Rakuten's much-publicized effort to build a shiny fourth mobile network in Japan has so far been a story of kamikaze losses and stunted growth. Including the just-published results from this year's first quarter, net losses at the parent company are now approaching $3 billion on sales of about $37.6 billion since 2019. Two years since commercial launch, Rakuten Mobile remains a pygmy next to the sumo giants of Japanese telecom, finishing April with about 5.8 million customers. NTT DoCoMo, Japan's biggest operator, serves more than 80 million.

So gargantuan does the loss now look that Hiroshi Mikitani, Rakuten's persevering CEO, has excluded mobile from his long-term plan to achieve a group operating margin of more than 20% by 2030. Today, minus mobile, it is 13.5%. But the segment loss at Rakuten Mobile rose to 135 billion Japanese yen (US$1 billion) for the first quarter, a year-on-year increase of nearly JPY37.5 billion ($290 million). Analysts fear it is a profligate offspring that may never contribute to the family.

Yet the signs are that its most spendthrift days may be in the past. Company data shows a "bottoming out" of the loss for the first quarter, and a projection it falls back to around JPY120 billion ($930 million) for the second. With population coverage hitting 97% in April, the rollout of the 4G network is nearly done, allowing Rakuten to wind down its expensive roaming arrangement to piggyback on KDDI's network. "In June, 94% of the traffic will be on our own network," said Tareq Amin, Rakuten Mobile's CEO, on a call with Light Reading.

Figure 1: Rakuten Group CEO Hiroshi Mikitani is a glass-half-full guy.

Ditching KDDI's roaming service should ultimately save Rakuten between JPY120 billion and JPY140 billion ($1.1 billion) annually, equal to about 30% of Rakuten Mobile's operating loss for 2021, according to figures previously provided by New Street Research. That is not the sole reason for optimism. The only big investment job still ahead of Rakuten involves sprinkling 5G basestations across Japan, according to Amin. Everything else is in place.

"What remains to be done is not as costly or expensive as what we have done before," he said. "We purposely didn't want to put any electronics at the site but have everything sitting at these far-edge data centers. From capital buildout, I don't see what really remains. SA [5G standalone] is already launched and my network capacity today supports 25 million customers, so I have huge uproom to grow. My fiber is built out, my DWDM [dense wave division multiplexing] is built out, my IP [Internet Protocol] is built out. The amount of investment that remains is no longer something that is substantial."

5G splurge

Losses would probably have been smaller in the first quarter were it not for what appears to be an acceleration of the 5G deployment. At the end of last year, only about 4,000 5G basestations had gone up, compared with about 40,000 used to support 4G. Earlier this year, Rakuten was talking about adding another 10,000 to the 5G footprint in 2022. But the latest figures indicate that exactly 12,544 were already in commercial service by April. "Remobilization of resources happened faster than I anticipated," said Amin.

Rakuten still lags the incumbents – NTT DoCoMo had deployed 20,000 5G basestations by the end of April – but the 5G gap is no longer so extreme. More importantly, as Rakuten untethers itself from KDDI's service, which caps data usage by its customers, it can make a bigger noise about its unlimited offers. With the launch of a new pricing plan that better situates mobile in the Rakuten ecosystem, Amin is confident his unit will turn profitable next year.

Figure 2: The worst is in the past? (Source: Rakuten)

Customer growth has clearly been a disappointment for analysts. Besides comparing Rakuten unfavorably with more dynamic new entrants elsewhere, New Street Research previously reckoned it would need 20 million subscribers just to break even. Rakuten's latest tariff ditches the free-usage component included in older service plans, and the company goal now is to phase out any non-paying customers by the end of June. The danger, clearly, is that some of them take flight altogether.

"Of course, there is a risk," said Amin. "The question one has to consider is what is better – making money or showing you have a larger customer base with no money. The reason we offered the initial plan is because the quality of network was not where we wanted to be at the time. We needed forgiveness in a way. We were not meeting expectations at an early point, but with densification we have a world-class network."

Getting traffic on the superhighway

Much of the initial skepticism about Rakuten's ability to offer reliable, high-performance services has certainly receded. A champion of open RAN, the cloud and more software-based technology, Amin has built a network that measures up well against the traditional variety in most third-party assessments, defying a few critics who predicted his project would be an outright failure.

Translating the positive technical reviews about connectivity into customer growth is still the obvious challenge. If the termination of free usage upsets some users, the bundling with the latest plan of Rakuten points – allowing customers to purchase various Rakuten products – should hopefully attract others. With about 100 million customers of Ichiba, its flagship e-commerce service, Rakuten has a massive upselling opportunity.

The transition to 5G should certainly help. Frequency-constrained in 4G, Rakuten holds as much 5G spectrum as rivals and Amin says he is not scared by the prospect of rocketing monthly usage. "I want every customer to consume 200 gigabytes of data and go crazy." Capable of handling a terabyte of capacity, Rakuten's fiber backbone is hardly used today, he said. "Now I need to bring the population to this highway." How quickly he can do that has become the company's most important measure of success.

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— Iain Morris, International Editor, Light Reading