Rakuten telecom losses narrow after it takes heavy ax to costs

Japan's Rakuten turns 27 this year, the curious age when various popular musicians (including Jimi Hendrix, Jim Morrison and Kurt Cobain) took their own lives. Harakiri by the ecommerce firm that Hiroshi (or Mickey) Mikitani founded before the US dotcom era has never seemed an option. But there have been questions about the survival of Rakuten Mobile, the telecom subsidiary launched just a few years ago. Mikitani would have imagined racing past the sumo bulk of Japan's older players. Yet it has failed to lure most Japanese consumers. And its monstrous losses have been a blight on the entire group.

They are shrinking, nevertheless, just as Rakuten enjoyed one of its best-ever quarters of customer growth. After the introduction of new plans, and an important roaming agreement to use the network of rival KDDI, it added precisely 840,000 network customers in the final quarter of 2023 to finish the year with almost 6 million in total. Thanks partly to that and efforts to reduce costs, quarterly operating losses at the telecom unit narrowed to 68 billion Japanese yen (US$450 million), from JPY106 billion ($700 million) a year before. And sales ticked up 6.2%, to JPY59.1 billion ($390 million).

The recent level of customer growth is a big improvement on the 350,000 subscribers Rakuten added between July and September and the 200,000 it gained in the second quarter. It has given Mikitani confidence he can finish this year with between 8 million and 10 million, the range he says Rakuten Mobile needs to break even (based on earnings before interest, tax, depreciation and amortization) for the month of December.

This would still leave Rakuten far behind market leader NTT Docomo, which boasts more than 80 million mobile customers in the country of roughly 126 million people. And Rakuten is axing both operating costs and capital expenditure to break even. Monthly network costs have been hacked down from JPY39 billion ($260 million) in September 2022 to just JPY23 billion ($150 million) now. "Further cost improvement" is planned, Mikitani told reporters on a call, targeting a reduction of 10% to 15% this year.

No longer a big spender

Meanwhile, Rakuten now expects to invest less than JPY100 billion ($660 million) in capex this year, down from about JPY178 billion ($1.2 billion) in 2023. Its argument is that work on network rollout is largely done. With a network of 60,940 4G basestations, and access to KDDI's low-band airwaves (good for indoor signals), Rakuten can now claim near-ubiquitous population coverage. Its "virtualized" network – which pools IT resources in aggregation points rather than distributing them at mobile sites – is cheaper to operate than older and more poorly architected rivals, it has long insisted.

Even so, there is some analyst skepticism. Despite concluding its new low-band roaming agreement with KDDI, Rakuten has recently acquired its own 700MHz license, which it will need to bring into service. Mikitani thinks Rakuten can spend as little as JPY54.4 billion ($360 million) over a ten-year period on the necessary equipment. Savings are possible thanks to the centralization of IT resources, already geared up to support these frequencies, said Sharad Sriwastawa, Rakuten Mobile's CEO, last year. But the operator will not be able to avoid installing new radios.

The status of Rakuten's 5G rollout has also received scant attention during recent earnings calls. Company slideware, though, shows that Rakuten had only 11,592 5G basestations in service at the end of last year, meaning there is a gap of 49,348 with the number of 4G sites. Like other telcos, Rakuten is also running 5G services over higher-band spectrum, which does not carry signals as far. Perhaps unsurprisingly, Rakuten has never disclosed a 5G population coverage figure.

Whether this has hindered customer growth is unclear. Many European consumers have seen little use for the latest generation of mobile technology, choosing plans based on price, reliability and customer service. But the Japanese have a reputation for showing more interest in the technology itself. A clear worry for some local reporters is the recent launch of new low-cost family tariffs by Rakuten and the impact these could have on spending. After growing sequentially for six consecutive quarters, average monthly revenue per user fell 3% for the final three-month period of 2023, to JPY1,986 ($13.20) – although Rakuten blamed the drop on "a dramatic increase" in business customers.

There was also little discussion this time round of Symphony, the telecom unit that sells software and services to operators outside Japan. But it has failed so far to realize an ambition of disrupting what it perceived to be a moribund sector dominated by Ericsson, Huawei and Nokia. Companies that already have networks are largely sticking with those or other big vendors, even when introducing new-look technologies, and hardly anyone is building a "greenfield" network. Amid soaring inflation and higher interest rates, operators have also been spending less.

Symphony's choppy revenues, up and down depending on recent deliveries, fell 30% for the fourth quarter, to $161 million, compared with the year-earlier period. Most recent work has apparently been driven by "anchor clients," of which there are a handful, including Germany's 1&1. Expectations this year may be low.