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Struggling Rakuten Might Need to Phone a Friend

Hiroshi Mikitani, founder of Japanese e-commerce empire Rakuten Group Inc., is keeping investors on hold while his own fortune declines.  

Once ranked the 25th richest person in Asia, Mikitani no longer even features in the top 140, according to the Bloomberg Billionaires Index. It’s not hard to see why: Rakuten shares are trading near levels last seen in 2010 as investors sour on attempts to grow itself into Japan’s fourth-biggest mobile carrier. That business lost 124 billion yen ($848 million) last quarter alone, an 18th consecutive period of red ink that has ballooned to a total of nearly 1 trillion yen as the firm builds out its mobile operations. 

Investors’ patience with the plan has been waning for months. Earlier this year, Rakuten blinked first when it abandoned its “zero yen” data offering, which gave users effectively free bills and was its chief differentiator in a crowded market. Shares have fallen more than 20% since, leaving Mikitani’s $2.7 billion fortune at less than a quarter of its 2015 peak. 

More concerningly, Rakuten is carving off parts of its best businesses to finance the cellular aspirations. Last week, the company agreed to sell 20% of its online brokerage, Rakuten Securities Inc., to Mizuho Financial Group Inc. for a little over $500 million. It plans to offload more of its securities unit in a forthcoming initial public offering, with its banking subsidiary also poised to go public.

Rakuten may be throwing good money after bad. The plan for mobile is another effort to get customers into its points “ecosystem,” in which users of one service (such as its mainstay online mall) are encouraged to use and earn points on another (such as insurance or credit cards). It’s hard to see how mobile will contribute significantly to this in the near term; Rakuten has just 5.5 million subscribers, compared to market leader Docomo’s 85 million. Rakuten says that losses have bottomed out and it’s targeting profitability in the year ending March 2024, while it plans to reach 10 million subscribers before the end of the decade.  

The bet on phones wasn’t a bad one at the time; Japan’s three main carriers are among the country’s biggest money-spinners. The plan seems to have been to hive off some of the cash generated by Nippon Telegraph & Telephone Corp.’s Docomo, KDDI Corp.’s AU and SoftBank Group Corp.’s listed mobile unit SoftBank Corp.

That cash in turn could have been shifted into finding potential new sources of revenue growth. Like many Japanese tech firms, Rakuten’s overseas ambitions have largely gone nowhere, despite its controversial “Englishnization” decision to change its official company language to English to help it compete. Over a decade later, more than 80% of its revenue still comes from Japan, a share that’s little changed in the past five years. 

But instead of boosting Rakuten’s other businesses, mobile has become a millstone around Mikitani’s neck. S&P Global Ratings, which cut the company’s credit to junk last year, has warned that delays in improving cash flow due to spending on mobile risk further reductions to its debt rating. 

Can things be turned around? Rakuten Mobile’s chief executive officer, Tareq Amin, certainly has prior experience, having helped build out Reliance Jio. But unlike India, Japan’s mobile market is fully mature, with nearly twice the number of mobile subscriptions as there are people. 

Any new entrant needs to be able to do the equivalent of what SoftBank’s Masayoshi Son did in the 2000s, when he bought and revamped Vodafone Group Plc’s struggling Japan operations. Son accomplished that by convincing Steve Jobs to give him exclusive Japanese rights to sell the iPhone — but in a world where smartphone tech has largely plateaued, there’s no obvious equivalent play for Mikitani to make. 

To make matters worse, permitting Rakuten’s entry into the market was just one of the strategies the Japanese government has used to boost competition in the sector — a key concern of ruling party heavyweight and former prime minister Yoshihide Suga. The idea of a low-cost but robust network might have been novel when Rakuten first announced it would enter mobile in 2017, but government pressure has since forced existing networks to unveil cheaper competitors, leaving consumers spoiled for choice.

There’s also an opportunity cost. Rakuten’s e-commerce business in Japan faces increasing competition not just from Inc. but also from SoftBank, which has come to dominate the growing mobile payments sector, too. SoftBank’s PayPay controls 45% of the QR code payment market, versus Rakuten Pay’s 17% share.

The outspoken, Harvard-educated Mikitani has long been seen as a maverick of the Japanese corporate world, feuding with old-school business lobby Keidanren, assailing plans to hold the Tokyo Olympics during the Covid pandemic as a “suicide mission,” and seeking to beat a different path than the country’s staid executives. His online mall was a dot-com era success, one the firm sought to replicate overseas with a series of prominent acquisitions. But now, Rakuten is in danger of becoming like the older firms it had tried to disrupt: fighting with local competitors for a share of a shrinking domestic pie, rather than pursuing loftier challenges overseas, such as bets on streaming video in Europe and the US that have largely failed to meaningfully add to revenue. The firm ended up teaming with old-school money in a 2021 tie-up with Japan Post Holdings Co.  Absent an iPhone-like game changer, Mikitani might need to take a different page from Son’s playbook and seek outside investors with deeper pockets who could finance the sort of long-term spending needed to make mobile a success. When Mikitani’s wealth peaked in 2015, the gap to the richest person in Asia (Alibaba Group Holding Ltd.’s Jack Ma) was just $25 billion. These days, the region’s richest men — the Indian tycoons Gautam Adani and Mukesh Ambani — command far greater wealth. Both have displayed their interests in mobile. With the yen at the weakest since 1998, Japan represents terrific value for money. Perhaps time to phone a friend? 

More From Bloomberg Opinion:

• India’s Richest Men and the $2 Customer: Andy Mukherjee

• The Whole World Could Do With an Early iPhone: Tim Culpan

• SoftBank’s Shogun Has a Rare Moment of Contrition: Gearoid Reidy

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.

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