2015 Digital Industry Outlook ① The "individual" in the online world has finally begun to drive the real economy ~ Takashi Honma, Executive Officer, Rakuten

The digital industry continues its dizzying transformation. Yet some point out that right now represents a major turning point. As we enter 2015, we asked key industry figures to share their outlook for the sector's future.

(Interviewer: Yuzo Ono, Director of Planning and Promotion, Digital Business Bureau, Dentsu Digital Inc.)

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Three Keywords: Sharing Economy, Changes in the Content Domain, and IoT

──Looking back on the recent state of the internet, what are your thoughts?

Honma: Since around last year, I've felt the power of the "individual" growing stronger. Of course, this has been a focus in the online world for some time, but until now, it was about the "individual" as a "target" in personalized marketing. However, going forward, I believe the "individual" as a "subject" will become much more significant.

──Could you give an example?

Honma: I believe the "individual" as an agent is now driving the real economy, both directly and indirectly.

One example is the sharing economy. Sharing services like Uber (a ride-hailing service using a smartphone app) and Airbnb (a sharing site where travelers can stay in private homes or spare rooms offered for rent) have entered Japan. Rakuten has also launched Rakuma (pictured), a flea market service, and C2C services are expanding. While the transactions are between individuals, companies provide the matching and payment services. Having companies involved behind the scenes reduces risk and creates safer transaction opportunities. In San Francisco, there are about three services like Uber, and it's said that this has led to approximately 40% of drivers who were affiliated with taxi companies leaving. They are moving to services like Uber, which allow them to work whenever and wherever they want.

The second change is in the realm of media and content. In the US, there's a paid video streaming service called Netflix. Last year, it invested about 10 billion yen to create the original drama "House of Cards," which was distributed to tens of millions of users and became a huge success. Building on this success, a second season is currently in production. This content was actually produced using data science. By analyzing Netflix's big data, they determined that political dramas are watched to the end, and that works starring Kevin Spacey or directed by David Fincher are highly popular. Analyzing individual data led to the creation of major content originating online.

Regarding individual content creation, YouTubers are gaining significant attention. This phenomenon is underpinned by two factors: the established ecosystem on Google's platform, where monetization through advertising is possible, and the widespread accessibility of video production equipment. The convergence of individuals with the ability to create content and the supporting ecosystem is generating new content that is driving the real economy.

The music business has also undergone significant changes. While the subscription-based streaming model, offering unlimited listening, has become mainstream instead of downloads, the sheer volume of content—even with access to a million songs—makes selection difficult, increasing the importance of curation. Rather than choosing based on hit charts, people follow playlists created by others, again involving individuals. While Spotify made this a core feature, Beats Music took it further. DJ sets curate and connect music around a single concept or worldview. Users follow favorite DJs from a large pool, meaning music becomes a context created by individuals, rather than just individual songs or albums. Additionally, indie music has expanded online. While indie labels were once seen as a fallback for those unable to break into the major labels, today it's a style where individuals share their remix tapes, DJ sets, and tracks for everyone to listen to. We've shifted from an era of passively consuming music produced by record companies to one where music and context created by individuals are shared.

Third is IoT (Internet of Things). For example, wearable devices are essentially sensors with communication capabilities. While worn by an individual, they continuously transmit specific personal data. This represents the ultimate big data. When such data surrounding an individual converges in the cloud and data science is applied, it enables a scheme to provide that person with optimal solutions across all aspects of their life. IoT isn't merely about connecting objects to the internet; it heralds an era where data science and sensing technology enable agents (software acting on behalf of users) to autonomously optimize one's life. This shifts the focus from manufacturers simply selling products to users to building relationships with individuals. The frightening aspect here is the question of whom to trust. Beyond just personal information, there's the potential for even your lifestyle patterns to be altered, which requires careful consideration.

Mission-driven entrepreneurs are beginning to transform social systems

──When considering the power of individual information dissemination and ecosystem utilization, large-scale success stories do indeed appear to be thriving in the US. But what about Japan?

Honma: That's a crucial point. Take IoT, for example. It should be a real opportunity for Japan, where our master craftsmen's skills could shine through sensing technologies. However, unlike Silicon Valley, regulations often negatively impact innovations like IoT and the sharing economy, creating significant hurdles. Flexibly applying regulations will be a major challenge.

──Regulations may be an obstacle, but could it also be that the underlying culture and mindset are different?

Honma: If culture and mindset were fundamentally different, it's hard to imagine US-born platforms like Twitter, Facebook, and YouTube becoming so popular in Japan. Selfies are also trending recently, and what's happening around smartphones is essentially the same in both the US and Japan. Personally, I see it more as a regulatory issue than one of culture or mindset.

──Then, looking globally including Japan and the US, what do you think is currently lacking in the internet industry?

Honma: It's not so much a lack, but what I've been noticing lately is the growing influence of entrepreneurs with strong social purpose and big visions. Everyone is taking a mission-driven approach to thinking big more seriously. This stems from growing confidence, fueled by successes like the sharing economy. While Uber and Airbnb originated in Silicon Valley, there's a spreading entrepreneurial spirit there focused on solving problems through technology. More companies are prioritizing improving society over going public as their founding purpose. Supporting this culture is an army of lawyers who challenge regulations. When individuals transact directly, they transcend existing B2B frameworks, clashing with laws and regulations designed to protect vested interests. Entrepreneurship and legal support have enabled them to overcome these obstacles, ultimately achieving success that surpasses established businesses. Entrepreneurial approaches that drive systemic societal change will likely increase further. However, Japan still lacks such role models, making this challenging. There's a tendency to focus more on economic success, making it harder to move toward changing society. It would be beneficial if people emerged who can focus on Japan's current problems, consider how to solve them, and think about how to use innovation to make it happen. This is an area I feel is lacking.

In IoT, the interconnection and integration of devices is crucial.

──What are your thoughts on recent device trends?

Honma: The tablet market in the US is shrinking rapidly. They're insufficient for handling major business tasks, while smartphones keep getting bigger, leaving tablets in a rather awkward position. Prices have also dropped sharply, but PCs are getting cheaper too.

──So, does this mean the market will polarize between PCs and smartphones going forward?

Honma: Because smartphones exist, we're seeing an increase in various Bluetooth-connected devices, and I believe wearables and IoT will become more widespread. Since smartphones can also handle data analysis and processing, it's becoming a model where data processed locally to some extent is then uploaded to the cloud.

──Wearables come in many forms. How do you see them evolving?

Honma: The scope covered by a single wearable device will narrow, leading to more specialized devices. However, the lack of any inter-device coordination is a key challenge moving forward. What will be needed is the ability to link IoT devices with each other and orchestrate them. We need to build a world where devices connect automatically at various levels—program-based integration, cloud-based connectivity, and so on. Alternatively, there's the idea of using routers with central control functions. For home automation, connecting individual devices to the network can be quite challenging. So, instead of focusing on each device, the approach is to ensure reliable connectivity through the router. Furthermore, robots could serve as interactive user interfaces, understanding and controlling the home environment.

──Automobiles are also becoming increasingly IT-driven. What are your thoughts on this?

Honma: Innovation in automobiles is progressing slowly but surely. For example, in the US, the basic approach for car audio is either streaming via Bluetooth from a smartphone or connecting via USB to play content. Beyond the amplifier and speakers, the same phenomenon occurring with home audio systems is happening. Furthermore, with smartphone screens getting larger, car navigation systems are being replaced by smartphones. A startup called "Automatic" provides a device that connects to your car. It features functions like assessing your driving score, recommending gas stations based on your remaining fuel, and outputting fuel efficiency and mileage data linked to GPS. Furthermore, pay-per-mile auto insurance has started. This uses the device to collect data like mileage and driving patterns, setting premiums based on factors like distance driven. Technologies like autonomous driving and lane-changing systems are also evolving. Cars could look completely different in ten years. Support services for daily life are also increasing, such as valet parking services like "ZIRX" (offering parking assistance at hotels and restaurants). Smartphones are changing how we use cars and enriching our lives.

──Drones are also gaining attention.

Honma: In terms of communication capabilities, the combination of drones and wearable cameras like GoPro is incredibly interesting. Chinese companies have made it possible to mount GoPros on consumer drones. This allows for easy capture of footage previously unattainable. Beyond movie production, applications include agriculture and real-time mapping at construction sites. There's no doubt drone utilization will expand further. The foundational technology exists; we're now at the stage of determining what apps and businesses will leverage it. This will likely be driven not by large corporations, but by individual users.

──With IoT, even everyday items are increasingly connected to the internet. How far will this trend progress?

Honma: Current IoT involves vertically integrated systems where individual devices cover everything from hardware and software to communication, apps, and the cloud. As long as this continues, the expansion will likely be limited. However, once common platform standards emerge enabling device interoperability, the possibilities will be virtually limitless. Another factor is the ecosystem supporting hardware development, like the crowdfunding platform Kickstarter. This enables the development of products tailored to user needs in an overwhelmingly short timeframe, making them compatible with IoT. As an IoT ecosystem leveraging individual power, there's also Quirky, a community-based startup that turns personal ideas into products for sale. People with diverse skills related to product development collaborate on a single platform, and the resulting rewards are shared among everyone involved. This service is like crowdsourcing, but it's specialized to cover the entire manufacturing process from upstream to downstream. Additionally, the trend of releasing dormant intellectual property to create new products is also expanding.

An era where even small-scale personal curation can be monetized

──There's a contrast between physical books and e-books, or CDs and music streaming. What are your thoughts on the relationship between the physical and digital realms, as seen in such examples?

Honma: I believe books are different from music or video. Music and video can be experienced identically regardless of the method or medium used to deliver them. In other words, the media experience and the media source are completely decoupled. Books, however, are integrated. You can't physically turn pages with an e-book, nor can you tap to turn pages on a physical book. The experience of reading on paper is entirely different from reading digitally. This means the tension between analog and digital in books is fundamentally different from the tension in music or film. In the case of books, some authors don't want their work released as e-books. But creators in music or film likely don't share that mindset. For example, you wouldn't find a film director who says, "I'm fine with it being shown in theaters, but I don't want a DVD released." Physical books differ from e-books in their physicality, and that physical stimulus can sometimes spark thought. That's why I believe paper and digital will coexist.

──Regarding music, there's a shift from downloads to streaming. Will this expand to e-books as well?

Honma: Several all-you-can-read subscription services exist in the US too. However, the nature differs from music or film. Publishers likely tolerate these models to revitalize long-tail content. They exclude bestsellers but offer older library titles via streaming to boost engagement. The idea is to monetize moderately popular music or books—rather than leaving them untouched—by actively circulating them. This approach is common online.

──I think monetization is crucial for nurturing content healthily. What are your thoughts on that?

Honma: I think creating and distributing work as a creator is different from converting your time and skills into money. The former is like being a YouTuber, while the latter involves taking on work through crowdsourcing to create content. Mechanisms for individual creators to monetize are gradually expanding too. For example, there's the LINE sticker marketplace. There are also ways to monetize through media re-editing, like creating Twitter compilations or music playlists where the revenue is shared.

──I see. So it's not about creating content from scratch, like composing music, to monetize it. Instead, there's a method where you curate and monetize based on existing content, like creating and offering tasteful playlists.

Honma: We're entering an era where individuals can monetize by sharing their thoughts and creative endeavors, rather than relying on large media outlets. This trend of individuals sharing content in this way shows no signs of stopping.

With matching and payment systems, anything can be combined.

──C2C models are expanding in various forms. Will this trend grow even more?

Honma: Since matching and payment form the foundation for everything, countless combinations are possible. In fact, numerous services have already emerged in the US. For example, "DoorDash" is a delivery service that provides restaurants unable to offer delivery with a website to accept orders and personnel to make the deliveries. It connects people who want food, people who can deliver it, and restaurants. There's also a service called "TaskRabbit." This is a service where individuals act as handymen, matching people who want something done with people who can do it, and providing a payment function.

──With the emergence of such sharing economy-like services, it seems like all sorts of unexpected new services could rapidly appear. However, as peer-to-peer transactions increase, the potential for disputes also seems likely to grow.

Honma: That's certainly a valid concern. But disputes have always existed in various forms, even with services provided by established companies. I don't think the internet itself causes more problems. Furthermore, disputes can be reduced by effectively utilizing systems like online ratings. For example, with Uber, drivers below a certain rating threshold stop receiving orders. To promote C2C services, safety, security, and trust are paramount—even before convenience—so companies are very careful about this.

──Regarding social media, we're seeing increased specialization and diversification of features. What are your thoughts on this trend?

Honma: I believe there will always be waves. Switching costs for social media aren't high, so even if users gather due to network effects, they can collectively move to another service. Since predicting this is impossible, social media is truly challenging.

──What impact do you foresee big data having on online media?

Honma: Big data is meaningful when analyzed and utilized, so data science is crucial. Data will undoubtedly change directions and decisions. I believe everything—social systems, media content, e-commerce—will shift toward data-driven approaches. Ad technology is a prime example, and it will also impact areas like traffic congestion prediction and power self-sufficiency forecasting.

──There's also debate about whether big data should be closed or open. What do you think will happen in the future?

Honma: It's a sensitive issue, but generally speaking, I think it will move toward openness. If data is kept closed, it becomes problematic if the entity holding that data cannot be trusted. Without ensuring data transparency and internet neutrality, people cannot feel secure entrusting their data. I also think hardware will follow a trend toward openness. Tesla Motors, the EV company, released all its patents, and that makes economic sense. By opening up intellectual property, if another company uses it to develop electric vehicles, Tesla can supply batteries to them, opening new markets and driving down battery prices. I believe opening up information and hardware to increase the scale and dynamism of the economy is a positive trend.

──Amidst this flood of massive information, will curation services gain more attention going forward?

Honma: I'm not sure if curation services themselves will gain attention, but the need for curation is increasing. For example, e-commerce via smartphones is expanding rapidly, but users can't choose from the vast number of products available. They want some kind of filter to provide them with items suited to them. I think we'll see the emergence of something like an agent that integrates data science and sensing, in addition to "human curation" targeted at individuals, rather than just simple personalization or recommendations.

Expectations for advertising as the pivotal element in the value chain that builds ecosystems

──How do you view current internet advertising?

Honma: I think the precision is evolving. However, it hasn't yet reached the point where ads genuinely benefit users. The challenge is how to move beyond serving ads based solely on advertiser convenience to a point where users actually feel positive about seeing them. For instance, seeing persistent ads for a product you've already purchased isn't appreciated by users. Ideally, ads should leverage data science to interpret intent from behavior and purchase history, then proactively suggest other information users might potentially seek.

──Recently, the negative aspects of the internet, such as account hijacking and the "right to be forgotten," have become more apparent. What are your thoughts on this?

Honma: Becoming a trusted company or platform is crucial. If problems occur even once, people will leave that platform. Fulfilling this responsibility is essential, and I imagine it's very challenging for major social media companies.

──What will be the major challenges and opportunities after 2015?

Honma: As mentioned earlier, the shift from the "individual" as an object to the "individual" as a subject is a major theme. I want to focus on the interconnected fields supporting this: IoT, data science, the evolution of media, and the sharing economy. In the past, the internet evolved with individual services spreading like fads. Now, however, it impacts entire social systems and the real economy. We must connect the internet's changes with broader societal shifts and consider what will emerge from them. It's unwise to be overly fixated on existing businesses; preparing for change is crucial. That said, if regulations negatively impact innovation, progress stalls. Striking the right balance is the challenge.

──What kind of talent will be needed in the internet industry going forward?

Honma: Engineers who creatively understand business and can also program themselves.

──What do you expect from the advertising industry?

Honma: Advertising is a major linchpin in the value chain that builds ecosystems. I hope the advertising industry will focus on supporting new ecosystems and media from that perspective. In internet business, advertising is the energy, the gasoline. I expect them to take on challenges from that viewpoint and play a role in expanding and strengthening the ecosystem.