Sunday, April 22, 2018

It may not be too late for cloud giants to enter the mobile market

It was over seven years ago, in December 2010, that NTT DOCOMO launched its 4G LTE network. Japan, of course, was already heavily saturated with 3G coverage and mobile penetration rates were among the highest in the world. DOCOMO’s 4G network was an instant success and very quickly itd subscribers upgraded their phones and moved onto mobile data plans. DOCOMO's network grew and grew, and so did those of its competitors – KDDI and Softbank Mobile. Since then, the Japanese population has not given up their mobile devices. Like everywhere, people are checking their phones all day long, from the moment they awake till late at night.

With their upcoming launch of commercial 5G services over the next 2 years, DOCOMO and KDDI are looking for history to repeat. They will be among the first operators worldwide to deploy the next generation of mobile technology and they hope the market will respond. But, there is a surprise twist. A new entrant, Rakuten, plans to launch a new 4G network by October 2019 – nearly nine years behind the market leaders, and in a market that seems oversaturated and with this little prospect of growth for the “old wave” technology.

This week, Rakuten received approval from Japan’s Minister of Internal Affairs and Communications to launch a new 4G network.based on its own mobile base stations.

Rakuten Mobile Network will operate over the 1.7 GHz frequency band with over 1,825 MHz of spectrum. The company aims to launch service in October 2019. The company plans to raise a maximum of JPY 600 billion to fund the rollout of the network. Of this, Rakuten Inc. (the parent company) plans to provide a maximum of JPY 200 billion - a hedge on its bet.

Rakuten – Japan’s e-commerce giant

Founded in 1999 by Hiroshi Mikitan, Rakuten is Japan’s e-commerce leader – the local equivalent of Amazon or Alibaba – but far from being a me-too follower, the company has consistently innovated and acquired to advance its vision. It now offers online merchandise for consumers and businesses, life insurance, fire insurance, travel insurance, digital content, an advertising network, and a growing list of communications services. Rakuten also operates the country’s biggest Internet bank and third-largest credit card company by transaction value.



Outside of Japan, Rakuten’s  major acquisitions include Buy.com (now Rakuten.com in the US), PriceMinister (France), Ikeda (now Rakuten Brasil), Tradoria (now Rakuten Deutschland), Play.com (now Rakuten.co.uk in the UK), Wuaki.tv (now Rakuten TV in Spain), Kobo Inc. (now Rakuten Kobo in Canada), Viber (now Rakuten Viber), Ebates, Viki (now Rakuten Viki), OverDrive, Inc. (now Rakuten OverDrive), Slice (now Rakuten Slice) and The Grommet.
Until now, Rakuten has experimented with being a mobile virtual network operator, claiming 1.5 million users. Going forward, Rakuten reckons that around JPY 600 billion is enough to build a nationwide network of 4G base stations. The company says it has poached key executives from the other three big mobile operators. It is also known to be seeking advice from network equipment suppliers about how to rollout a nationwide network as quickly and efficiently as possible.

A key metric for Rakuten is its global gross transaction value, which is the sum total of everything sold on its platform. For 2017, that figure was up 21%.

Strategic thinking

Given its current size and the deep pull from its consumer base, one might expect that it would be easier and faster for Rakuten to buy out one of the three existing mobile operators compared with the time and trouble of building a whole new 4G network.  Practically speaking, no such option exists in Japan for Rakuten. NTT Docomo obviously is out of reach. KDDI is doing well enough on its own as the main challenger to Docomo, so is unlikely to be interested. And Softbank Japan, with Masayoshi Son at its helm, has big ambitions of its own, making the prospects of a merger or buyout with Rakuten unlikely.

For Rakuten, the value of becoming a mobile operator is not to battle it out with Docomo in hopes of poaching subscribers and earning a thin margin on the sale of monthly 4G data plans. Rakuten’s strategic thoughts must centre on building direct access to its e-shopping consumers.  It might even be willing to accept losses in the first years of operating the forthcoming mobile network, in return for a building a better e-commerce experience for its consumers.

In India, Reliance Jio is another late-comer to the mobile market and it too has been willing to suffer deep losses to build its new nationwide network and to establish its subscriber base. However, in Jio case, there is not a thriving e-commerce business to justify the risk.
There are however other cloud giants who will be watching Rakuten’s entrance into the mobile business. Alibaba might be constrained in doing so in its home market, unless the government wants a fourth competitor. But conceivably Alibaba could try its luck as a mobile operator overseas. The other big player of course is Amazon, who might very well be studying Rakuten’s moves.

See also