With only 310,000 new users added during the 1Q 2022 (slightly more than Q4) Rakuten Mobile’s most pressing challenge is to boost subscriber growth. At its recent earnings call, the company unveiled numerous service initiatives, which interestingly included plans to target the business/enterprise market starting in October.

Leveraging the Rakuten Digital Ecosystem

Several initiatives to boost subscriber growth are planned during the next few months, including a new pricing plan with a focus on increasing the number of paying users. In addition, Rakuten plans to launch a series of points-based marketing campaigns designed to leverage synergies between its mobile business and other Rakuten digital services businesses.

In contrast to its rivals, Rakuten owns its own digital services ecosystem, which includes e-commerce services, banking, payment platforms, streaming video services and insurance, with around 36 million active users per month. In fact, the company claims that the main motivation behind building its own mobile network is to capitalize on the ecosystem synergies between its digital services. Rakuten thus regards mobile connectivity as an enabler to engage users in its wider digital ecosystem and the company hopes that leveraging these synergies will be more fruitful than monetization via connectivity alone. At a previous earnings call, Rakuten shared data showing the proportion of new mobile subscribers who started using Rakuten's other digital services (e.g. Rakuten Ichiba, Card, etc.) within 12 months of subscribing to Rakuten Mobile (Exhibit 1, upper diagram).

©Rakuten Group: FY2021 Fourth Quarter & Full Year Consolidated Financial Results, Slides 67, 68

Exhibit 1:  Leveraging the Rakuten Digital Ecosystem

Rakuten also claims that this cross-marketing of services is starting to have an impact on revenues. For example, the company reported that the average annual Gross Merchandise Sales (GMS) per user for mobile users using its Ichiba e-commerce platform was 67% higher after 12 months compared to just 20% higher for non-mobile users (Exhibit 1, lower diagram). From July, the company also plans to launch a points-based, cross-business marketing campaign, in which various digital services will be offered for free on a trial basis with the award of loyalty points.

Improving Financials

With most of its 4G network deployed, Counterpoint Research believes that Rakuten Mobile's financials should start to improve during the second half of 2022 helped by cost reductions due to lower roaming costs, lower capex expenditures and to some extent boosted by increasing revenues at its Symphony telecom platform.

Rakuten also needs to continue deploying its 5G network, which will require a much denser network than 4G. Although 2Q capex may well be less than the $1.1 billion expenditure in 1Q, Counterpoint Research believes that infrastructure spending will remain high throughout 2022 and into 2023 as Rakuten continues deploying 5G radios throughout its network. In contrast to its open-RAN brethren Dish, however, Rakuten has been reporting steadily increasing mobile revenues for several months, which the company claims will be boosted significantly by revenues from its Symphony telco business from the end of 2022 onwards.

Targeting New Markets

Although the retail market remains Rakuten main focus, the company plans to enter the broadband and enterprise markets with a range of services starting in October. Rakuten claims that it will become an MVNO network provider and will offer a range of private networks services.

In addition, Rakuten plans to launch a FWA broadband service on both its sub-6GHz and millimetre wave frequencies starting in December as well as a FTTH service, thus making Rakuten a fixed broadband service provider. With its extensive fibre transport network across Japan, Rakuten certainly has the capacity to offer FTTH services and continues to invest in expanding the network’s capacity. For example, in a recent test with Nokia, it achieved speeds of 1 TB/s per channel over its DWDM fiber network, an increase of 5X compared to existing 200 Mb/s transmissions.

Drive To Profitability Starts Now

In commercial terms, Rakuten's market debut to date has been disappointing, particularly when compared to new entrants using conventional infrastructure. But with its 4G network now covering 97% of the Japanese population - and presumably offering a comparable user experience to rivals - it looks as if the company is about to embark on its first serious attempt to boost subscriber growth. Rakuten is first and foremost an Internet services company with its own digital ecosystem - an advantage that rival CSPs lack. The key question therefore is: how much of a differentiator could this really turn out to be? Although initial results shown in Exhibit 1 look promising, most of the marketing initiatives will not be launched until July and hence the full impact on subscriber and revenue growth will probably not become apparent until the end of 2022 or later.

Responding to Competitive Threats

During the next few months, Rakuten needs to demonstrate serious traction in boosting subscribers and provide investors with a credible path to profitability in its mobile business. However, Japan is an extremely competitive market and Rakuten's deep-pocketed rivals will not be slow to respond to any new competitive threat. Already competitors are taking advantage of Rakuten's decision to terminate its popular zero-yen plan, with KDDI's Povo - where subscribers pay for data used rather than a flat fee - benefiting the most. Competition in the 5G market is likely to intensify as Rakuten expands its marketing initiatives across Japan. Although its mobile business will benefit from revenues from its Symphony business, the road to profitably is likely be a long haul and may take many years. Meanwhile, in the short- and possibly medium-term, Rakuten will need to raise further funds, particularly if it intends to undertake a sustained marketing campaign.

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