dollar craneYou can learn a lot about your company from usage behavior in Japan. Just like the Japanese language has a system for incorporating foreign words, when Japan latches onto particular Internet services like it did with Yahoo and Twitter, they become so important and widspread that they take on a trajectory all of their own.

In the case of Twitter, for instance, Japan found mass adoption faster than the US did. In fact, it still holds the highest Tweets per second record for New Year’s day. Within a short time of setting up shop at Joi Ito’s Digital Garage, Twitter made Japan its testing ground for new features and monetization strategies.

Japan is not nearly the largest market in Asia, but with 128 million people, 40 million of which live in Tokyo’s metro area, where strong 3G & LTE networks, tons of carrier WiFi & WiMax access and high incomes are pervasive, you can’t find a better place to test the logic of an internet business. Japan, unlike China, does not block the most successful companies from abroad. Rather, Japan’s internet border is porous. As long as the service’s simplicity prevails over the language barrier, usually the best service wins.

In Osaka, when you say hello you’re asking “Have you profited?” What needs to be stressed here is that in Japan, the internet  — whether desktop or mobile — is a business. Recently, when Facebook declared it had 19 million monthly active users in Japan, it was considered a victory over the legacy Japanese social network Mixi. But Mixi’s valuation peaked with it’s $3 billion IPO in 2006, and neither Facebook nor Mixi have been “winning” in Japan because they were only creating usage and not revenues. Zynga Japan, which came from a US/Chinese company acquisition, recently closed its offices, and neither company has been a pioneer of advertising, in Japan.

The difference in Japan is that there was no period where mobile was unmonetized. They had internet businesses on feature phones, dominated by gaming. It’s true that Japan’s feature phone market slowed its adoption of smartphones, which is why when I used the word “mobile” this past week Japanese colleagues winced, and why the mobile advertising market is still behind the US in terms of sophistication.

The mobile business in Japan started in the 90s with NTT Docomo’s feature phone platform, and two internet powerhouses DeNA (pronounced D-N-A, and who acquired the iFund company ngmoco and GREE together reigned over the feature-phone social gaming segment. Both companies are larger than Zynga yet unfettered by Facebook’s social graph because they had their own social networks. Now, as iOS and Android proliferate, DeNA and GREE no longer are the gatekeepers. However, splitting social and gaming was key in bringing a new balance in internet business.

In the last year, an amazing thing happened. An aging games studio called Gungho, which had a hit with Puzzles and Dragons for iOS and Android, and is creeping up on GREE in terms of revenue and market cap, and is actually above Zynga, at $2.3 billion based on only 8 million monthly active users. Gungho did not use social for distribution, the game succeeded just the on power of the app stores and TV ads.

Product advertising is what Japan does best. Actually it’s hard to have an understanding of GREE and DeNA from the US because although they do advertise here but they mainly do corporate advertising; they advertise for example the unfathomable GREE brand rather than advertise their products’ characters. This completely confounds Antti Sonninen, Country Director for Rovio Japan. In Japan “everywhere you look in there is only product advertising, even on trains you have well-known cartoon bears telling you not to get your hands caught in the doors.”

It’s true, last week in Tokyo it seemed like every possible reference that can be made to a game, anime or other folk hero is used, and used in 360 campaigns that include TV, vending machines, vertical pricing banners at restaurants, animated digital banners and print banners over your head in the subway advertising products. The going stat is that 70 percent of gaming companies are running TV commercials in Japan.

So, with that background it’s possible to fathom how Japan is the battleground for not just social, but social, publishing and advertising, or the full set of internet services. And today, Japan is a battleground where two Korean services have grown wildly and have come under Japanese control. Line  has 40 million Japanese users of its mobile social network and comes from NHN, a Japanese subsidiary of Naver. Kakao talk, which was launched in Korea is now 50 percent owned by Yahoo Japan and has 50 million users across Asia. Line and Kakao embody an evolution of social networking, gaming and advertising that reflect years of refinement.

These social networks are pushing out new features come from Facebook, Instagram, Path (the Digital Garage’s latest tenant) as well as What’sApp and WeChat, the behemoth from Tencent with 300 million users. But they are also innovating on how they monetize those networks.

Line isn’t wasting time wondering if one of his characters is the next hello kitty. Instead, Line is using a character licensing model so that emoticons, or “stamps” can become little atomized ads localized for each market. For example before I left for Tokyo I downloaded Line and found Snoop Lion and T-Pain stickers in #lineapp. I offered a cultural exchange with many of the Japanese I met, Snoop Lion for Line duckies and bunnies. To me the concept of emoticons as ads, at least for entertainment characters, should make it to the top of the Native Advertising leaderboard.

What remains to be seen for Japan is whether even Japanese entrepreneurs can take advantage of this market. Being open to foreign internet services provides certain tailwinds, like having sizable Facebook and Twitter user bases means app developers can use those services as identity options for signups. Services like Hotpepper.jp (the Yelp of Japan) uses Line links to facilitate multitasking. But beyond that, it means stiff competition and fewer options for copy-to-Japan businesses.

Though most VCs would admit they invested in a groupon clone, they are now more interested in businesses that fix something that definitely solves a problem in Japan, not just a problem peculiar to western markets. And its is not like there are no broken industries in Japan. I was surprised not to see an Uber crop up since cabs started at $7.60, and perhaps a Japanese Netflix would do well as new DVDs cost $40, which is $10 more than the external DVD drive that I bought for my MacBook Air.