Rakuten pays heavily for entering Japan’s already crowded mobile carrier market

Next month, Japanese billionaire Hiroshi Mikitani will take the stage at the Rakuten Optimism conference, his e-commerce firm’s biggest event of the year.

Optimism isn’t a word one associates with Rakuten Group Inc these days. The company appears in crisis mode, having lost money in 15 of the last 16 quarters. Shares trade at levels not seen since the aftermath of the financial crisis, when Japan’s stock market was in the doldrums.

Once the great hope for a Japanese online commerce and tech giant to match the likes of Amazon.com Inc or Alibaba Group Holding Ltd, Rakuten has been hamstrung for more than half a decade now with a problem entirely of its own making: the decision in 2017 to enter Japan’s already crowded mobile-carrier market.

In retrospect, that move has been a disaster. Rather than look to the future, where Rakuten could have dominated efforts to grow sectors such as mobile payments or artificial intelligence, Mikitani focused on the past. It’s easy to see how the chief executive officer was swayed: The lucrative mobile market has meant big profits for the incumbents, Nippon Telegraph & Telephone Corp’s Docomo, KDDI Corp and SoftBank Corp. The three remain among the nation’s largest and most profitable firms, despite repeated and increasingly pointed government attempts to reduce their fat profit margins.

While mobile losses have been narrowing, profits still seem distant, and its finances are worsening. In the past year, Rakuten has been forced into some ugly decisions to make up for this glaring hole. It has sold for yields of up to 12 percent, eye-watering rates for a company that gets nearly 85 percent of its revenue from Japan, where the central bank continues to hold rates below zero, and the overall market is shrinking. It ditched a stake in storied chain Seiyu after just two years, giving up on plans to make an online supermarket business to compete with Amazon’s.SoftBank overcame similar reputational struggles after its own highly expensive entry to the mobile market in the mid-2000s. But Masayoshi Son’s firm had an ace in the hole in the form of exclusive access to the iPhone, thanks to Son’s relationship with Steve Jobs. Japan’s mobile market might have already been mature then, but the shift to smartphones was just beginning.

It has raised nearly 300 billion yen ($2.1 billion) through a stock sale that further diluted already unhappy shareholders. Earlier this year, the company disposed of about a third of Rakuten Bank Ltd, the financial unit, in a public listing. Next, it’s planning to bring to market the highly successful online brokerage, Rakuten Securities Holdings Inc, having already sold 20 percent of the firm to Mizuho Financial Group Inc last year. None of this is enough: Bloomberg Intelligence analysts say the firm may look to sell more assets to plug funding holes through the end of next year. With options running low, that might include its 8.5 percent stake in ridesharing giant Lyft Inc, or Spanish peer Cabify.

Perhaps there’s another option: selling the company outright back to Mikitani. Rumors that the firm was mulling a management buyout surfaced in the magazine Sentaku last week, and were the first good news investors have seen in months (the firm declined to comment on the report.) Such a move might appeal to Mikitani — a Michael Dell-style take-private that would allow him to restructure at leisure. He and his wife already hold more than 25 percent of the firm. But financing such a move was much easier when Dell did it in 2013 than it would be now. Rakuten badly needs access to the capital markets to stay on top of its debt repayments.

The firm is pinning its hopes on fixing mobile. Nearly half of its most recent earnings presentation was devoted to the lofty goal of becoming Japan’s number one carrier. Hopes rest on boosting network quality, with reception woes the chief reason for its poor reputation with consumers. Rakuten’s counting on being allocated the 700Mhz “platinum” wireless band as early as this autumn, while in the interim, it’s expanding a roaming agreement with KDDI.

SoftBank overcame similar reputational struggles after its own highly expensive entry to the mobile market in the mid-2000s. But Masayoshi Son’s firm had an ace in the hole in the form of exclusive access to the iPhone, thanks to Son’s relationship with Steve Jobs. Japan’s mobile market might have already been mature then, but the shift to smartphones was just beginning.
It’s hard to see a similar game-changer for Rakuten. These days moving carriers is easier than ever, a double-edged sword at best for Rakuten as Docomo and KDDI expand their own discount options. It also remains unclear how, having spent years pitching Rakuten as a discount brand, the company intends to upsell consumers and increase average revenue per user. As many Japanese brands have discovered over the years, being the cheapest is often a losing strategy.

Rakuten’s core business is strong. But increasingly, the carrier’s reputation risks impacting the existing brand. Instead of a buyout of the company, the time is rapidly approaching for the firm to consider when to hang up its mobile plans — before there’s nothing left to sell. Bloomberg