Rakuten spectrum deal would risk breaking the bank

Parts of Japan's mainstream press seem to think the cloud really means a cloud, as in the water-shedding grey vapors that float above our heads. In a report about Rakuten Mobile, Nikkei Asia writes: "The company is counting on its virtualization technology, which replaces most network hardware aside from antennas with cloud-based software." Ditch those servers, upload your network code to a passing cumulus and cut costs.

Sadly, software can't replace hardware. The cloud, as in the data-center version, might shift its location, change how companies pay for it and even reduce the quantity of servers in use. But hardware isn't about to cloudily evaporate. If it were, then Rakuten Mobile would probably look in much better financial shape and the world would be awash in greenfield networks.

It is three-and-a-half years since the Japanese company switched on its cloudy network, promising a revolution in what had been a market of three long-established mobile operators. Yet customer numbers have only just inched past the 5-million mark in a country of more than 120 million people where NTT Docomo, the market leader, serves more than 80 million.

That's despite multi-billion-dollar investments in building a nationwide network. While critics have continued to voice skepticism about the reliability of Rakuten's new-look technologies, its network performs well against rivals, according to third-party monitors (although obviously with far fewer customers). Rakuten has also undercut its competitors on pricing and bundled in the online services offered by Rakuten Group. What's gone wrong?

Spectrum shortage

A major problem is Rakuten's lack of spectrum, and specifically the lowband frequencies that any operator needs to provide good wide area and indoor coverage. Spectrum is bountiful in higher ranges and good for supporting high-speed services, but signals do not travel as far and can be stopped by the flimsiest of barriers. To penetrate walls, windows and other city obstacles, companies ideally need spectrum below the 1GHz threshold. And Rakuten has none.

What's more, its long roaming deal with KDDI, one of the three big mobile rivals, did not even include permission to use KDDI's lowband spectrum until a new agreement was announced earlier this year. Access to those airwaves could be critical in Japanese cities where people spend most of their waking hours either in skyscrapers hundreds of feet above ground or subway trains below it. In a May presentation, executives revealed that "weak signal at home" and "can't use on subways" were common tweeted (X'd?) complaints about its service.

But a deal with KDDI means paying a rival and relying on its infrastructure. The alternative would be to acquire sub-1GHz frequencies of its own and adapt networks to support them. And after some deliberation, Rakuten has now made a request to the Ministry of Internal Affairs and Communication for allocation of the so-called "platinum" band, covering the 700MHz-to-900MHz range, a Rakuten spokesperson confirmed to Light Reading. Those airwaves, said the company, are essential for "optimal connectivity."

The big questions are whether this will spur customer adoption and what impact it will have on Rakuten's financials. If the latest roaming agreement with KDDI does not lead to a notable improvement in subscriber numbers, there is little reason to believe Rakuten's acquisition of a sub-1GHz license will make a difference, either. The real problem, then, might simply be the unwillingness of stubborn Japanese consumers to budge service, no matter what they are offered.

Mounting losses

The investment needed to support a sub-1GHz service might also be substantial. A possible clue is in the sharp spending cuts that Rakuten linked to the signing of the roaming agreement in its first-quarter earnings report. Between 2023 and 2025, it would be able to slash capital expenditure by about 300 billion Japanese yen ($2 billion), to as little as JPY270 billion ($1.8 billion), it said. This would leave the company spending a tiny amount next year and in 2025 after investing about JPY200 billion ($1.3 billion) in capital expenditure in 2023.

Cuts are needed to improve Rakuten's financial health. Since 2019, the parent company has racked up net losses of $5.4 billon (at today's exchange rate) on revenues of about $49 billion. Losses are shrinking, but Rakuten has estimated it needs between 8 and 10 million customers just to break even. At the current rate of subscriber growth, that could take about three years. On the operating cost side, cuts seem to have gone about as deep as they can. Monthly network costs were down from about JPY39 billion ($260 million) in September 2022 to roughly JPY26 billion ($170 million) in June. The target is JPY24 billion ($160 million).

Former Rakuten Mobile boss Tareq Amin played down the need for additional investment to support a sub-1GHz service, insisting this would largely be a software job. But the forecasts suggest otherwise, and any license would probably come with some coverage obligations. If that's the case, Rakuten might have to rip up its latest spending projections and hope that a bigger commitment will deliver the customer growth it so badly needs.