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On April 18, US Oracle announced it would invest $8 billion (approximately 1.2 trillion yen) in data centers in Japan over the next 10 years. Additionally, US OpenAI also announced its entry into the Japanese market.

Along with other major US cloud companies like Microsoft, the total amount of announced investments in Japan this year is approaching 4 trillion yen. What is behind these US cloud giants’ emphasis on data centers in Japan?

The Spread of Generative AI and Response to Security Risks

One underlying factor is the rapid spread of generative AI (artificial intelligence). Among user companies, the demand for cloud services to train and operate large language models, which serve as the foundation, is increasing. German research firm Statista predicts that the market size of data centers in Japan will reach approximately $24 billion by 2028, expanding to 1.4 times the size of 2023.

However, security risks associated with cloud services are emerging. Surveys by sources like the Nikkei indicate that about half of companies lack sufficient regulations regarding disclosure requests from authorities in various countries. Many Japanese companies depend on storing data overseas, with some even placing data in countries like China and Russia, where concerns about censorship exist, making immediate action necessary.

With heightened awareness of security and privacy, regulatory authorities in various countries and regions are increasingly emphasizing data sovereignty, managing their own data domestically. The Japanese government also restricts cross-border transfers of personal data under the Personal Information Protection Law. Japanese companies are being urged to manage sensitive data domestically.

To meet these needs, major US cloud companies are announcing large-scale investments in Japan one after another. The focus on Japan extends beyond the AI field. The world’s largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC), is investing about 1.3 trillion yen to mass-produce computing semiconductors at a factory built in Kumamoto Prefecture by the end of 2024. They have also decided to invest about 2 trillion yen in constructing a second factory aimed at commencing operations in 2027.

Previously, TSMC concentrated its production bases in Taiwan, but considering the risk of Chinese aggression, it is diversifying production bases to countries like Japan, the US, and Germany. The construction of the Kumamoto factory is part of this strategy, and the importance of Japan, where related industries gather and semiconductor demand is high, may further increase. This situation is likely to continue influencing the actions of major cloud companies.

AI as an Essential Element for Japan’s Economic Growth

In Japan, a country prone to earthquakes and high electricity costs, data center costs are considered higher compared to overseas. Nonetheless, US Amazon Web Services (AWS) and Google, which compete with Microsoft in cloud services, are also embarking on large-scale data center investments domestically.

Microsoft President Brad Smith stated about Japan, “With an aging and declining population, AI is an essential element for sustainable economic growth.”

Going forward, we should continue to pay attention to the potential of AI and the trends of major cloud companies for Japan’s economic growth.

In March 2024, NVIDIA, a leading semiconductor company, announced the launch of the next-generation AI semiconductor “Blackwell B200” GPU.

What is B200?

“Blackwell B200” is a combination of two chips of the same size as the company’s previous products, and the number of transistors that greatly affect performance is 208 billion, compared to 80 billion in the previous main product “H100”. Approximately 2.6 times.

What is the price of B200?

The B200 is expected to ship in the latter half of 2024, and while pricing is still unclear, it is expected to be higher than the “H100” and “H200.”

However, the announcement that major cloud service providers such as Amazon, Google, Meta, Microsoft, Open AI, and Oracle are expected to adopt this new semiconductor underscores the significant impact this technology will have on the industry.

NVIDIA is not only accelerating the advancement of AI technology but is also solidifying its position as a key player in the industrial sector.

As the processing power of GPUs improves, there is no doubt that AI will be increasingly utilized. The development of generative AI is also expected to increase the production of content that requires substantial data volumes, such as videos and music, which were previously difficult to generate. Thus, the demand for data centers is expected to continue rising.

We will continue to monitor industry trends.

In February 2024, OpenAI, famous for Chat GPT, announced a new video generation AI named “Sora”. As of April 2024, however, “Sora” is not yet available to the general public, and its pricing details remain undisclosed.

“Sora” is a next-generation AI system that builds upon OpenAI’s large-scale language model, GPT-4, with further enhancements.

With just a simple instruction, it can easily create high-quality videos up to one minute long.

While video generation AIs existed before, they could only produce videos of a few seconds, making “Sora” superior in both length and quality.

The launch of “Sora”, equipped with GPT-4, is undoubtedly set to significantly impact the world.

This article will provide a detailed introduction to the video generation AI “Sora”, including its overview, pricing, user experience, and applications.

Examples of “Sora” Creations

The following videos are actual examples created by “Sora”:

1. Balloon Head Prompt: Sunny, our balloon-headed boy, embodies the blue sky feeling of boundless potential that we felt when we first began using the tool. Our heads filled with so many ideas, it felt like they might POP.
    

1. Gold Record Bullying Prompt: Exploring space-time with Sora. This isn’t going to replace the filmmaking process, rather, it’s offering an entirely new way of thinking about it. Not restricted by time, money, or other people’s permission, I can ideate and experiment in bold and exciting ways.

Pricing of “Sora”

As of April 2024, the pricing structure for “Sora” after its public release has not yet been announced. However, based on previous patterns like Ghat-GPT, it is likely that both free and paid versions will be released, with more advanced features available only in the paid version. Initially, all features might be offered for free, with some becoming paid later on.

Applications of “Sora”

The potential future applications of “Sora” include:

1. Movies and animation videos

2. Virtual reality (VR) experiences

3. Educational explanatory videos and tutorials

4. Breaking news and weather forecasts

5. Product promotion videos

6. Short videos for social media

7. Personalized message videos

8. Virtual tour videos for real estate properties

9. Virtual event videos like fashion shows

10. Automated editing of sports highlights and commentary videos

11. Simulation videos in the medical and scientific fields

12. Documentary videos about historical events and figures

13. Music videos and live performance videos

14. Video manuals for automobiles and household appliances

15. Visualization and reporting videos of stock market and financial data

16. Presentation videos for architectural and interior design

17. Emergency evacuation routes and safety procedure videos

18. Language learning conversation scene videos

19. Customized videos for personal memories and anniversaries

These are just examples, but the ease of creating videos can cater to viewer demographics and needs, allowing for the creation of original videos. The ability to easily produce virtual imagery, which used to be costly, will likely be a major advantage.

Video Generation AI and Data Centers

Plans for new data centers dedicated to generation AI are being announced in succession. Given the large data capacity required for easily creating videos, the demand for data centers is expected to continue growing.

NVIDIA announced its fiscal year earnings for January 2024 on February 21st. The annual revenue reached $60.9 billion, marking a 126% increase from the previous year, with operating profit soaring to $33 billion, an increase by 7.8 times.

For the fourth quarter (November to January), the revenue was $22.1 billion, a 265% increase year-over-year, exceeding the company’s forecast of $20 billion. The operating profit for the quarter reached $13.6 billion, a tenfold increase, with an operating margin surpassing 61%.

In response to the strong performance, the after-hours stock price surged by over 7%. The sales forecast for the February to April period is set at $24 billion (±2%), with a confident outlook stating, “We will continue to grow in 2024, 2025, and beyond.”

Half of data center sales are for the cloud

Demand for data centers continues to drive NVIDIA’s performance.

Data center revenue has been increasing quarterly, with the third quarter reaching $14.51 billion, a 279% increase. The previous quarter saw revenue of $10.32 billion, a 171% increase, and the first quarter reported $4.28 billion, a 14% increase.

In the latest quarter, more than half of the data center revenue came from major cloud providers.

Jensen Huang, the founder and CEO of NVIDIA, stated, “Accelerated computing and generative AI are at a turning point. There is a surge in demand worldwide across corporations, industries, and nations.” He claims that the data center installation base amounts to approximately $1 trillion and predicts the emergence of data centers worth $2 trillion that will power global software over the next four to five years.

Will NVIDIA Continue Its Dominance?

The demand for data centers is expected to grow further. With the expansion of generative AI, the demand for high-performance semiconductors is surging, and NVIDIA is extending its lead in securing orders.

On March 19th, Hitachi, Ltd. announced a collaboration with NVIDIA in developing AI services. The partnership aims to digitize railways and infrastructure facilities in virtual spaces to improve maintenance efficiency.

Moreover, NVIDIA and Chinese EV companies have announced an expansion of their partnership to enhance autonomous driving technology.

While NVIDIA’s dominance seems likely to continue for the time being, we will keep a close eye on the company’s developments.

As introduced in the previous article, Sakura Internet plans to invest up to 100 billion yen over the next five years to enhance its capabilities.

Sakura Internet’s President Tanaka mentioned in the context of future management strategy, “Next term, we plan to hire up to 200 new personnel, which is double the number of this term. We aim to improve the development and operational capabilities of our data centers that store servers.”

The proactive stance is backed by the sustained expansion in demand for data centers. With the broadening base of the cloud, along with the emergence of new technologies requiring substantial computational power such as generative AI, there is a global shortage of data centers capable of performing vast computations efficiently.

Moreover, in November last year, albeit conditionally, it was selected as the provider for the foundational part of the government cloud used jointly by the government and local authorities, with the condition being “to meet all technical requirements by the end of FY2025” (Minister Kono for Digital Affairs). Following the four American entities—AWS Japan, Google Cloud Japan, Microsoft Japan, and Oracle Japan—this marks the first entry by a Japanese company.

The stock market responded to the announcement of the first government cloud certification for a Japanese company, with the stock price surging immediately after the announcement. The year-on-year price increase for 2023 placed it at the top among the listed companies on the Tokyo Stock Exchange Prime.

Capitalizing on its Japan-based operations

Unlike overseas IT giants, Sakura Internet rents out infrastructure necessary for cloud services, such as virtual servers, through its data centers, all of which are located domestically. All developers work in Japan, providing the flexibility to tailor cloud functionalities to customer needs with ease.

Among the ministries and local governments that have taken the lead in adopting the government cloud, over 90% of the 175 issued accounts have chosen AWS. However, there appears to be a significant number of local authorities wishing to use Sakura Internet’s “Hinomaru Cloud” for the protection of personal information, though the expected increase in revenue is projected to be only a few billion yen annually.

What’s important are the indirect benefits such as increased visibility and trust gained from entering the government cloud market. The company plans to leverage this to explore new business opportunities with manufacturing giants wanting to streamline operations using generative AI and major travel companies working on translation services for international visitors to Japan.

Additionally, last year, it was decided to invest approximately 13 billion yen over three years in the development of a cloud service for generative AI, “High Power”, at its data center in Hokkaido. The Ishikari Data Center is equipped with servers featuring the high-performance NVIDIA H100 Tensor Core GPU by Nvidia, aimed at uses centered around generative AI such as large language models, with the “High Power PHY” service commencing in January this year.

President Tanaka also mentioned as a medium to long-term outlook, “If we cannot provide ten times the current capacity in 3-5 years, we will not be able to meet the domestic demand.” He is seeking stable supply from Nvidia in collaboration with the Ministry of Economy, Trade and Industry to support the development of the Hinomaru Cloud.

If the data center enhancement continues in line with the GPU procurement outlook, the investment could simply amount to 100 billion yen. The generative AI-related business has a high-profit margin, and the profits generated here will be used as capital for additional investments, with the shortfall being considered for bank loans and other financing options.

Looking forward to further growth

While American IT giants are also intensifying their efforts in Japan, Sakura Internet is expected to continue its aggressive stance. Leveraging its local presence in Japan, we look forward to its further growth.

Sakura Internet, an Internet service provider that operates its own data centers equipped with Japan’s largest capacity and fastest communication lines, along with advanced security and robust infrastructure, has made a significant stride in the cloud services sector.

The company’s Infrastructure as a Service (IaaS) offering, “Sakura Cloud,” was certified in November 2023 by Japan’s Digital Agency in its call for cloud services to support government cloud infrastructure development. This certification marks a first for a Japanese company, as previously only foreign entities such as AWS, Microsoft Azure, Google Cloud, and Oracle Cloud Infrastructure were selected. This provisional certification is contingent on meeting all technical requirements by the end of fiscal year 2025.

To fulfill these requirements, Sakura Internet must significantly enhance its cloud functionalities in a short period, which hinges on acquiring exceptional IT talents capable of developing sophisticated software. The company plans to allocate grants primarily towards securing IT personnel, with a strategy to hire up to 200 individuals in the fiscal year 2024 and accelerate technological development in data storage and encryption.

Launching Cloud Services for Generative AI

Leveraging its certification as a government cloud provider, Sakura Internet is also venturing into meeting the demands of large corporations utilizing generative AI.

The development of “High Power,” a cloud service tailored for generative AI, was initiated, recognizing the critical need to ensure stable supply of computing resources for AI to advance Japan’s digital society. The service, equipped with “NVIDIA H100 Tensor Core GPUs,” commenced on January 31, 2024, with the “High Power PHY” bare-metal series. With a planned investment of 13 billion yen over three years, the company aims to expand this service further.

The newly launched “High Power PHY” features servers with eight “NVIDIA H100 Tensor Core GPUs” each and inter-server communication capabilities of 200GbE×4, designed specifically for uses such as large-scale language models central to generative AI. Moreover, the service is set to be provided from the Ishikari Data Center, operated entirely on renewable energy sources, enabling CO2 emission-free development of generative AI.

Industry Spotlight on Sakura Internet

Sakura Internet’s selection as a government cloud service provider, previously dominated by foreign companies, has garnered significant attention. Kunihiru Tanaka, the president of Sakura Internet, expressed a firm commitment to fulfilling the plan to enhance functionalities by the end of fiscal year 2025, reflecting a strong resolve. The future developments of Sakura Internet are highly anticipated within the industry.