Japanese Internet marketplace Rakuten announced in February it intends to accelerate plans to build a new, disruptive competitor in the Japanese market. Since launching 4G/LTE services officially in April 2020, and adding in 5G service in September, the company has seen solid, while not overwhelming, customer adoption. At the same time, however, the company’s operating losses have skyrocketed, raising the concerns of investors increasingly anxious that turning a profit may be many years off.
The Rakuten story is not just about adding yet another mobile service provider to the mix. The market is dominated by three well-established operators – NTT Docomo, KDDI, and Softbank – and mobile adoption rates are already extraordinarily high. Rakuten itself had previously sold mobile service in an agreement through which it essentially resold cellular service from KDDI’s network as a so-called mobile virtual network operator (MVNO).
Rakuten Mobile intends to accelerate network deployment
Despite the competitive landscape, Rakuten Mobile decided to build its own network, which it launched officially in April 2020 using LTE technology, and expanded to 5G service in September 2020. Rakuten vowed to differentiate by building arguably the most technologically advanced 5G network in the world, including advances in four key areas: disaggregated Open RAN radio, unified cloud, massive networking automation and platform organization. Rakuten also estimates that it is equally matched with its Japanese competitors on spectrum available for 5G deployment.
Rakuten Mobile CTO Tareq Amin surprised – and possibly alarmed – investors by announcing in February the company will accelerate network deployment by a full five years from its original plan. Rakuten believes that due to its innovative network architecture, it is now able to cover 96% of Japan’s population by summer 2021. The company’s confidence is bolstered by its early deployment, which finished 2020 well ahead of schedule.
Losses are a worry
Unfortunately, the CTO and the CFO/CMO case may be at odds. While Rakuten appears to be executing on plan technically, it also posted an operating loss of 75 billion Japanese yen (nearly $700 million) in Q4 2020, its largest in a string of operating losses that seems likely to continue and perhaps worsen with the announced network acceleration plans.
The ultimate question is whether its network innovation will translate into customer adoption. The current subscriber base stands at just over two million – an impressive beginning but still relatively tiny (by comparison, Rakuten’s primary competitors have between 45 million and 80 million mobile customers).
Rakuten is counting on innovative rate plans, a high-performing network, and strong ties to Rakuten’s e-commerce operations that will enable loyalty rewards in addition to mobile subscription revenue. However, Rakuten Mobile will need to attract a much larger base of customers to actually profit from its expensive network investment. In an already saturated mobile market, that may be a tough sell.