Rakuten embraces disruption
Japanese e-commerce giant bets big on mobile virtual networks using technology it hopes to sell around the world. By Francesca Regalado in Tokyo
In early March, Rakuten executives Hiroshi Mikitani and Tareq Amin returned to Barcelona, the site of their fateful first meeting. It was on the sidelines of the Mobile World Congress in 2018 that Amin, then an executive at the Indian mobile firm Reliance Jio, had sold Rakuten founder Mikitani on the idea of building Japan’s fourth mobile network and using a then-untested technology to do it.
“I told ‘Mickey’ that this was a very risky approach,” Amin, now chief technology officer of Rakuten Mobile, told Nikkei Asia in an interview. “If we want to disrupt, we will need to do things differently.”
Building a domestic carrier that can compete with the likes of SoftBank is already an ambitious goal, but Rakuten is aiming even higher. It also hopes to sell its novel mobile infrastructure technology, constructed on open cloud-based software, to customers overseas, pitting it against traditional telecom infrastructure builders like Ericsson and Huawei.
One of the best sales pitches to foreign operators would be a successful rollout of its technology at home. Two years into commercial operations, however, Rakuten Mobile has incurred a US$2-billion loss for parent company Rakuten Group, whose share price is down around 17% this year, and its customer base remains a modest 5.5 million in a country of 125.8 million.
With analysts and investors worried about strain the rollout is putting on Rakuten’s healthier businesses, the company is entering a crucial phase for its mobile ambitions to pay off.
Rakuten, better known as Japan’s homegrown answer to Amazon.com, joined the mobile market in April 2020. Its aim was to offer rates that would entice users away from the entrenched trio of SoftBank, NTT and KDDI.
The market was ripe for such a move. Japan’s mobile prices were the highest among the Group of 7 countries, according to a 2020 government survey, and then Prime Minister Yoshihide Suga was calling on operators to slash rates by as much as 40%.
Unfortunately for Rakuten, companies heeded those calls. Less than a year after the launch of Rakuten Mobile, the monthly fee for 20 gigabytes of 4G data had dropped by more than 60% in March 2021 from the previous year, according to a government survey.
Rakuten also had to follow the incumbents in raising data limits. This was costly since the company was paying to lease KDDI cell towers in areas where it had not yet filled in its own network.
The company says it has kept subscriber numbers deliberately low to reduce fees to KDDI. Both the company and analysts expect customer acquisition to pick up in the second quarter of 2022, a turning point for profitability when a promotional year of free mobile service ends and the next phase of switching off KDDI roaming begins.
Mikitani has set a goal of reaching 10 million subscribers.
That could be tough in a market where competitors offer a full range of price points. SoftBank Mobile, for example, is SoftBank’s premium brand, while its Y!mobile caters to midtier customers and Line Mobile serves as a cheap entry point.
“If [subscribers] want a cheap plan, they just stay within the ecosystem. It means people are stickier and less likely to change carriers,” said David Gibson, a senior research analyst at MST Financial.
The relationship with the e-commerce business could help, said Neale Anderson, head of Asia telecoms research at HSBC.
“There are many Japanese consumers who are going to be interested in improving their points or cashback earning power via Rakuten. And that’s the area where I would expect to see the strongest growth,” he said, but he added: “Worst case here is that they can’t attract customers and the economics become unsustainable.”
For now, the financials are grim and have forced some hard choices on the parent company. Rakuten Mobile recorded a loss of ¥421 billion ($3.45 billion) in the fiscal year ended in December.
Rakuten Group sold an 8% stake to Japan Post last year in hope of bolstering its flagship e-commerce and logistics business, where it is losing market share to Amazon Japan. The idea is to tap Japan Post’s logistics expertise to offer lower shipping rates to merchants. Rakuten Bank has been spun off for listing later this year to enable it to lend more, since the mobile unit has constrained capital.
“The investment on Rakuten Mobile was more than they planned and that has constrained the ability to invest in the rest of their business,” said Gibson at MST.
Amin told Nikkei Asia that the mobile rollout was bringing benefits elsewhere in the group. New mobile subscribers were spending 70% more on shopping in the Rakuten marketplace, he said.
And then there is the opportunity to sell its innovative technology abroad.
The vision for Rakuten the mobile player that Amin pitched to Mikitani in Barcelona rests largely on two innovations, known by their acronyms vRAN and O-RAN.
A virtualised radio access network, or vRAN, contrasts with a conventional mobile network, where information transmitted by cell signals is processed at the physical antenna site. In a vRAN, this is done by software in data servers, or the cloud, enabling simpler antenna designs that need less space, hardware and maintenance.
Open radio access network, or O-RAN, technology allows interoperability between various pieces of kit, meaning network operators can shop around for different parts of their system.
That is a potentially big change. Many of the world’s leading telecoms companies, from AT&T in the United States to NTT in Japan, have been in the mobile business since first generation networks were launched in the 1970s, and have typically been locked in with one equipment provider for decades.
“Mobile network architecture just hasn’t changed. The industry has been stuck with very little innovation,” said Anderson of HSBC.
Each subsequent generation of mobile technology required new hardware, and operators were generally locked in with one of five providers — Sweden’s Ericsson, Finland’s Nokia, South Korea’s Samsung and China’s Huawei and ZTE. The prospect of interoperable equipment is especially enticing for operators pressed by Western governments to phase out Huawei and ZTE from their networks.
Rakuten says its technology offers flexibility and lower costs, including up to 30% cheaper operational costs than with traditional networks.
“There was no playbook or guidelines. We had to do everything from scratch ourselves,” Amin said. “There were countless technical challenges, as can be expected. But that is the beauty of a software-based architecture — whatever problems there are you can fix them because they are software.”
While Rakuten’s technology works for its 5.5 million subscribers in Japan, the question remains whether it will work to the scale of its competitors. SoftBank Mobile, a telecoms disrupter before Rakuten, has nine times the number of subscribers.
Another question is whether the technology will support networks as old as 2G, which global industry leaders expect to remain in use in rural areas until at least 2025.
With those questions in mind, incumbent operators appear unwilling to abandon legacy infrastructure in favour of full virtualisation.
Investors, meanwhile, have focused ever more on the toll that the mobile rollout is taking on Rakuten’s healthier business segments.
This means the clock is ticking for Rakuten, analysts say.
“The longer you’re in the market, the less advantage you have,” said HSBC’s Anderson. “You become another struggling operator with very high capital intensity.”
“Mobile network architecture just hasn’t changed. The industry has been stuck with very little innovation”
NEALE ANDERSON Telecoms analyst, HSBC