Struggling Rakuten might need to phone a friend

Hiroshi Mikitani, founder of Japanese e-commerce empire Rakuten Group Inc., is keeping investors on hold as his own fortunes decline.

Once ranked the 25th richest person in Asia, Mikitani is no longer even 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 wary of attempts to become Japan’s fourth-largest mobile operator. This company lost 124 billion yen ($848 million) in the last quarter alone, an 18th consecutive period of red ink that soared to a total of nearly 1 trillion yen as the company expands its mobile operations.

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

More worryingly, Rakuten cuts out parts of its top companies to fund cellular aspirations. Last week, the company agreed to sell 20% of its online brokerage, Rakuten Securities Inc., to Mizuho Financial Group Inc. for just over $500 million. It plans to offload more of its securities unit in an upcoming initial public offering, with its banking subsidiary also set to go public.

Rakuten can throw good money after bad. The mobile plan is another effort to bring customers into its points “ecosystem,” in which users of one service (such as its main 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 short term; Rakuten has just 5.5 million subscribers, compared to market leader Docomo’s 85 million. Rakuten says losses have bottomed out and it is aiming for profitability in the year ending March 2024, as it plans to hit 10 million subscribers before the end of the decade.

The bet on telephones was not bad at the time; Japan’s three major carriers are among the country’s biggest money carriers. The plan appears to have been to divest some of the cash generated by Docomo from Nippon Telegraph & Telephone Corp., AU from KDDI Corp. and the publicly traded mobile unit of SoftBank Group Corp. SoftBank Corp.

That money, in turn, could have been reallocated to finding new potential sources of revenue growth. Like many Japanese tech companies, Rakuten’s overseas ambitions have largely come to nothing, despite its controversial “anglicization” decision to change the company’s official language to English to help it stay competitive. More than a decade later, more than 80% of its revenue still comes from Japan, a share that has changed little in the past five years.

But instead of boosting Rakuten’s other pursuits, the motive became a millstone around Mikitani’s neck. S&P Global Ratings, which slashed the company’s credit to the trash last year, warned that delays in improving cash flow from mobile phone spending risk further reducing its debt rating.

Can things be reversed? Rakuten Mobile CEO Tareq Amin certainly has previous experience, having helped build Reliance Jio. But unlike India, the Japanese mobile market is maturing, with almost twice as many mobile subscriptions as there are inhabitants.

Any new entrant must 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 Japanese operations. Son achieved this by convincing Steve Jobs to grant him exclusive Japanese rights to sell the iPhone – but in a world where smartphone technology has largely plateaued, there is no obvious equivalent game for Mikitani.

To make matters worse, allowing Rakuten to enter the market was just one of the strategies used by the Japanese government to stimulate 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 new when Rakuten first announced it would enter mobile in 2017, but government pressure has since forced existing networks to unveil lesser competitors. expensive, leaving consumers spoiled for choice.

There is also an opportunity cost. Rakuten’s e-commerce business in Japan faces growing competition not only from Inc., but also from SoftBank, which also dominates the growing mobile payments industry. SoftBank’s PayPay controls 45% of the QR code payments market, compared to 17% for Rakuten Pay.

Outspoken, Harvard-educated Mikitani has long been seen as a Japanese business maverick, feuding with the old-school Keidanren business lobby, attacking plans to hold the Tokyo Olympics during the pandemic. of Covid as a “suicide mission” and seeking to follow a different path than the country’s stilted executives. Its online mall was a success in the dot-com era, which the company sought to replicate overseas with a series of significant acquisitions. But now Rakuten risks becoming like the older companies it tried to disrupt: battling with local rivals for a slice of a shrinking domestic pie, rather than pursuing higher challenges overseas, such as video streaming bets in Europe and the United States. which have largely failed to significantly increase revenue. The company ended up teaming up with old-school money in a 2021 tie-up with Japan Post Holdings Co. to fund the kind of long-term spending needed to make mobile a success. When Mikitani’s wealth peaked in 2015, the gap to Asia’s richest person (Alibaba Group Holding Ltd.’s Jack Ma) was just $25 billion. Today, the wealthiest men in the region – Indian tycoons Gautam Adani and Mukesh Ambani – command far greater wealth. Both have shown their interest in mobile. With the yen at its lowest since 1998, Japan represents excellent value for money. Maybe it’s time to call a friend?

More from Bloomberg Opinion:

• India’s richest men and the $2 customer: Andy Mukherjee

• The whole world needs a first 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 of 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 deputy chief of the Tokyo bureau.

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