Rakuten’s mobile misadventure: from ambitious plan to millstone. When Rakuten (4755.T), a Japanese e-commerce and fintech behemoth, created a mobile service network in 2020, the company committed to disrupting the world’s third-largest telecommunications market to some extent. Still, the most significant change has been its financial situation.

Rakuten Mobile is experiencing a significant loss of revenue and is in profound distress. Because of the ever-increasing infrastructure expenses, Hiroshi “Mickey” Mikitani, the company’s founder and CEO, could not realize his early vision of a low-cost network utilizing cloud-based software and inexpensive hardware. Rakuten obtained a reputation for having poor coverage due to an overly rapid deployment, which it is now attempting to improve.

The harm that has been done to its parent firm has been considerable, consisting of thirteen consecutive quarters of operational losses that have totaled around $5.5 billion and a massive amount of debt, of which $5.4 billion is due within the next two years.

Rakuten is about to face another challenging year in 2024, with investors eager to see if the company can fulfill its objective of having the mobile segment approach profitability. At a time when competitors are on the offensive with competitive pricing and reward promotions, this is a challenging goal that requires increases in the number of subscribers as well as the average revenue per user (ARPU).

In addition, Rakuten has to refinance its debt, which is a step that the business has stated it would take. It also indicates that it will seek further “equity-related financing” to lessen its debt burden. “The company can’t afford to put a foot wrong,” said Mitsunobu Tsuruo, an analyst at Citigroup.

“If there’s a recession or some kind of tightening of credit markets, then that could represent a big risk to Rakuten.”

The mobile division of Rakuten has a clear road to profitability, according to a statement that the company sent to Reuters. The statement cited recent rapid subscriber growth as evidence of the company’s strong position to meet its 2024 targets.

Analysts believe that Rakuten has been able to survive the harm up to this point because its other companies are so strong. The company’s primary e-commerce operation competes with Amazon Japan for Japan’s most popular e-commerce website title. In contrast, many of its online financial services companies have consistently improved their profitability.

Despite this, Rakuten has, since 2021, offered additional shares to strategic investors and the general public, sold down its ownership in Rakuten Securities on two separate occasions, launched Rakuten Bank (5838.T), and offloaded other assets to strengthen its financial position.

These actions have resulted in the collection of around 800 billion yen, which is equivalent to $5.4 billion. Rakuten Securities’ plans to go public have been delayed, however, because rival SBI Securities has begun providing clients with stock trading with no fees for their transactions.

At this time, analysts are forecasting that a listing of Rakuten cards is on the horizon. The unit, which is at the core of Rakuten’s ecosystem and contains the group’s points and payments system, is the most critical component. Their e-commerce consumers are enticed to switch to other services through the rewards program. After that, points may be used to pay bills, make trip reservations, or purchase groceries.

RIVALS ARE GOING THEIR WAY FOR IT

The introduction of Rakuten Mobile was instrumental in lowering subscriber rates across Japan’s telecommunications sector; however, over four years after its inception, the company still only holds a market share of around 2.5%.

As of the end of September, Rakuten had 5.2 million customers. According to the announced break-even scenario for the unit, the number of subscribers has to increase to between 8 and 10 million. During the most recent quarter, there was an increase of almost 400,000 members. Rakuten would not be able to meet the lower end of its aim until far into the year 2026, after most of its bond redemptions are due. If this continues, it will take very long.

According to a statement that Rakuten sent to Reuters, the company said it had a net subscriber gain of 192,000 in October. If sustained, this monthly level would indicate that the company may reach 8 million users by the end of 2024.

The average revenue per user (ARPU) for Rakuten is 2,046 yen, but the break-even scenario calls for it to increase to between 2,500 and 3,000 yen. Since many of Rakuten’s clients are highly price-conscious, experts believe this is another challenging challenge.

Regrettably, Rakuten competitors have increased the intensity of their competition.

NTT Docomo, the market leader in the sector, announced a new tier of low-cost plans in July, which put it in a more direct battle with Rakuten.

Subsequently, in October, SoftBank Corporation (9434.T), the third largest mobile network provider in Japan, initiated a big incentive promotion for most mobile customers who utilized the PayPal online payment system offered by SoftBank Group (9984.T).

Some analysts think that Rakuten should invest significant money in marketing. This would be done in order first to highlight network improvements after it had reached a roaming agreement with KDDI (9433.T) and then to attract the attention of customers in the first quarter of 2024, which is in advance of the new school and financial year when many subscriptions are renewed before the new year begins.

On the other hand, Mikitani has stated that the corporation does not intend to launch a broad marketing effort. He stated that the firm will instead focus on finding new and inventive ways to contact clients, even though most of Rakuten Mobile’s sign-ups are based on the organization’s website. Analysts believe that Rakuten does not have many choices on a strategic level. Because the mobile unit does not generate money, it is doubtful that it would attract potential buyers, and competition regulations would most likely preclude companies like SoftBank and Docomo from submitting bids.

According to Amir Anvarzadeh of Asymmetric Advisors, winding it down is also not likely to be a desirable alternative. He also notes that Rakuten would have to resort to more equity funding because the potential charge would be high.

“If they actually decide to pull the plug, they would completely wipe out the equity base,” added the executive.