Paying the Price

Rakuten's Reality Check

Going it alone will require significant capital expenditure.
Photographer: Behrouz Mehri/Getty Images
RAKUTEN INC
-8.00
At Closing, May 22nd
772.00 JPY

Japanese e-commerce group Rakuten Inc. got the go-ahead to build its own telecom outfit late Friday.

The Tokyo-based company was already operating a successful mobile virtual network operator (MVNO) business -- where spectrum capacity is rented from other players -- when it announced plans late last year to apply for its own bandwidth. Japanese regulators are set to provide Rakuten a slice of the 1.7Ghz band, with some conditions.

Not Happy

Rakuten investors seem unimpressed with the company's plan to build a mobile telecom operator

Source: Bloomberg

According to Japanese media, including Mag2News, Mobile Watch and noted industry outlet Tsutsumu's SmartPhone Times, the panel reviewing the application was adamant Rakuten stand by itself. That means building out its own network, and developing the technical capabilities to maintain a fully functioning telecom operation.

In other words, Rakuten won't be able to piggyback off other firms. To what extent the company was actually planning on developing its own infrastructure is up for debate.

"Rakuten plans to save investment costs by leasing Tepco's infrastructure, such as transmission towers and utility poles," Bloomberg Intelligence senior analyst Anthea Lai wrote last month, referring to Tokyo Electric Power Co. Leasing a pole to hang a transmitter on is one thing, digging up roads to lay cable is another. Rakuten will probably still sign roaming deals with incumbents, but there isn't much incentive for existing players to help a competitor.

Cost of Doing Business

Incumbent telcos already spend far more than Rakuten has budgeted

Source: Bloomberg Intelligence

Note: Data for SoftBank is for its domestic telecom business.

Rakuten itself has said it will invest 200 billion yen ($1.9 billion) in 2019, the first year of service, rising to 600 billion yen by 2025. That's barely a drop versus what NTT Docomo Inc., KDDI Corp. and SoftBank Group Corp. spend per year on capex, Bloomberg Intelligence data show. Docomo, for example, spends in 12 months what Rakuten plans over seven years.

Admittedly, Rakuten's goal of 15 million subscribers is modest compared to the 75.7 million Docomo had at the end of December, but capital expenditure isn't linearly correlated to customer numbers.

wrote back in December that Rakuten's plan isn't too crazy. If Amazon.com Inc. decided to start a telecom firm, it wouldn't sound weird. But with regulators now being very clear on what they expect from Rakuten, the pressure's on to spend up.

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

    To contact the author of this story:
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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