November 11, 2022
A few years ago, inspired by the success of Reliance Jio in India, Hiroshi Mikitani decided Japan's mobile telecom market was similarly ripe for disruption. More than two-and-a-half years since the Rakuten boss launched his own mobile network, no one would think it today. Just 5.2 million people use the Rakuten Mobile service, giving it a meager share of a technology-obsessed market home to 126 million people. Mikitani's network seems to have gone down with the Japanese like a sirloin steak at a Buddhist retreat.
Operating losses have swelled like a trainee sumo wrestler's girth while most Japanese consumers stick with NTT DoCoMo, KDDI and SoftBank, the traditional operators. The results just out show they hit 256 billion Japanese yen (US$1.8 billion) for the first nine months, a 72% year-on-year increase, even though group sales were up 14%, to about JPY1.36 trillion ($9.8 billion). In 2018, before its telecom ambitions came to light, Rakuten made an operating profit of JPY161 billon ($1.2 billion) on sales of JPY1.1 trillion ($7.9 billion). A telecom supertanker has been hitched to an Internet speedboat – creating a huge restraint impossible for stakeholders to ignore.
Rakuten's executives would not have it so, insisting the mobile unit drives take-up of other Rakuten services, but they must be disappointed it has not been given a warmer initial reception. They are still pouring money into network rollout, envisaging capital expenditure will reach JPY300 billion ($2.2 billion) in 2022. This, however, would be JPY15 billion ($110 million) less than Rakuten spent in 2021, and the figure is expected to continue dropping next year as Rakuten completes buildout.
Figure 1: Rakuten CEO Hiroshi Mikitani dreams of disrupting Japan's telecom market.
Having put some 50,000 4G basestations into service, it plans to add another 10,000 next year, bringing population coverage to 99%. Costs are expected to fall as more customers shift to its own network from using KDDI's, under an expensive roaming agreement for Rakuten. Amid reports of job cuts, Rakuten has also confirmed that its highly automated network unit is becoming even leaner.
"In the first phase, when you build a mobile network, you invest a lot in the organization and headcount especially around basestation construction," said Tareq Amin, Rakuten Mobile's CEO, on a call with reporters earlier. "The staff we would have required to continue the build and investment into the build – obviously, as the number of basestations reduces – such staff we are transferring to other functions in the group."
Still, Rakuten is evidently struggling to fund rollout. It previously sold $2.2 billion worth of shares to investors including Japan Post Holdings and is currently planning an initial public offering of its Rakuten Securities business. Discussions with Japanese banks about access to loans are also in progress, Rakuten confirmed today. None of this, of course, was in the original script.
There are some glimmers of light. For one thing, all the customers on its network are now at least paying for a service, after the ditching of free offers and related promotions. Average revenue per user has consequently risen, and overall telecom sales are also going up – even if they are not as high as Rakuten would have hoped. The latest results show revenues at Rakuten Mobile grew 62.5% for the third quarter, to about JPY89.3 billion ($640 million), compared with the year-earlier period.
Operating losses at the unit have also now shrunk sequentially for two consecutive quarters, in line with earlier guidance. Continue that trajectory and Rakuten will eventually break even. But without speedier take-up of its service, the turnaround could be slow and painful. Today, that process is like watching an articulated lorry perform a three-point turn in a country lane.
Figure 2: (Source: Rakuten)
Investors have taken encouragement from the latest news on spectrum. This week, Japan's government said that companies holding frequencies in the valuable 900MHz "platinum" band – needed for good indoor coverage – should bear the costs of any transfer to Rakuten, which clearly anticipates a future reallocation. Deploying that in Rakuten's existing network will cost little, Amin has promised. News of the government report on spectrum sent Rakuten's share price up 4.5% on November 8, although it has dropped 40% so far this year.
Unlike nearly every other operator on the planet, Rakuten owns the network software it is using. It has also been able to strike favorable deals on hardware with local Japanese manufacturers. Besides helping it to reduce costs, technology ownership gives Rakuten something it can sell to operators in other countries. Rakuten Symphony, the supplier unit responsible, has made revenues of $315 million over the five quarters of its existence, Amin revealed for the first time today, and has $3.1 billion in bookings.
Lock-in risks and a 5G gap
But Symphony's customers obviously cannot expect to save money like Rakuten via technology ownership, and its efforts to sell a broad range of products have generated some concern it could become much like other big vendors.
"In essence, the difference between Rakuten and Ericsson is none," said Yago Tenorio, the networks architecture director for Vodafone. "One claims it is open and the other doesn't, but the fact is you are buying it from Rakuten and you are locked in and that is a risk."
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Another potential problem for Rakuten is the gap its rivals have opened on 5G rollout. For all its talk of using the latest and greatest technologies, Rakuten had only 6,440 5G basestations classed as "macro" sites in service at the end of September, compared with more than 20,000 at NTT DoCoMo, Japan's biggest operator. Slideware shows the Rakuten number has not grown much in the last few months. Amin promises an "acceleration" in the coming quarters, but he has not divulged any firm targets.
From a telecom perspective, Rakuten is increasingly like two separate companies. One leads a software revolution in the sector, pitches persuasively about its cutting-edge technologies and has a captivating presence wherever it shows up. The other is saddled with losses and struggling to attract customers. A takeover of the latter by the former is what Rakuten now needs.
— Iain Morris, International Editor, Light Reading
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