Loss-making Rakuten Mobile banks on new KDDI deal for revival

Japan's biggest population centers are skyscraper jungles of steel and glass above the mazy warrens of the underground subway system. People spend their days hundreds of feet above ground level or racing around beneath it. That's been a problem for Rakuten Mobile, with its deficit of sub-1GHz spectrum good for penetrating walls and providing indoor coverage. A consumer survey it carried out scored the operator worse for network quality than any of its key rivals. "Weak signal at home" and "Can't use on subways" were two of the typical tweeted complaints about its service.

This could explain why customer adoption has lagged initial expectations. More than three years since it first launched services, Rakuten Mobile has captured only 4.65 million network customers in a country of 126 million people where NTT Docomo, the market leader, serves more than 80 million.

Losses have ballooned on mobile rollout, weighing heavily on group financials. The worst may be over. Rakuten Mobile's operating loss narrowed to 102.7 billion Japanese yen (US$760 million) for the first quarter, from JPY132.3 billion ($980 million) a year before. But sales dropped sequentially (by 12%) for the first time since early 2021. At JPY96.3 billion ($710 million), revenues were up nearly 26% year-on-year but not substantial enough to propel Rakuten into profit.

Figure 1: Rakuten CEO Hiroshi Mikitani remains upbeat despite mobile challenges.
(Source: Rakuten)

The latest plan to fix this involves a new roaming deal with KDDI, a mobile rival and long-time roaming partner. Unlike an earlier costly arrangement, this one gives Rakuten access to KDDI's "platinum band," the Japanese marketing label for sub-1GHz spectrum. "The new roaming agreement will also provide access to platinum band in parts of metropolitan areas in Tokyo, Osaka and Nagoya that were not previously covered by our roaming agreement," said a Rakuten spokesperson by email.

Overall, Rakuten expects this to boost coverage from 98.4% today to about 99.9% from June, when the plan takes effect. As small as the difference sounds, it could be critical if much of the usage is happening in that 1.5% gap. KDDI ranked second on network quality in Rakuten's survey, trailing only NTT Docomo. If that translates into a better perception of Rakuten's service – with customers ignorant of the underlying infrastructure used – the subscriber base may start to grow.

No limits

Access to KDDI's platinum band is not the only big change. Previously, Rakuten customers roaming onto KDDI's network were penalized when they exceeded a monthly usage threshold. "When it reaches five gigabytes it slows to one megabit a second," said Hiroshi Mikitani, Rakuten Group's CEO, on a call with reporters. "They feel performance went down and we call this throttling." Under the new plan, branded Saikyo, there will be no such limitation.

Rakuten says it has also worked to address handover problems when a customer moves from its own network onto KDDI's. More importantly, it has made the process of signing up to its service much easier, claiming activation can now be done in "one click." Customers can avoid much of the form filling that was previously required.

It is not obvious why KDDI would share such valuable resources unless Rakuten paid heavily for the privilege. Rakuten does acknowledge that roaming costs will be higher than they were under the original plan but insists they will steadily decrease over time. It continues to target operating cost savings of about JPY15 billion ($110 million) a month.

Figure 2: Capital expenditure (Source: Rakuten)

The main financial impact of the new KDDI arrangement is on capital expenditure. Rakuten had planned to spend about JPY570 billion ($4.2 billion) between 2023 and 2025. Thanks to its deal with KDDI, it is now forecasting capex of JPY300 billion ($2.2 billion). This should help Rakuten to address some of the financial problems related to the construction of a nationwide mobile network.

"We have a challenging project in the mobile segment and the so-called burden or liability has to be reduced," said Mikitani. Shares in Rakuten Group have been sold, along with a stake in the Seiyu supermarket chain. Meanwhile, an initial public offering of Rakuten Bank went ahead in April and other divestments are being considered. "Significantly reduced mobile capex is another aspect," said Mikitani. "The cost reduction of Rakuten Mobile will also push the revenue up. It's only been a few hours since that announcement but already applications are on the rise for that new plan."

A mere software upgrade

But the capex reduction means the pace of buildout by Rakuten will not be as fast. "Rakuten Mobile will continue basestation construction for the Rakuten network area, but the speed is expected to slow down," confirmed the company's spokesperson. Nevertheless, Rakuten will want to avoid a permanent arrangement with KDDI that implies making never-ending payments to a rival.

Instead, it is hoping to receive its own sub-1GHz licenses in future. "We continue to ask for allocation of platinum bands as soon as possible," said Rakuten's spokesperson. Authorities are currently examining options for the award of spectrum in the 700MHz, 800MHz and 900MHz ranges, all of which have attracted Rakuten's interest. According to slides shown today, it is pushing for 3MHz (both uplink and downlink) in currently unused 700MHz spectrum along with a 15MHz allocation between 800MHz and 900MHz.

The concern for investors is whether any such award would kick off another round of heavy spending on network rollout. Executives, though, have continued to play down the need for additional kit with the move to new generations of mobile technology. "This is not about new technology introduction," said Tareq Amin, the CEO of Rakuten Mobile.

"It is for us just a mere software upgrade to go from 4G to 5G and a lot different from the incumbents in Japan that have to do a hardware swap, hardware replacement, cabinet replacement," he added. "Keep in mind that our capex investment is extremely low when we go to 5G and the only hardware we have to install is just an antenna at the site. The site's already been built."

The response to Rakuten's mobile launch has not been what Mikitani would have wanted. Despite offering much lower prices, along with an array of other Rakuten services, the company has struggled to excite most Japanese consumers. But after announcing Saikyo, Mikitani said he would aim to capture 24 million customers on top of 7 million business subscribers by 2030. Investors will know much sooner than that whether Saikyo has made a difference.

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— Iain Morris, International Editor, Light Reading