Internet 'keiretsus': 'Net firms find strength in numbers

Have you been following the battles between eBay and Auction Watch or X.com and Wingspan? If you're wondering which companies will triumph, first take a look at which Internet "keiretsus" they belong to.

In the Japanese tradition, keiretsus are vertically linked cartels. Keiretsu members do business primarily with one another, with each controlling some major facet of commerce. For example, the Sumitomo Keiretsu is strong in shipping, heavy manufacturing, banking, insurance and technology. NEC, which is a member of the keiretsu, does a lot of business with Sumitomo Heavy Industries, finances through Sumitomo Bank and ships its goods on Sumitomo freighters. Each of the companies is independent, but there is substantial cross-ownership and board redundancy.

Keiretsu members do business with companies outside the keiretsu but give "most-favored-nation" status to fellow members. For example, if Softbank Ventures goes pitching a new start-up today, it doesn't take long for Softbank to bring up its relationship with Yahoo, in which it has a substantial investment. Or Kleiner Perkins Caufield & Byers will trot out its portfolio company Excite@Home and suggest to a new investment that a "strategic relationship" between the new company and Excite@Home could easily be arranged. Or Disney can talk to fledgling companies, holding up Infoseek and its Go network as bait.

And like the fully integrated Japanese keiretsus, each Internet keiretsu will have a full array of Internet assets: search engine, portal, online e-commerce shops, e-bank, insurance company, auction site and so forth. Whatever part each keiretsu doesn't yet have, it will build or buy into. Then the keiretsu will post links to its newly acquired companies from its own site and make these new companies work better.

The keiretsus will line up against each other like football teams. Furthermore, they sometimes will combine with one another if any one keiretsu seems to have an unassailable position.

That's the one issue the keiretsus worry about - that any one of them will gain power over the Internet the way Microsoft has power over PC operating systems and applications or Intel has power over chips. In any case, there will be nine or so key Internet keiretsus (Kleiner Perkins, Paul Allen, CMGI, AT&T, Idealab, Softbank, Microsoft, Disney and AOL) and a gaggle of wannabes.

Entrepreneur Bill Gross has used the Internet keiretsus concept at Idealab, a so-called "incubator" for Internet businesses, and it's working like a charm. Full disclosure: I'm starting a high-tech Internet incubator, YankeeTech Incubator, right next door to the Massachusetts Institute of Technology, and I have been receiving offers and some not-so-subtle threats from the keiretsus. Their message: Let us invest in your incubator fund, and your young companies will have access to our muscular Internet friends and the powerful cyberspace brands we control. Don't let us invest, and your phone calls may not be returned in your lifetime and your e-mail will somehow never hit our server.

Guy Kawasaki, former Apple evangelist and CEO and founder of Garage.com, a firm that helps high-tech start-ups find venture capital, tells young start-ups that their "killer app," which they think is unique, probably is simultaneously being developed by five other start-ups. In fact, says Kawasaki, if a similar app isn't under development by that many other companies, it probably isn't very good. Which one of these start-ups succeeds? Probably the one that is wired to the right keiretsu.

The Yankee Group estimates that there are now 10,000 Internet start-ups and business plans around - because everyone we meet can talk about nothing else. They can't all succeed; soon there will be more online pet supply stores than there are cats. But the one that gets favorable positioning at AOL or Yahoo or eBay clearly will have advantages over the others.

The traditional advice to young companies is speed at all costs. Not bad advice, but not quite accurate; what is more important is that key strategic call. Strategy has to go beyond hiring quickly, marketing heavily and running big deficits. Sooner or later, young companies will need the strategic alliance that is the mother's milk of the Internet keiretsu.

While there is nothing wrong with or illegal about Internet keiretsus, they bear watching because this is where the corporate battles of the near future will be fought. I predict that the Department of Justice will one day attack the Internet keiretsus because they will be in restraint of trade. Good luck. MacArthur tried to break up the Japanese keiretsus and failed, and I don't expect the justice department to be any more successful.