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Rakuten Takes On Japan’s Big Three Mobile Phone Operators

Machida Tetsu [Profile]

[2018.03.02]

Rakuten, which operates the budget mobile phone company Rakuten Mobile, has announced plans to transition from a mobile virtual network operator to a mobile network operator. How successful will President Mikitani Hiroshi be in taking on the cooperative oligopoly of the “big three” operators? The author examines Rakuten’s potentially rocky path forward in entering the MNO market.

A Market Shake Up in the Making?

Rakuten recently disclosed its plans to enter the mobile network operator business as early as 2019. Speaking in Tokyo on February 13, Rakuten President Mikitani Hiroshi announced the decision, saying, “We will develop our MNO business into a driving force like our credit card business.”

Some readers may wonder what this means since the Rakuten Group already includes Rakuten Mobile, a budget mobile phone company offering low-cost handsets and wireless communication services. To understand the significance of the plan, we must look at how mobile virtual network operators differ from mobile network operators.

Unlike the big three MNOs of NTT Docomo, KDDI (which offers mobile service under the Au brand), and SoftBank, Rakuten Mobile currently does not have its own mobile wireless network but instead rents bandwidth from NTT Docomo. Mikitani first announced the plan to transition to an MNO in December 2017 with the aim of upgrading the size and profitability of Rakuten’s mobile business and making it a more integral part of group operations.

Rakuten remains tight lipped about the details of its new mobile business, since it has yet to receive a frequency license from the government. While only speculation, Rakuten may have decided that the timing is ripe to build its own mobile wireless network since the frequency spectrum allocated to the MNOs is finite and 4G capacity will approach its limit in about two years’ time.

Rakuten’s strategies are drawing the interest of consumers since, in Japan’s mobile network market, competition does not function effectively, fees tend to be high, and the diversification of services proceeds slowly. The Ministry of Internal Affairs and Communications blames this situation on the cooperative oligopoly of the big three MNOs that offer all but matching cell phone plans. Should Rakuten succeed in its transition to become a fourth MNO, monthly mobile phone fees may decrease, a tantalizing prospect for consumers.

A Growing Market for Rakuten Points

The development of new growth areas is a pressing issue for Rakuten. According to its fiscal 2017 consolidated results, net profit rose for the first time in three years, reaching an all-time high of ¥110.5 billion. However, its domestic e-commerce business, the company’s founding business and namesake of the Rakuten Group, is struggling to compete with Amazon. Operating profit of this unit fell 3.8% against the prior year to ¥74.6 billion. In contrast, the operating profit of the financial business of credit cards, debit cards, and Internet banking rose 11.0% to ¥72.8 billion, supplementing the weak e-commerce earnings.

Mikitani’s remark that he will develop the MNO business into a driving force for the group reveals his intent to turn the mobile phone business into a source of earnings on par with the credit card business. Even if the venture is not immediately profitable, Rakuten, as it did with its financial business, aims to first attract customers to its mobile service and then bolster its position in the consumer space by utilizing it as a platform for collecting data on the consumer habits of subscribers.

Rakuten’s current MVNO business integrates the group’s loyalty point system, known as Rakuten points. A growing number of young consumers are deciding where to shop by whether they can earn points, and many Rakuten users apply the points they accumulate through online shopping toward their monthly Rakuten Mobile bills. The company could grow its business further should it increase incentives for using points through its own mobile wireless network. Rakuten’s public relations department has stated that promoting the use of points will reduce the cost of acquiring new customers compared to other mobile phone companies and will make it easier to express the strengths of Rakuten to prospective customers.

A Ministry Favorable Toward New Entrants

Rakuten’s ambition to become an MNO does have its challenges, though. At the top is Rakuten’s pledge to raise ¥600 billion to build a mobile wireless network over the next few years. The big three MNOs and communication equipment makers have derided this amount as being entirely too small to allow Rakuten to build a wireless network for Tokyo and adjacent prefectures, let alone Japan’s three largest metropolitan areas of Tokyo, Nagoya, and Osaka.

When I asked a senior official of the Ministry of Internal Affairs and Communications, the entity with the authority to assign the frequency band Rakuten will need to launch its mobile network services, about the ¥600 billion issue, I received a slightly different perspective.

According to the official, the entry of a fourth MNO that would break the cooperative oligopoly of the three incumbents aligns with the ministry’s policies. Even if Rakuten is only able to raise ¥600 billion and must at first rely on a network with limited coverage, it should still be possible to offer nationwide service by roaming through the networks of other MNOs. It will be sufficient if Rakuten can steadily expand its wireless network, even if the process takes several decades to complete. Judging from this response, the ministry hopes to foster competition in the industry and is in favor of Rakuten throwing its hat into the ring when it allocates frequency bands in March 2018.

The same official reports that the four frequency bands selected for allocation are expected to go to the big three MNOs and a new entrant. Provided that conditions are met, the new entrant can expect to be assigned the most favorable frequency band (the so-called platinum band).

Prime Minister Abe Shinzō has previously promised the reduction of mobile phone fees, and Mikitani is said to have called on the prime minister’s office repeatedly regarding the assignment of frequency bands. Such factors may be influencing the ministry’s flexible stance toward the size of Rakuten’s initial investment.

On the other hand, the ministry has pointedly requested that Rakuten guarantee it can raise the ¥600 billion. When the ministry previously allocated platinum band frequencies to eAccess in autumn 2012, the fourth MNO of that period, the company sold itself to SoftBank in a few months’ time. The reason for the sale was the inability of eAccess to raise sufficient investment funds, an outcome that made the ministry wary of similar bids to enter the market. The official notes that the ministry cannot allocate electromagnetic frequencies, the assets of Japanese citizens, to companies with reckless fund-raising plans. Thus, should Rakuten decide to submit an application by the end of February, the ministry wants it to come secured with a ¥600 billion loan certificate affixed with the seal of a bank officer.

Banks, however, are unlikely to commit to such a large loan before investment plans are finalized. To test this thought, I inquired with a major bank that Rakuten may turn to for a loan. The bank’s officials were stunned to hear that the ministry was demanding a loan guarantee. Resolving the guarantee issue will take time and may drag out the application process.

An Eye on Earnings

There are still more issues for Rakuten to resolve. In building a mobile network from the ground up, Rakuten must develop an optimal plan for locating base stations, and it must secure a vast number of sites for them.

To date, Rakuten has sold private-label smartphones as an MVNO to users that the big three MNOs failed to attract, paying network rental fees that helped the major MNOs recover their own network investments at an early date. Once Rakuten becomes an MNO, it will be a full rival to the major MNOs while having a wireless network that does not yet offer nationwide coverage. Rakuten will need to provide coverage beyond its own network by concluding roaming agreements with the major MNOs. However, unless Rakuten pays fees that far outstrip the wholesale fee for MVNOs, the major MNOs are unlikely to be receptive to roaming agreements.

A final issue is whether Rakuten can forge strategies that effectively assimilate its MNO business into its group operations and whether the new businesses it develops will become centers of high earnings and growth. Rakuten will risk alienating investors if it turns out that it could instead achieve better figures by negotiating lower network fees with the major MNOs as Japan’s largest MVNO.

While the Rakuten Group is planning to begin mobile service as an MNO in 2019, many challenges remain. We can only hope as consumers that Rakuten will win its race against time.

Company Profile and Rise of MVNOs

Rakuten was founded in 1997 by Mikitani Hiroshi, formerly of the Industrial Bank of Japan (currently part of Mizuho Bank), as the operating company of Rakuten Ichiba, an Internet shopping site. Subsequently, through an aggressive program of mergers and acquisitions, the firm expanded its business to include such financial services as securities, banking, and credit cards and a broad range of Internet businesses including travel reservations. Rakuten also manages a professional baseball team and a J. League soccer club. The company drew attention for becoming a major sponsor of FC Barcelona, the powerful Spanish soccer club, with a €220 million contract for four years from the 2017–18 season.

The mobile communications startup Japan Communications, taking a page from the business plan of Britain’s Virgin Mobile, became Japan’s first MVNO in 2001 by leasing the PHS phone network of DDI Pocket (currently the Ymobile unit of SoftBank). Concerns about the cooperative oligopoly of the three MNOs led the Communications Ministry to adopt measures to promote mobile communications in recent years. NTT Docomo, which moved vigorously to provide access to its wireless network, enabled the MVNOs to grow rapidly.

(Originally published in Japanese on February 21, 2018. Banner photo: A sign decorating a party celebrating the partnership between Rakuten and FC Barcelona of La Liga, the first division of the Spanish soccer league, July 13, 2017. © Jiji Press Photo.)

  • [2018.03.02]

Economic journalist. Born in Osaka in 1960. Graduated from the Faculty of Commerce and Economics of Kobe University of Commerce with a degree in economics. After joining the Nikkei, reported on such areas as finance and communications. Studied at the Wharton School of the University of Pennsylvania and also served as a foreign correspondent in Washington DC. Became a magazine editor after leaving the Nikkei and went freelance in 2004. An outside director of the Japan Post Bank since 2014. Publications include Kyodai dokusen NTT no shukuzai (The Original Sin of the Giant Monopolist NTT) and Nippon yūsei tokihanatareta kyojin (Japan Post: The Unbound Giant).

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