Re: 6094 FreakOut, Inc.

1. Basic Information

FreakOut, Inc. ("株式会社フリークアウト") is an online marketing agency and a developer of programmatic marketing tool. The company will be listed on Tokyo Stock Market Mothers Section on June 24.

FreakOut's business is not that different from traditional ad agencies, purchases "ad spots" from media (contents providers) and resale it to advertisers. And the company sometime acts as a subcontractor for other ad agencies. But the difference is that, as the clients’ agent, FreakOut does most of advertising process with algorithms.

2. Programmatic Marketing

Before analyzing FreakOut's structure or managements, you have to understand "programmatic marketing," or program (algorithm) based marketing deployed in online ad industry.

Advertisers and the ad agencies used to post ads "on a web site" where they bet their potential customers will visit. However, deploying programmatic marketing, advertisers can post ads "on a particular visitor's internet device (ex. PCs, smart phones.)" Advertisers can display ads to those who would likely have interest in advertisers’ product. In other words, advertisers are able to choose who should see their ads.

That new discretion for advertisers is materialized by technology called "real-time bidding" or RTB. In process of RTB, advertisers determine whether to post an ad on each visitor’s device based on the cookie, user-agent, OS, IP address etc. When they judge the visitor would be potential customer, they "bid" to purchase "ad spot" for that visitor. Then the ad of highest bidder will be shown on the visitor’s device. Of course whole judging and bidding process is executed by program and typically completed in 100 milliseconds.

Such programs used by advertisers are called "Demand Side Platform" or DSP. Advertisers give several instructions such as visitors' property, bidding price range, etc to DSP then DSP automatically finds qualified visitor, starts bidding and posts ads.

3. FreakOut's Business

FreakOut's mainstream business is to develop such DSP and to operate and maintain the platform for advertisers. Although it is confusing, FreakOut’s DSP is also named "FreakOut." In addition, FreakOut, Inc. supplies the DSP to online ad agencies which do not have enough skill to develop and maintain the platform.

As of February 2014, FreakOut serves for more than 4,000 clients including over 95 online ad agencies. Major clients are listed below.

• GMO NIKKO Inc. ("GMO NIKKO株式会社"): Online ad agency.
• s1o interactive. inc ("株式会社エスワンオーインタラクティブ"): Online ad agency and "ad trader".
• K.K. DeAGOSITINI JAPAN. ("株式会社デアゴスティーニ・ジャパン") : Publisher of dictionary like magazine.
• Lion Corporation ("ライオン株式会社") : Multi-line consumer toiletry products manufacturer. One of the leading consumer goods producers in Japan.
• FROM SCRATCH Co., Ltd. ("株式会社フロムスクラッチ"): Consulting firm specialized in internet marketing.
• NTT ADVERTISING, INC. ("株式会社エヌ・ティ・ティ・アド"): Multi-line advertising agency. Wholly owned subsidiary of the largest communication company in Japan.
• Japan Airlines Co., Ltd. ("日本航空株式会社"): One of major airliner in Japan. The predecessor company filed chapter 11 in 2010.

4. Miscellaneous Findings

• FreakOut is one of two major DSP developers in Japan. Another is MicroAd, Inc. ("株式会社マイクロアド"), a subsidiary of online ad pioneer Cyber Agent, Inc.
• FreakOut's business name and products’ name ("FreakOut" and "MOTHER") are inspired by American musician Frank Zappa. He had led a band called "The Mothers of Invention" and released an album titled "Freak Out!" in 1966.
• The head office is somehow flushy for Japanese standards. Too Silicon Valley-ish.
• In the latest fiscal year ending September 2013, FreakOut suffered from huge loss at its subsidiary (yet to be specified). Net profit was pushed down by JPY 70 million to JPY 86 million in the latest fiscal year because of the loss occurred at subsidiary.