING ] That is a very difficult challenge that is being faced by a number of organizations. And I think clearly Toshiba has been addressing this issue organizationally for quite a while. And there is a basic difference. I'll use the bank as an example.

There are some very large banks in the United States who use the Internet but clearly are not Internet companies. They don't think like an Internet company; they take a lot of time in creating new products; they are not trying to deconstruct their organization; they're trying to put the Internet into their existing organization. And at the same time, there are Internet companies in the U.S. who are doing banking. And I would contend that there is a very big difference between a bank using the Internet and an Internet company doing banking. And the differences are probably not as much about the technology, but more of a philosophy and core cultural aspect in the organization. Where the Internet company is not afraid to reconstruct or deconstruct their organization, take it apart and rebuild it based on what the new opportunities are, where most existing companies today that use the Internet can take the Internet and apply it to the current business processes.

A good example in the banking area in the United Kingdom is, there is a grocery store that is redefining itself as a bank, and using the Internet to do banking. So they are a grocery store that is an Internet company that does banking. Now what they've done is that they've said, "Maybe we really aren't a grocery store," and that's probably the first step of how you become an Internet company as you think about: Are you a grocery store or are you a bank or are you an information management, a customer transaction, a customer support organization? And in that case, Sainsbury's in the U.K. went through a long period of rethinking about what they were and what their real core competences are. And I think the difference between, maybe, the traditional analog newspaper and the digital newspaper is more in the analysis of what the core competences are and maybe not publishing but finding and aggregating information is more of the Internet model, whereas more of the analog one would be the focusing on the core competency of publishing in hard copy.

[NOMURA] Mr. Nishimuro?

[NISHIMURO ] Concerning the Internet company, if I may, I should like to add a little more. Jack Welch mentioned this morning that GE, in January this year, established a total company network utilization and they started the rollout of strong initiatives for using information technology. And at that time the message was: Destroy your organization; destroy your conventional business practice. That was the message at the rollout. What this means is that the conventional established organization, going into the new Internet society or information technology, may not fit well. So, the conventional practices would have to be changed or destroyed. So destroy that. So that was a very strong message of awakening. The Japanese executive management tend to use mild, moderate expressions. So when talking about a strong, radical message, we had better use English.

[NOMURA] Well, Mr. Nishimuro earlier talked about Amazon.com in a critical light. Or, at least he was critical about the Amazon.com type of management model. Among American corporations, be it an Internet company or so forth, the total capitalization may be six or seven times of the sales, whereas with Toshiba and major Japanese corporations, it is a one-to-one relationship. Mr. Whiting or Mr. Glaser?

Even though revenues are not made, large market capitalization is achieved. Do you think this is an extraordinary form of high value of the shares or an unhealthy, unsound form of bubble share market? How do you respond to Mr. Nishimuro's comment?

[GLASER] Well, I think it is very interesting to use the word bubble. I know that's a famous word here. Of course ten years ago, you would have had American executives complaining about the very high P-E ratio, price-to-earnings ratio, of the major Japanese companies and saying that this was an unfair competitive advantage compared to the U.S. capital markets. And so on one level there's an element of fashion, or as Jack Welch said this morning, waves where there'll be one wave that has a timing in Japan and then there'll be another wave that has a timing in the United States.

I do think that the Internet is a very, very fundamental source of value-creation, because unlike other technological changes, it does not just affect one industry. I spent ten years at Microsoft before I started RealNetworks, and I saw the personal computer -- the microprocessor, the form of package software -- changed the computing industry from the vertical orientation that there was, in the days of the mainframe with IBM and Fujitsu and Hitachi and others, to the horizontal organization where there were microprocessors and operating systems and applications. So that was a huge change in a big industry, maybe the largest industry in the world.

The Internet is bigger than that, because it is changing not just one industry but several industries. The Internet is changing retailing in a very dramatic way; the Internet is changing media in a very dramatic way; the Internet is changing business-to-business commerce in a very dramatic way; the Internet is changing telephony and communications in a very dramatic way. So if you add up all those different industries, the economic impact of the Internet will be ten times, twenty times, fifty times the economic impact of a change even as powerful as the microprocessor.

Having said that, it's harder to go from that observation to saying that the financial market's view of the current situation is correct or not correct. My personal opinion -- and I have to be careful about what I say because I run a public company and I don't want to go back to the United States and be visited by the Securities and Exchange Commission, but I think I can say this safely -- is that there are some companies that are the leaders in their businesses that really are creating the kind of value that in the long term will be reflected by a discounted cashflow analysis of their companies in the same way that any traditional businesses, where the stock prices today will in retrospect look like an inappropriate bet on those companies.

I think there will be many companies that either fail, or that only succeed in become good investments because they get folded into these other relatively small member of winners. So that's not to say that any particular company like Amazon or Yahoo! or ourselves may be overvalued or undervalued. It is to say that there are probably too many companies that are given strong valuations, except for the fact that many of the big companies, the successful companies, will be acquired or folded in some of these other companies that by themselves certainly don't have a chance to attain the value that is being ascribed to them.

[WHITING ] I guess, yes, you could argue that there are some stocks that are speculative. I would agree with you, Rob, on that. I think the other aspect of this, though, is that there is a fundamental new model that is emerging in the stock market. And just like historically we have used models that were based on the future prediction of earnings, discounted back to some point, and used that as one of the indications of what a company is worth, their stock price. We're now seeing a model that says that if I can pull in and aggregate 100 million or a billion users and create retention and stickiness -- the typical word in the Internet space of getting people to come back to my company and to my brand and my site and my products -- what potentially is that worth?

And when you start thinking about some of the numbers that are being reached in the Internet space, a billion users coming back to your site over a period of time or being able to aggregate a billion users or 100 million users is not inconceivable at some point in the future, and what people are betting on is that if you can get that first-mover advantage that Rob talked about and start to have people coming back to your web site, and think about that number of people recognizing your company's name and downloading your products, maybe for free today but starting to depend on it and starting to utilize it without thinking about it, what kind of revenue generation will that mean and what kind of profits at some point down the line? Because that's what the model has been based on, that a prediction that if we can aggregate a number of users and create a community among those users, that has enormous potential value. And that's what you're seeing in the stock market today.

[NOMURA] Stickiness, you mentioned, Mr. Glaser. I'd like to raise a follow-up question. In order to get the clients to stick, do you have any ways or creative ways and wisdom that you use in order to create this stickiness on the part of your networks? Do you have any device to create the stickiness you mentioned?

[GLASER] Well, the first thing we did -- and this goes back to 1995 -- is, we decided that when we had our first product, the Real Audio Player, that it would be free to consumers -- and not just for one month or only free to them if they were a non-profit or free in some temporary way -- that it would be free permanently and we made a commitment; didn't sign a contract but promised to the people that were broadcasting using our technology that we would always have a free version of our product. And I remember in 1994, 1995 when I talked to investors or other people they said, "Okay. So you're going to be free from the beginning, but then you're going to charge everybody after you have them addicted to your product. Right?" And we took a different approach. We do have products that we sell. We have an advanced Real Player and we've sold over 2 million copies of that in three years, and that's a very good business for us. But that's in a base of about 80 million free products, of 80 million free users of our products.

And so the first thing we did was, we really believed that the network was about relationships, not just about establishing a critical mass and then changing the business model and charging for things that used to be free.

The second thing we did was, as I mentioned in the presentation, we asked users to tell us who they were, and we said let us know if it is okay for us to contact you, and we assumed that it would be unless they checked a mark that said they didn't want us to contact them, but we asked them. And we found that between 85 and 90 percent of the people that downloaded our software were happy for us to contact them as long as we had a reputation that we wouldn't contact them about things unrelated to our software, and that was part of the relationship. They would give us a space on their hard disk, we would contact them for updates of our product or other things we thought were interesting to them.

That led to the third thing that we began doing about one year ago, where we made the software, actually software that not only could deliver video and audio but that could deliver new versions of that kind of software or other software to do what we called auto-updating, automatic updating, so that we took the relationship one step further and didn't just know who the user was, but we had a direct digital pipe connection into their hard-drive.

Now I say this not to suggest that I want everybody in the room to follow the same strategy, because I don't think that consumers will want to have 100 pipes into their hard-disk. But to say as a metaphor for the relationship approach as opposed to the transaction approach, I think that's a fundamental part of how this kind of network is different. You have a personal relationship with the consumer. You know who he or she is; you know how to reach him or her individually. And that is the single most powerful enabler of the new kinds of business models in my opinion from this medium.

[NISHIMURO ] Mr. Glaser and Mr. Whiting, talking about the use of the Internet... You represent different segments. Mr. Whiting, you are in a business world and you are trying to create a community there. But in the case of Mr. Glaser, you are in the business-to-consumer world. So these two, in some respects, overlap, but in some other respects they have to be considered separately one from the other.

I raised my hand to take this opportunity to speak, because as I was listening to Mr. Glaser's comments I was left with some curiosity, in relation to intellectual property, or copyright. Given my ignorance of Mr. Glaser's operations or your business, let me ask this. Today the publishers of music software are very much concerned about copyright issues. SDMI is an initiative going on -- Secured Digital Music Initiative. And they want to enhance their security level on the strength of this initiative. Mr. Glaser, what do you think of this initiative?

[GLASER] The SDMI initiative, I think, is very important both symbolically and substantively. We were part of the founding of the SDMI. It was started by the Recording Industry of America, RIAA, in association with other trade groups such as the RIIJ here in Japan, as well as the major record labels. And then they invited technology companies such as Toshiba and RealNetworks and Intel and other companies into this effort.

Before SDMI started, there was a movement, a spontaneous movement of consumers to take CDs and encode them in a format called MP-3 that was a standard part of the M-peg specification, and then to download and e-mail this music around. This didn't happen with any one company marketing it. It was sort of an idea that consumers got excited about. The reason why this idea became popular is because it allowed people to do things that they couldn't do before, which is have access to music when they wanted to, wherever they wanted to. There's a completely legal element of that, which is that if the consumer buys a CD, the consumer would want to be able to listen the songs in whatever order they want to, or if an artist hasn't been made famous yet and wants to get his or her songs out there, the artist might put them up on the Internet to be downloaded. So that's a very legal and positive element. And then there was an illegal element of this, which was a copyright violation. And so what SDMI has the idea of doing is to try to embrace the legal elements and encourage consumers to follow this path and to steer consumers away from the illegal element.

In our products we have been supporting the spirit of this approach as well. My honest belief is that the MP-3 phenomenon made the big music companies take the Internet very seriously. Instead of thinking, Hey, the Internet is something that's going to affect our business in three years or five years, or sometime in the future, the MP-3 phenomenon made the music industry say, This is a real network that is having an impact on how consumers listen to music, and we need to take action.

In my opinion we will look back five years from now, ten years from now and say that the Internet as a digital distribution medium had the same positive impact on the music business that the VCR had on the movie industry. It's almost 20 years ago when the VCR was first introduced, and there was a famous law suit between Universal Studios and Sony over the Beta Max, where Universal and U.S. movie companies felt that the VCR was going to kill the movie industry; no one would go to the movies anymore; they would just watch it when it came on television and tape it. In fact, the United States Supreme Court said that the VCR was a legal product, and now we've seen that 17 years later the movie industry is four times the size that it was before the VCR. The movie business in theaters is bigger than ever, and now, in addition to that, there is the video rental market and the video purchase market each of which is, by itself, as big as the theatrical market.

So I think the same thing will happen with digital distribution because it will give consumers so many additional ways to enjoy and experience the music that they want to. But of course today we're just at the beginning of the commercial market, so it is understandable that there is some anxiety about this.

[NOMURA] Thank you. Well, this should be the last question, then we should entertain questions from the audience.

A question to Mr. Whiting, if I may. Earlier, you talked about the supply web. This is not necessarily a word we quite understand in full. On the network, the more we have the traits -- is that the meaning of the supply web? Assuming that is true, for example, if you look at Japanese companies they do business in keiretsu form, so that they sort of source themselves from the same suppliers, so that supply and purchase is worked out in a closed network. To what extent would this have an impact towards that kind of society?

[WHITING ] Let me start off with what may be a more fundamental description of what I meant by a supply web and then follow up with your question about keiretsu. The fundamental idea of a supply web is that when you start to lower the cost and the barriers of entry for companies supplying you and being able to have multiple vendors that you can select from, you start to see a topology that looks more like an interconnection of a network model, rather than of a linear model. Now you can argue that that doesn't necessarily mean the best economic model for your company in terms of product supply and logistics and procurement. What it starts to say is that in certain situations where you want to have multiple sources for supplies or for raw materials, you are not necessarily locked into preexisting relationships. What that starts to do is give you as a procurement organization a greater degree of freedom to be able to design your supply chain, to be much more agile and much more dynamic.

I use the example of a U.S company in somewhat of a similar situation as has been the keiretsu model, and this was a large aerospace manufacturer in the United States, and they made the comment to me after they had done a very in-depth analysis of their supply chain. They had very long-term relationships with a number of very significant suppliers. And what had happened over time is that they had become so reliant on those suppliers that the actual cost of shifting to a new supplier was so high that they could not literally go to a new supplier. And the end result in the analysis that they had done of over a ten-year period that the actual cost of supplies and products that they were buying was somewhere in the range of 20 to 30 percent higher than if they could have sourced it independently of the existing relationships. Now part of that was solely because of their own organizational structure that required them to have very complex relationships with their suppliers that, in retrospect, they weren't sure that they really needed, but had evolved over time.

The bottom line that they had to deal with was that they had set suppliers as very structured, very linear. And they were really struggling with this idea of switching to being a non-linear buyer. And I think that was the idea that they wanted to get to. They felt that if they could lower the barriers to entry for suppliers, they would have greater choice; they would have lower cost in terms of the procurement management and the administration side of it, and they would probably have better quality products and supplies over a long period of time. And they felt, in the final analysis, that it wouldn't necessarily change the way that they would do business. It may change their options and their opportunities, but the key point was that they started to look at the model that said that they wanted the flexibility to do it one way or the other, not being forced to have a specific type of a supply chain, a certain linear relationship with their suppliers.

[NOMURA] Thank you. I'd like to see if there are questions from the floor. If you'd like to ask questions, please identify yourself.

[QUESTION] Sugata is my name. Bilas Marketing. I represent a company which is trying to create a business model. And my question is directed to Mr. Nishimuro, but also a question each for Mr. Glaser and Mr. Whiting.

Now, Mr. Nishimuro, my question for you is this. In doing business you talked about a north-south gap developing in terms of information availability. And I think it's true, particularly in the case of Japan, there is this gap. If you look at some particular website, that may be useful to some people, but other people may not fail to benefit just by not being able to look at a particular website. I am aware of these concrete examples of gaps between have's and have-not's. Do you think the manufacturers of computers should take an initiative to address the situation? What is your view, sir?

[NISHIMURO ] Can I respond? Should the computer industry take up this issue, to address this information gap between the north and south, what should we be doing? Well, we have to provide terminals which are user-friendly and how they can be upgraded with little effort and at low cost. Beyond that, I don't think there's anything that we can do. But that is a kind of effort the computer manufacturer has to be working on constantly. But of course there are other questions such as the cost of communications and also the availability of contents, or adequacy of contents.

[QUESTION] Thank you. Then, Mr. Glaser and Mr. Whiting, my question to you is, you talked about web network business; you talked about some success elements, four or five elements for success. It was a good lesson for me. But in terms of priority, for me attractive and comprehensive content comes first. Then, secondly, comes superior customer satisfaction. The third element would be a holistic virus market. These would be the three future success elements in that order. On this belief, we are trying to create a business model. Do you have any comments as to this ordering or prioritization?

[GLASER] I certainly wish you well in your new business development. The four points that I mentioned assumed that the business had a product that consumers wanted. And I agree with you that if you don't have a product that people want, nothing else will matter. I also think it is a good point that to have great support for the customer is also very, very important, and that is an important philosophy that we have as well. Those two elements, as important as they are, I think have been true for any business; before the Internet they have been true across geographies. In my comments I was trying to focus on the elements where you would look at them and you would say, "They're unique to the Internet and they don't necessarily have the same importance, or even exist in other areas." So, for instance, something like first-mover advantage. It's very, very important on the Internet, because the decision for what product a consumer will use happens so quickly. In manufacturing businesses and traditional businesses, for instance, there are many companies -- Matsushita is a famous example -- where they are not always first in a category, but because of manufacturing excellence and continuous improvement, they can enter a market later and make a success.

Now it may happen that this is also possible on the Internet, but at least so far, what we have seen is that the first mover gets such an advantage in terms of having most of the customers make decisions to go with one product, that the cost of switching can be very, very high. So even though continuous improvement is of course very important, on the Internet, I think, we have, at least so far, seen that there are other search engines beside Yahoo! There is Excite; there is Lycos; there is Go; there is Snap. And some of these companies have spent many tens of millions of dollars to market and promote their services. But they have not managed to close the gap with Yahoo! In fact, Yahoo!'s lead is getting bigger against those companies.

And so it is my observation that, at least for now, we are seeing that that's why first mover is such a special advantage on the Internet compared to other businesses.

[NOMURA] We have many people who'd like to ask questions, so perhaps we have to move on to the next question.

[QUESTION] Jean-Pierre Lehmann. I'm French. And I would like to say something about the English language, following remarks by Mr. Nishimuro.

My remarks actually may surprise the audience in view of my nationality. But I really do very strongly believe that English as a global language is here to stay. And this, I think, has to be simply accepted and that basic literacy in the global age is to be able to speak English and to be able to use a computer. And my sense is, if there's anybody under 62-and-a-half who doesn't speak English and wants to be part of global age, well then, he or she should go out and just learn it. In fact I know Mr. Nishimuro, and I know he speaks excellent English, so I'm conscious of the fact that I'm not making any insults here.

But I also very strongly believe, as a Frenchman, that there is a fantastic advantage of having a global language, and English is a relatively easy one, but that it doesn't necessarily in any way weaken other languages. We in France took a long time to catch up in the Internet, partly because we are fighting this silly language battle instead of concentrating on developing. But the atmosphere has changed a great deal. And if I look at, for example, myself now, my bookmarks, I would say about 70 percent are English. The other 30 percent are four or five other languages. And I see an enormous amount of creativity going on in developing web sites, and so on in local languages. So I strongly believe that the Internet can invigorate languages. So we should keep English as a global language, and then local languages will be invigorated.

And if I may, I'll just give one example which I find particularly revealing. I think anybody over the age of 52 will be familiar with the name of Daniel Convendit. He was the most famous leader of the May '68 movement in Paris, and he is now the leader of the Green Party in France. And recently I had a look at his web site. And his web site is extremely -- Daniel Cohn-Bendit in fact is a French political figure of German origin -- but his web site is extremely creative, and very French, very European. And in fact I don't know him personally; I'm not paid by him; I have no particular reason to give propaganda. But if I can just give his web site, www -- and it's called envie de politique, which in French means desire for politics -- http://www.enviedepolitique.org. /. And even if you don't speak French, go and have a look at this particular web site, and you'll see what can be done in creativity in the French language while recognizing English as a global language. Thank you very much. These were remarks, obviously, about that question.

[WHITING ] I'd want to use that just as a -- I would like to comment on your comment. I think there is one fundamental fallacy about the Internet. Everybody says that it's global. It is not. I think the companies and the people who think that they can reach international marketplaces just simply by having an Internet site and force everybody to think in the way that they think is wrong. We ran into a lot of U.S. companies that think that they can become global overnight by creating a web site that is one for all, and the single web site that anybody can get access to and, "You have to do business like I do business. And just come to my web site." That's basically wrong. I think the idea of the Internet says that you now have an obligation to think more effectively about who your customers are and deal with your customers on a one-to-one basis and deal with them in their language, in their culture, with products that are localized, and so on. So if I am doing business with a set of customers in South Africa, I have to think about what it would be like to be a South African and create a web site and create an environment -- it doesn't matter where the server is -- but to create a web site that is appropriate for them and that I think about that.

Rob made the comment about selling into the Japanese market. They have a location here and an operation here; they have people here. Just having a web site doesn't change that. Yes. We may have common languages, but you really still have to have a unique understanding of who the people are, who are your customers. And also the fact that the Internet doesn't undermine culture and the unique attributes of a particular set of people. In fact I would agree with the last person over here that suggested that, that the Internet actually provides a great opportunity to enhance the local cultures and to create a very robust, a global recognition and awareness of the unique cultural attributes and contributions that can be made throughout the world.

[NOMURA] Mr. Nishimuro, as the person who has provoked this argument?

[NISHIMURO ] Well, basically, I do agree with you that Internet has a potential to create a kind of world where all those different cultures are respected, and also to help maintain the original cultures of the country. But on the other hand, a very strong danger exist of those people who really cannot or do not appreciate the difference of the culture. In that case, if that power becomes dominant, then this is the total perish of the individual culture. And the point I'm taking up here is the danger we always have to keep in mind so that those unique cultures by country have to be honored and respected and preserved. Thank you.

[NOMURA] Other questions?

[QUESTION] I'm Ito from Optical Communication Capital. Our company just launched an Internet IT exclusive venture capital project. In Japan, in the days ahead, I believe there will be many people who would like to become like Mr. Rob Glaser. And for those young venture capital entrepreneurs we would like also to support them through our investment. But for us investors of this venture capital, what would be required of us? What would people expect from us? And also for a business like ours, if there's any advice that you could give, I would appreciate it very much.

[NOMURA] So Mr. Glaser, could we have a word from you?

[GLASER] I think it is certainly fair to say that one of the advantages that new Internet companies have had in the United States, compared not only to Japan but to most other markets in the world, has been the availability of venture capital, which is a business that began really in the 1960s, mostly in California and then grew up around the personal computer and biotechnology and a few other industries, and it's been a very potent force for the Internet.

I think in the current environment right now, there is so much focus on people starting and building companies, and there's a little bit of what we call a gold rush mentality going on right now, that it might well be the case that the best environment for a venture capital investing isn't Silicon Valley where everybody is trying to start a company, except for the people that are starting venture capital funds. But in an environment like Japan where there's a deep talent base of innovative, creative, technical talent, where you might find a high proportion of innovation happening here. The factors that I think might make it harder is because there is less of a tradition here; there is less of a sort of a network of advice; and yes, there are incredible entrepreneurs like Song-san who have done great work, or Ken Tsukamoto of Impress. So there is beginning to be a group here to draw on. And that would be my biggest piece of advice, which is to take advantage of the local talent here who have this expertise, who have been through the process.

On our board of directors is a very distinguished gentleman by the name of Mitch Kapor, who has been a friend for me something like 15 years, and I asked him to be on our board because he had founded a company called Lotus Development that was one of the most important PC software companies. And he knew all of the phases that a company goes through when there was rapid growth. And to have him involved in our company, when I could ask him about various phases we went through and various challenges, was very, very helpful. So that's probably my single biggest piece of advice, which is: Draw on the successful entrepreneurial talent that you have here in Japan and make sure that the new entrepreneurs have a connection or relationship with those pioneers. And I think if you do, this may well be a very fertile environment for the next generation of entrepreneurs.

[NOMURA] Thank you very much. Other questions?

[QUESTION] I'm from Hokusei University. Ichimoto is my name.

In June and July this year, there was so much impact in the public opinion in what happened between Toshiba and one consumer. This kind of incident, as globalization moves ahead, I believe it's going to increase and expand in its impact. And regarding this particular issue, I wonder if there's anything that we could learn from this recent incident?

[NISHIMURO ] Well, that's a tough question for me to answer. As you correctly pointed out, when we look back, since this incident broke out, there are many elements that we have to rethink.

What preventive measures we can use in the future? Basically, we will have to provide sufficient training for our customer service and also to review the corporate ethics and train our people along that line. What we regret the most at that time was that this was the very raw comment made at the time. That was the greatest regret we have. As the basic attitude for the communication in our company, I think we've lacked the effort. This is something that we will have to admit and this is something that we'll have to apologize to society for.

I apologize that my response is not very clear, but there have been many aspects that we had regretted, and also in the future we anticipate that a similar kind of incident will happen again. However, it's going to be very tough on us if we are constantly reminded of the Toshiba Internet Incident. It wasn't really from our own volition that this kind of situation had occurred. We will try to see this situation not happen again, but I think if a similar situation occurs again, I think we can cope more appropriately.

[NOMURA] Well, one or two more questions can be entertained.

[QUESTION] Tatsumi is my name. I'm a consultant in human resource affairs for a company called Recruit. After this difficult question I'd like to ask this to Mr. Nishimuro again. We are moving toward a new society, but you need destruction of the existing system to be able to make this transition to the new system. So what will be the organizational system required of the new age is my question. It's maybe an abstract question. I apologize for lack of concreteness, but can you respond to this question?

[NISHIMURO ] I am afraid that my answer to your question may be vague,too. Because if I talk about organization, what we are pursuing in concrete terms, we might lose our competitive edge. But basically, we would like to create an organization where decision-making will be quicker and fewer layers in terms of information transmission. That will be an ideal structure that we'd like to see for ourselves. How to build such an organization, I think all companies will be doing their best to create such an optimum organization.

I talked about GE, or in the case of ourselves, we exchange and compare notes, but so far we have not been able to identify the optimal structure organization. Business management for the future is a science that has to be developed. Moving forward, we are at the doorstep of such a new age.

[WHITING ] I'd like to add, to respond to that, too. One of the things that CommerceNet does worldwide every year is that we talk to a large number of senior executives about the challenges and the major barriers to implementing electronic commerce. This last year, in the United States, for the first time, organization and cultural barriers inside the company, company culture became the single largest barrier to implementing electronic commerce and use of the Internet. When we went in and talked to with these executives at length about this issue, we came to find out that some of the problems that they were running into were that existing organizational models don't fit with the Internet. It is hard to hire people; it's hard to train them; there are not enough people who understand both the technology and the issues of business models that are available in the marketplace.

So today, to really move into this new Internet space and this new environment for technology and technology-enabled companies, corporate organization, HR policies, corporate environment is that single largest challenge and barrier to this, and it really has to start at the senior executive level. There are not many companies that have the vision that Toshiba has or General Electric, where the chief executive officer stands up and says that this is the direction that they're going to go and that this is important and they're looking at a new organizational model. Many of them are saying, Oh, let marketing take care of it, or Let our corporate IT department take care of it, and they'll manage it. And what typically happens is that they spend most of the time and effort in in-fighting within the organization about: Who should own the Internet?

[QUESTION] Fukuzawa of Y's (Wise?) Corporation. I use Real Audio Player free of charge. Thank you very much.

My question is, you've been distributing Real Audio since 1995 free of charge. Now many companies are distributing their services free of charge, but not many have been very successful and have continued to grow. Why is it then that RealNetworks has been able to grow so enormously and been able to enjoy sustained success? And in from here on, what will be your growth path in the future? What would you like to do in the future?

[GLASER] Well, thank you for using our product. Now that you've used our free product for four years, maybe you will buy our Player-plus now.

Seriously, that is a joke, and it's also a part of the answer. As we build a product that is more and more useful for consumers, one of the ways we make money is we have additional features that we add or additional products, so that we can make money from that activity. And that, as I say, we've sold products to two million people -- maybe now two million and one.

The second piece is, when an audience gets big enough, it opens up the revenue opportunity for advertising in sponsorship. We recently announced that we have distributed over 10 million copies of the Real Jukebox, and in the United States we are partnering with a major Internet consumer electronics retailer and a major Internet music company; one is called 800.com, the other is Checkout.com and where they are paying us sponsorship and placement fees because we help them reach such a large audience and also such a targeted audience for exactly the products and services that they sell. And the third way we made money was selling the broadcasting software and services. We also have free versions, but we have advanced versions that we sell.

So the big-picture answer to your question is, by having a diverse set of revenue streams making money from first two and now three different significant ways and having the ubiquity of our products be something because we built a relationship on that, that we could make an ongoing revenue stream from. I think that approach has been a central part of our financial success.

Because we are a public company, I cannot give you forward statements about our future growth. I can point out that in the last quarter that we reported, our sales grew by 85 percent compared to the previous period and that our growth has been in that range of 80 to 100 percent annually for the last two or three years. And I see the opportunity in front of us to be very, very large. But we try to build an organization that doesn't promise more than we can deliver with our products and also with our financial results. So the financial results we achieve for the future, we will talk about them as we deliver them.

[NOMURA] While we are still waiting for the announcer, perhaps we can entertain one last question really.

[QUESTION] My name is Masamichi Uji-ie with Federal Express Corporation. One question I had was more towards Mr. Whiting. In the Japan market we've been trying to provide supply chain management solutions, and we've been doing those for several companies. And what we're finding out is that there's a lot of proprietary software in use by many of these Japanese companies, and we wanted to know -- you mentioned that ECO was an initiative, and I wanted to know how you're addressing these kinds of issues with that initiative.

[WHITING ] That's a really good question. And in fact Federal Express has been one of the participants in the Eco project. Thank you very much.

The challenge is a very interesting one, because if you standardize too much, there's kind of, on one hand you have everybody has a proprietary solution and everybody does it differently because they want to put in their own innovation and their own ideas and control it; the other end of the spectrum is, everybody does it exactly the same, and it becomes the least common denominator and nobody does it very well. And what we're working on within the Eco model is that we believe that there's a point in the middle that says that there should be enough innovation, allow people to do proprietary implementations in terms of their business processes and -- essentially their own unique way of doing business. But being able to define some degree of commonality in negotiation between different partners to be able to translate and integrate across multiple vendors without forcing them all to buy the same piece of software from one vendor. I mean, if I was that software vendor, I might like it that, you know, force everybody to buy my software, but... And like we've seen historically, that doesn't work when there is a dominant vendor who tries to make everybody buy the same piece of software, with the exception of maybe one company in the north-western part of the United States that we won't mention.

But generally we're trying the ideas not to try to make everybody do the same thing, but to create an environment where things really do interoperate. So you can have your piece of software, your implementation, your application, and we design it, hopefully, in a way that it can interoperate with other applications from other people. I mean, that's the model that's starting to be rolled out in many of the software companies around the world and is actually being supported by a lot of the very large software companies and a lot of the technology companies, as well as many of the supply chain management and logistics companies. I mean, I know that that's a model that FedEx has strongly supported in the idea of interoperability to be able to link in and to plug into sites and make it very easy to plug in. I think that's the future model that we're all going to go to. And clearly the companies that don't do that will eventually lose out in the market. I think the history is that if you try to do things in a proprietary manner for too long and do it in a way that becomes detrimental to the overall market, you will lose. Somebody will find a way around what you're doing and put you in a defensive position in the marketplace.

[NOMURA] Thank you very much. I think our three panelists deserve a wide round of applause for their excellent presentations.