Japan’s Richest 2019: Rakuten’s Mikitani Bets $5.5 Billion To Shake Up Telecom Industry

12-Apr-2019 Intellasia | Forbes | 6:00 AM Print This Post

Rakuten CEO Hiroshi Mikitani doesn’t shy away from risks. His $5.5 billion bet is his biggest one to date: a startup using a new technology to disrupt the nation’s entrenched, three-way mobile phone oligopoly. Rakuten wants to build a new telecom network in Japan in as little as half the time and at a cost of up to 40 percent less than what it would take to build a conventional system.

The new service, Rakuten Mobile, aims to attract about 10 million customers over nine yearsand 15 million over a longer periodby providing what it claims will be a cheaper, faster and more reliable network. That $5.5 billion capital outlay is roughly the equivalent of what Japan’s two largest incumbent players, NTT Docomo and KDDI, each spend in a single year. “Exactly. That is the point,” says Mikitani, 54, who ranks No. 5 on this year’s list, with a net worth of $6 billion.

Mikitani plans to leverage the 100 million customers in Japan already using Rakuten’s e-commerce, credit cards, internet banking, online trading and content to also sign up for the mobile service, which will start initially in October in major Japanese cities and then expand nationwide. “Using our ecosystem, we can acquire customers at a relatively lower cost,” Mikitani says. “Our operation is much leaner than our competitors, and we can enrich the service using the existing Rakuten ecosystem. And I don’t think people really care whether it’s NTT, SoftBank or Rakuten that much. It’s primarily about connectivity, speed, price and what kind of extra services we can provide.”

While Rakuten’s initial public announcement to build the network dates to December 2017, the first trial run of the service wasn’t conducted until February, with Mikitani on hand to test it. While Rakuten rolls out the service, KDDI will provide coverage in areas where it’s not yet present, and the company already has a virtual mobile service with lines leased from incumbent carriers NTT Docomo and KDDI.

One major technology behind the network is called a virtualised radio access network (vRAN), which simplifies base stations that connect handsets to the network. Using this and other know-how, Rakuten Chief Technology Officer Tareq Amin says its cloud-based network can slash operating and maintenance costs by at least 30 percent. Rakuten is building its 4G service to easily convert to 5G, a change that he says can be done as a software upgrade, rather than through expensive new hardware outlays. 5G, which Rakuten plans to start in 2020, promises real-time connectivity, including for AI services and autonomous driving, and download speeds a hundred times faster than today through greater capacitysomething especially crucial in Japan’s congested urban networks.

Mikitani isn’t the first tycoon to shake up Japan’s telecommunications industry. Billionaire Masayoshi Son made a similar bet. Rather than starting from scratch, as Mikitani is doing, Son entered by acquiring an existing carrier, Vodafone’s Japan operations, for nearly 1.8 trillion yen ($15 billion) in 2006, which is now known as SoftBank Corp. Son thus set a precedent that a driven newcomer could become an established company in the sector, expanding its share to about 26 percent from 16 percent over six years.

While Rakuten is optimistic about being able to make its service work in time for its commercial launch in October, some investors remain skepticalthe company’s share price today hovers near where it was in December 2017 when it first said it would go into telecom. “We feel it is too early to be investing into a mobile network operator success, so we maintain our cautious view,” Oliver Matthew and Shinji Yoshida, Tokyo-based analysts at CLSA, wrote in a report in February. CLSA forecasts Rakuten’s net profit will drop 59 percent to 58.9 billion yen in 2019 and fall another 38 percent to 36.4 billion yen next year because of mobile capital outlays and separate costs for improving its e-commerce logistics. The brokerage expects Rakuten’s mobile service to incur losses through at least the next three years.

To be sure, no telecom company has attempted what Rakuten is planning, to build from scratch the world’s first end-to-end cloud-based vRAN network. Rakuten acknowledged the challenge in a presentation in February: “They said it would be impossible…we dared to make the impossible, possible.” In February, Rakuten said it wanted to take a “strategic investment” in one of its main partners to build the network, US telecom software firm Altiostar Networks, for an undisclosed sum (the deal still needs US regulatory approval to close).

Some worry if Rakuten can roll out its network on schedule. “It’s very difficult to know whether things will go entirely to plan in terms of timing,” says a top ten Rakuten shareholder who asked not to be named. “You know these things are often more complicated than when they first appear.”

Yet others believe Rakuten’s mobile service will give it an edge over e-commerce rivals in Japan, especially Amazon. Last year, Amazon took a 26 percent share of Japan’s total e-commerce revenue of $87 billion, outpacing Rakuten’s share of 17 percent, according to London-based market research firm Euromonitor.

Apart from competing with Amazon, Rakuten will have to contend with Japan’s entrenched and well-funded incumbent carriers. NTT Docomo accounts for a lion’s share at 38 percent of the subscriber market of 178 million, KDDI has 28 percent, while SoftBank has 23 percent, with the rest being circuits leased from the three carriers used for discount mobile services, including those operated by the incumbents. The big three’s dominancethey hold a combined 89 percent market sharehas been scrutinised by regulators, who are pushing them to slash rates and allow customers to easily switch providers. This regulatory stance bodes well for Rakuten Mobile.

“The magic ingredient is Rakuten,” says Q Motiwala, a managing director at Tokyo- and Silicon Valley-based venture capital firm DNX Ventures and former Qualcomm wireless and chip engineer. “It’s like a perfect stormthey are able to marshal the global trends in cloud and virtualisation, with a Japan flavor, and bring their cloud- and services-oriented mindset to these different components and demonstrate a new 5G network architecture to the world.” The next step is to get Japanese consumers to dial into the service as well.

From Problem Teenager to Billionaire

Mikitani’s early resume doesn’t scream “disruptor.” In fact, it suggests someone averse to taking risks and shows an elite career trajectory: Hitotsubashi University, the blue-chip Industrial Bank of Japan (now part of Mizuho Financial Group) and Harvard Business School.

That was true in the late 1980s and until the mid 1990s, but it also hid his penchant for thumbing his nose at conventionsomething that might be traced back to his formative years. As a teenager, he skipped school, smoked cigarettes, played pachinko and bet on the horses but finally turned himself around in his final years of high school, according to Problem Child: How Hiroshi Mikitani Was Raised, a 2018 book written by Kenichi Yamakawa based on interviews with Mikitani, his father Ryoichi and others. Yet, the DNA for his later success can also be traced to his upbringing: Ryoichi was a well-known Kobe University of Commerce economist.

At the buttoned-down IBJ, he became the first person in his cohort to earn a company scholarship in 1991 for an MBA. (Big Japanese firms thenand to a certain extent even todayprefer to hire hundreds to thousands of fresh graduates each April over job hoppers.) However, the 1995 earthquake, which wrecked his hometown of Kobe and killed over 6,000 people, including an aunt, an uncle and friends, prompted him to think hard about the Buddhist term mujo or the “transiency” of life, according to Mikitani’s 2009 book Principles for Success.

The next year, Mikitani left IBJ, not knowing exactly what he would do next. In 1997, he started Rakuten with one other partner, Shinnosuke Honjo, who is no longer at the company, and invested over a half a million dollars in profit from a post-IBJ consulting business. A cross between Amazon and e-Bay, annual revenues of the online market climbed to nearly $30 million in revenue when Rakuten listed in 2000.

Mikitani was on the forefront of Japan’s internet revolution along with the likes of SoftBank’s Masayoshi Son. And he’s been pushing the boundaries of Japan Inc.’s hidebound corporate culturesuch as making English Rakuten’s official company language in 2010 and making an unsolicited bid in 2005 (a no-no in Japan even today) for major TV network Tokyo Broadcasting System.

After the March 2011 Fukushima nuclear disaster, Mikitani broke ranks with the nation’s corporate bluebloods. Three months later, he quit the influential business lobbying organisation, Keidanren, over its continued support of nuclear energy. The following year, Mikitani started the Japan Association of the New Economy or JANE. His new organisation, made up mainly of internet and IT firms, has been promoting aggressive reform policies such as easing rules for immigrants in Japan; allowing ride-sharing (Rakuten has a stake in Lyft); as well as reducing corporate, personal and inheritance tax levels.



Category: Japan

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