For such a passionate believer in disaggregation, Tareq Amin had seemed an integral part of Rakuten, conceiving and leading the initial phase of the Japanese company's telco strategy. A Rakuten separated from Amin risked looking as powerless as a network chip minus the software. So his abrupt departure at the start of the week triggered speculation about a strategic U-turn by Rakuten. With group net losses amounting to about $5.5 billion over the last four-and-a-half years, there was even the suggestion Rakuten might quit some of its telco activities.

But there is certainly no sign of that in the company's latest earnings update. As with previous announcements, when Amin was still on board, the Mobile and Symphony telco businesses were given the most airtime by Hiroshi Mikitani, Rakuten's founder and CEO. After recently obtaining access to KDDI's lowband spectrum in an improved roaming agreement, Mobile has been able to slash costs and make some progress on attracting customers. It now sees a path to breakeven ahead. And Symphony claims to have nearly plugged gaps in its portfolio that had hindered sales progress with brownfield telcos.

Even so, Mobile clearly has a long way to go. Network customer numbers hit 4.91 million in July in a country where NTT Docomo, the market leader, serves more than 80 million. At the current monthly rate of growth, Rakuten is gaining about 1.2 million customers a year. According to its latest cost and capex projections, it needs between 8 and 10 million to break even. Unless the subscriber growth rate improves, that would take at least two-and-a-half years.

It leaves Rakuten Mobile today reporting sales for the recent second quarter of about 52.2 billion Japanese yen ($360 million), a 13.3% increase on the year-earlier figure, along with an operating loss of around JPY78.9 billion (US$550 million). That's a big improvement on the JPY116.1 billion ($810 million) quarterly loss Mobile reported one year ago, but it has been driven by a super-aggressive cost-cutting program. Last September, Rakuten Mobile was running up monthly network costs of about JPY39 billion ($270 million). By June, spending had fallen to JPY26 billion ($180 million).

Scrimping and saving

The ultimate target of JPY24 billion ($170 million) is just JPY2 billion ($14 million) less, and there is only so much a company boasting such low-cost, highly automated operations can cut without crimping its ability to serve customers. "Including human capital, maybe we have less than one tenth of competitors," said Mikitani when answering questions about efficiency. "A new roaming agreement was concluded, and this is a big factor – roaming costs reduced dramatically, and they will be going down further."

On the plus side, Rakuten seems to be well past the heavy-lifting stage of network buildout. And its network performed well during speed tests carried out by Opensignal earlier this year, delivering faster uplink and downlink 5G connections than rivals (on average). Any quality issues seem down to Rakuten's lack of sub-1GHz spectrum needed for inbuilding coverage. The new deal with KDDI is a temporary fix. Eventually, Rakuten hopes to obtain new 700MHz licenses from Japan's government – with decisions expected later this year.

The concern for any investor is about another big round of network investment in this so-called "platinum-band" spectrum. Rakuten was originally planning to pump about JPY570 billion ($4 billion) into capital expenditure over the 2023-25 period. After concluding its deal with KDDI, this figure was cut to just JPY300 billion ($2.1 billion). But that does not factor in any spending on 700MHz or adjacent bands.

Rakuten Group's five-year share price in Japan (yen) (Source: Google Finance)

Rakuten insists the amount would be low, saying it can reuse existing basestations and update software. Unlike other telcos, it owns the software that powers its radio access network and therefore does not have to pay license fees to any third parties. But if the amount is so low, and 700MHz is of such critical importance, why are estimates not provided?

The other big worry for investors is the seeming reluctance of Japanese consumers to shift from established networks to Rakuten's lower-cost one – even when it can promise an additional array of e-commerce and entertainment services. Unless there is evidence of a dramatic change in behavior when the new roaming deal with KDDI takes full effect, Rakuten could be in serious trouble.

Not forever and ever, Amin

Unfortunately, for Mikitani, the telecom situation in Japan is not the same as it was in India when Amin led network strategy for Reliance Jio. In that crowded, price-sensitive market of relatively expensive, poor-quality networks, the new entrant – backed by Reliance Industries' billions – quickly made an impact, thanks partly to government favoritism. By contrast, Rakuten faces some of the most technically advanced network companies on the planet in a country where consumers are willing to spend heavily on technology.

Like the prospective "brownfield" customers of Symphony, all have had to maintain ageing "legacy" networks while deploying 5G and examining new architectural choices. And for the telco vendor part of Rakuten, business remains relatively slow after the sales surge that happened in the final quarter of 2022, with second-quarter revenues down 18.5% year-on-year, to just $72 million. A chunk of this was generated internally, with Mobile classed as a customer, although Rakuten is not disclosing how much.

Rakuten Symphony's quarterly revenues ($M) (Source: Rakuten)

After Amin's departure, Mikitani was keen to dispel talk of a "leadership crisis" during a questions-and-answers session with reporters on today's call. Many of Amin's duties across both Mobile and Symphony will now fall to Sharad Sriwastawa, formerly Mobile's chief technology officer. That could bring "operational strength" and be a "more positive situation for us," said Mikitani, in what could be interpreted as a sign of unhappiness with Amin's performance. But Ken Hyakuno, Rakuten's chief operating officer, had kinder words, saying the company "appreciated his efforts."

His are big shoes to fill in the telecom industry, though, and it is unclear if either Sriwastawa or Mikitani can do it. He was not only an industry figurehead for network transformation but a rare case of someone who combined eloquent sales patter and charm with technical knowhow and vision. If the tune remains the same, Mobile and Symphony must be careful to avoid hitting any wrong notes now the lead conductor has gone.

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— Iain Morris, International Editor, Light Reading