Ever since it started work on the rollout of a new mobile network in Japan, Rakuten has been recording sumo-sized losses.

They ballooned to a loincloth-stretching 225 billion Japanese yen (US$2 billion) last year, more than doubling the 2020 figure, even though group revenues grew 15.5%, to nearly JPY1.7 trillion ($14.7 billion). But the bloat may soon be over, says Rakuten.

Executives at the Japanese company are confident losses will "bottom out" this first quarter of 2022 and start to shrink thereafter. A nationwide 4G network is largely built after Rakuten hit its 96% population coverage target several years ahead of schedule.

Previously, it had to spend heavily on renting network services from KDDI, a competitor, in areas the Rakuten network did not reach. No longer.

"We save an unbelievable sum of money on roaming," said Tareq Amin, the chief technology officer of Rakuten Mobile, on a call with reporters and analysts. "It is really expensive in Japan."

Figure 1: Rakuten CEO Hiroshi Mikitani says the worst is behind his business on losses
(Source: Rakuten)

But there are two concerns for investors in Rakuten. The first is 5G. While the 4G network is now largely built, rollout of the newer technology standard is at a much earlier stage.

Quizzed by analysts about progress and plans, Rakuten Mobile CEO Yoshihisa Yamada declined to provide a 5G population coverage figure. What he did reveal is that only about 4,000 basestations have been deployed so far.

To put that in context, Rakuten previously indicated it would need 44,000 4G ones to hit the 96% coverage goal. Moreover, Yamada expects to add "at least" another 10,000 5G basestations to his company's footprint this year as he ramps up coverage.

It does not sound like a minor investment. Competitors, meanwhile, have raced ahead. KDDI aims to have 50,000 5G sites deployed by March. Softbank, another network, has an identical target.

The other concern about Rakuten's big telecom project is the rate of subscriber acquisition. Nearly two years since it launched a mobile service based on the latest cloud and software technologies, take-up has risen to just 4.5 million customers on the Rakuten network, while another 870,000 are still at Rakuten's older MVNO (mobile virtual network operator) business.

In a country of 125 million people, where NTT DoCoMo serves about 80 million subscribers, that looks disappointing.

It's all about 5G

But there are some positive signals when it comes to 5G. The first is that much of the underlying investment in infrastructure was done at the time of the 4G rollout.

"5G is not an afterthought but architected from day zero," said Amin earlier today. "Basestations have common fiber. We don't have to worry about mobile backhaul or strength of towers."

This might explain why Rakuten's 5G budget was much lower than its 4G one from the outset.

In the annual report it published for 2018, the company estimated that around JPY600 billion ($5.2 billion) would be needed for the older standard and no more than JPY200 billion ($1.7 billion) for 5G. Last year, it raised the overall estimate by JPY200 billion, but this was entirely to reflect the need for additional 4G basestations.

Rakuten's big problem there is a lack of spectrum. On paper, it has been assigned a measly 20MHz, about a fifth as much as any rival. Worse still, in parts of Japan only a quarter of that allocation has been readily available, with Japan's defense ministry occupying the rest.

Hiroshi Mikitani, Rakuten's CEO, is hopeful he can acquire relicensed sub-1GHz spectrum – which Japan refers to as the platinum band – in future.

"With the platinum band available, in terms of efficiency we can compete better with the other three carriers," he said earlier. "That is our wish."

Figure 2: Quarterly losses at Rakuten Mobile (Source: Rakuten)

But there is no similar hobbling in 5G. There, Rakuten has been awarded the same 100MHz mid-band concession as each of its older rivals, along with a 400MHz 28GHz license.

Amin also claims a few technology advantages over competitors. For starters, his mid-band network (sub-6GHz) is the only one that uses massive MIMO everywhere, he says. In the Rakuten network, this advanced antenna system puts 32 transmitters and 32 receivers into each radio unit for higher capacity and throughput.

The bigger difference, perhaps, is the level of automation Rakuten boasts.

"The operational experience of Rakuten Mobile has given the team an automated and elegant system you won't find in the industry today," said Amin.

"When you see the totality of the solution – how zero-touch provisioning works – then I think no one can compete with us."

In terms of headcount, Rakuten Mobile today employs only about 200 people in its entire operations team, a small increase on the 175 it had about two years ago, before services had been launched.

A brownfield network would typically use thousands of people for operations, Amin has previously said. All being well, this should translate into a cost advantage for Rakuten if other problems can be addressed.

Sluggish customer growth

An important endorsement of Rakuten's cost claims has recently come from New Street Research, an analyst firm with deep reservations about the project's commercial viability.

While it doubts Rakuten will be able to overcome its spectrum constraints or speed up 5G deployment, New Street Research agrees – after building its own model – that Rakuten's per-site capital costs are 40% lower than a traditional operator's and that its operating bill is 30% less.

But in a research note issued today, the analyst firm doubted if the transition from KDDI's network to its own would save Rakuten much money. It spends only about JPY40 billion ($350 million) annually on that arrangement, a figure that equates to less than 10% of Rakuten Mobile's operating loss for 2021.

Capex across the whole of Rakuten Mobile – including the retail footprint – also remains high. Last year, it made investments totaling about JPY485 billion ($4.2 billion), according to a chart in its financial documents, up from roughly JPY325 billion ($2.8 billion) in 2020. It expects capex in 2022 to remain at last year's level.

Investors will be even more worried about the failure to attract customers, though. Heavy discounts and the promotion of unlimited data services do not seem to have enthused many Japanese consumers, judging by Rakuten's customer numbers today.

Mikitani signed off today's investor call by saying "20 million or 25 million is not impossible" for Rakuten Mobile in future, implying he views those numbers as an ambitious target. Yet New Street Research previously reckoned 20 million was the level needed just to break even.

Comparisons are often drawn between Rakuten and Reliance Jio, where Amin previously worked.

The Indian operator also built a greenfield network using the latest tech. Unlike Rakuten, however, it has usurped India's telecom throne, overtaking rivals to become the number-one provider.

Circumstances might have been different, and Jio undoubtedly benefited from government favoritism. But Rakuten's Japanese revolution risks being a much quieter affair.

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— Iain Morris, International Editor, Light Reading