Rakuten says it's on track for 8 million mobile customers next year

Japan's Rakuten burst through the doors of the telecom market in early 2019 like an overly exuberant salesman, creating a stir with its plans to build a new virtualized mobile network using a contingent of non-traditional vendors. Yet by the end of 2020, about nine months after the launch of its inaugural 4G service, much of the excitement had faded. In a country of about 126 million people, Rakuten finished that year with about 2 million applications for service. The Japanese seemed to have little interest.

Take-up has risen since then, but not at the rate Rakuten Group CEO Hiroshi Mikitani would have expected in 2019, and not enough to offset the enormous costs of building a mobile network. Customer numbers crept past 5 million a few months ago. For the first half of this financial year, Rakuten reported a net loss of more than $900 million.

But the company now claims to have some gas in its tank. After dusting off its mobile plans, and striking a deal with KDDI to improve service quality, Rakuten Mobile finished October with 5.42 million customers. As low as that still seems next to the more than 80 million reported by NTT Docomo, it includes the addition of 192,000 subscribers in October alone, said Rakuten in its latest earnings update. That's nearly double the amount Rakuten added in July.

If it can sustain this rate of growth, Rakuten will finish 2024 with about 8.1 million subscribers. The figure is significant because Rakuten Mobile has previously said it needs between 8 and 10 million customers just to break even, following efforts to slash monthly network costs and reduce capital expenditure.

Across the entire group, Mikitani now thinks Rakuten can break even at the operating income level by December. Group sales were up 10.1% year-on-year for the third quarter, to 518.4 billion Japanese yen (US$3.4 billion), and Rakuten's operating loss halved to about JPY41 billion ($270 million). But the Rakuten Mobile numbers are not pretty. Although sales rose about 22%, to roughly JPY56 billion ($370 million), its operating loss was a huge JPY79 billion ($520 million). While this was narrower than the JPY112 billion ($740 million) it reported a year earlier, Mikitani still needs other units to pick up the considerable slack.

Not out of the woods

Unfortunately, it is far too early to say Rakuten Mobile's fortunes have irrevocably changed for the better. While it has probably benefited from a wave of customer enthusiasm for recent pricing and service changes, this could easily fade given the apparent resistance of Japanese consumers to budging from their existing providers.

There is also skepticism about Rakuten's cost projections, evident during a call with Japanese reporters earlier today. It has already cut about as much as it can from monthly network costs and now thinks it can invest as little as JPY100 billion ($660 million) in capital expenditure next year, down from almost JPY200 billion ($1.3 billion) it expects for 2023. This includes spending on the rollout of 700MHz-compatible equipment after the recent government award to Rakuten of a 700MHz spectrum license.

The so-called "platinum" spectrum band is critical because Rakuten has until now lacked any sub-1GHz frequencies. These are much better at penetrating buildings and providing wide-area coverage than Rakuten's higher-range spectrum. Customers complained they could not use Rakuten's service indoors or on subway trains, the company admitted earlier this year.

Rakuten's immediate answer is a recently struck roaming deal giving it access to KDDI's sub-1GHz spectrum. That arrangement, however, means continuing to pay a rival and having no authority over the underlying infrastructure. With its own 700MHz network, Rakuten should be able to end its KDDI relationship once and for all. But to do that, it first needs to build a 700MHz network.

Skepticism stems from Rakuten's forecast that doing so will cost it just JPY54.4 billion ($360 million) over a ten-year period. Its argument is that its existing virtualized 1.7GHz network is largely software-upgradeable to support 700MHz services. Yet no amount of virtualization can remove the need for new 700MHz-compatible hardware. What's more, lower bands usually require bigger equipment, and Rakuten's antenna units look small next to rival kit, Mikitani was told on today's call.

"What we're doing is we'll be using two RRH [remote radio heads] on the same antenna but the location, the pole, the CU [central unit], the DU [distributed unit] will be the same," said Sharad Sriwastawa, Rakuten Mobile's CEO. "From a capex perspective, it is very minimal and very easy to deploy." While units designed to support 700MHz services are typically bigger, Rakuten's 1.7GHz equipment has "good-enough antenna gain," he said.

Silent Symphony

Even so, missing from Rakuten's main update was all but a cursory, "continuing to expand" reference to 5G. The operator now boasts 98.8% population coverage on its own mobile network, and it had deployed more than 60,300 macro sites by September this year. But it missed a target of deploying 10,000 5G sites in 2022, ending the year with about 7,000, and had reached only 10,560 by September. Recent silence on the topic of 5G does not instil confidence.

The other concern is the Symphony division of Rakuten Mobile, set up to sell Rakuten's software and services to other telcos outside Japan. It received almost no attention in Rakuten's latest investor slide pack or on today's call and has struggled to make inroads with brownfield operators.

It also has little to show from its flagship deal with 1&1, a German operator building a greenfield mobile network, which has blamed slow progress on other suppliers. Amid this year's downturn in sales of mobile network products, Symphony's third-quarter sales fell 7% year-on-year, to just $84 million. Again, the relative silence does not buoy spirits.

Update: Story has been amended to include further details about 5G basestation rollout and Symphony revenues.