'We Need Scale': Softbank's Masayoshi Son on Sprint, T-Mobile, and AlibabaBy
Masayoshi Son founded Japanese telecom SoftBank in 1981 and has overseen the company’s transformation into a wide-ranging Internet and mobile behemoth. Along the way, Son hasn’t been afraid to spread the $90 billion company’s money around. Sometimes that’s hurt his company, but it’s also paid off big. On the verge of an initial public offering by Alibaba, which could add more than 50 percent to early investor SoftBank’s market cap, Son sat down with Bloomberg Businessweek to discuss his investment strategy and whether he can keep buying his way further into the U.S. mobile market.
Bloomberg Businessweek: Fourteen years ago, you made a small investment in a Chinese e-commerce company called Alibaba. Along with subsequent investments, your stake is now worth $56 billion. What were your expectations at the beginning?
I thought at the time there were many people in China. There would be a bunch of political risk. People were not yet using the Internet and there was a different philosophy of people. But I thought a big trend was coming, that China was going to become a big player in the world.
Our original investment was in the U.S., with Yahoo! and ETrade. Then the second wave was in Japan. Our third wave was in China. Eventually it’s going to be bigger than the first or second wave.
The second part was e-commerce. In the U.S., it started with Amazon and EBay. In Japan we started Yahoo! Japan to compete with Rakuten. In either the U.S. or Japan, we were very successful with e-commerce. So it was the third tryout for us. If you can challenge three times, you’d better be somewhat better in the third round.
The third part was identifying the best entrepreneur. Jack [Ma, executive chairman of Alibaba] was definitely that guy. The day we met with Jack the first time, I had met with maybe 20 different Chinese Internet startups. Alibaba was one of those 20 meetings. His eyes were totally different from the other guys. Most of them, I just dismissed. When Jack’s turn comes, he starts talking, I extended the time. Eventually, I said: Take my money [$20 million]. He said $1 million is enough. I said: No, you should take $20 million. He said, I don’t need that much, I only need you to participate 5 percent—I’m not looking for a big money investment. One million will start the relationship. … I said, on the Internet we have to move at Internet speed, and we have to become partners. So instead of him convincing me, I started pitching him. That’s the relationship.
What’s Alibaba’s opportunity in the U.S. and abroad?
The U.S. is a developed country with lots of established competitors. Alibaba has been focused in the Chinese market. It has a strong team with strong momentum. The expansion into the global market is something we should look at with very much an open mind.
How long will you hold your stake?
Alibaba is our core company. We would like to extend our strategic relationship in many ways. Alibaba can be very successful on its own—because it has such a massive momentum right now. Alibaba is now investing into many of its own portfolio companies. Our portfolio companies, their portfolio companies—they can stimulate each other.
Should Amazon or EBay be worried?
They have their own strengths. I’m sure they will continue to succeed in their own way. We have a little different business model and different areas of strength. I think we can coexist.
You bought a controlling interest in Sprint last year and became chairman. What opportunity did you see there?
The U.S. market is pretty much a duopoly. I always felt that we were coming to the U.S. market after it was already basically game over. The top two duopolists have such a strong brand, strong networks, strong customer bases. [Still] this is the richest market in the world, the center of innovation for the Internet. Mobile service is migrating from voice-centric service to data-centric service. We may have the last opportunity. If we have any chance to build a meaningful competitor, our Internet background may help a little bit on that end. But we need scale.
Yes, so you are rumored to pursuing a merger with T-Mobile. How would that help?
I don’t want to talk specifically about a company. We need scale. Now these two big companies [Verizon and AT&T] are getting even bigger. AT&T has announced an acquisition of DirecTV. Comcast has announced the Time Warner deal. So wireless companies can no longer just be pure wireless companies. There’s no longer such a thing as a pure wireless business. They all have to bundle services. The quadruple play is really emerging as a consumer offering.
Now there once was spreadsheet software called Lotus 123. It was competitive. After Microsoft introduced Microsoft Office, which bundled spreadsheet software with the word processor and PowerPoint and so on, they could not fight with the guy who bundles spreadsheets into the full suite of services, including the operating system Microsoft had. You cannot compete.
Now I hear people saying these big gigantic companies merging will probably get approved. If both deals get approved and the big companies become even bigger, the dominant companies become even more dominant and provide bundled service in a quadruple play. We have only a single service which is wireless. And it’s only half-good wireless. How can we stay competitive unless we find a way to get meaningful scale?
Do you think you will get regulatory approval to merge Sprint and T-Mobile?
It’s a good question. If they get approved and we don’t, that is very unfair. The dominant players will become even more dominant. It’s really the three big guys, it’s no longer wireless or wired service. It’s one service, which is the Internet highway. We want to create a fourth option. But we have to take the first step.
Why have U.S. broadband speeds lagged so badly the rest of the world?
That’s the point. The wireless industry is a duopoly and the wired broadband is basically a single big player [Comcast]. If those guys set net neutrality rules, everybody has to follow it. They are all slaves of the monopolist or the duopolist.
It seems like Sprint’s performance has improved recently, no?
It depends on how you look at it. Is it sustainable? Both Sprint and T-Mobile are free-cash-flow negative. We only have a half-good network. We don’t have enough spectrum. This is a capital-intensive industry. Unless you have large amounts of capital and enough spectrum, which requires free cash flow, it is not sustainable. A few quarters can look okay.
Are you feeling regrets about entering the U.S. market?
I have mixed feelings, to be honest, considering approval [of buying T-Mobile] is up in the air. It takes a lot of [capital expenditure], and buying new spectrum is going to cost a fortune. Not only to buy it on auction, but it will require additional capex once we get the spectrum. Its not small. We are increasing the number of subscribers, but revenue per user is going down. It’s the same for T-Mobile. Even though they increased the number of subscribers, the average price per customer is decreasing rapidly, so total revenue is decreasing. But you are required to invest in new spectrum. How can you pay that back if you are cash flow negative? We might be able to survive if we scale down, if we become a small player, like Metro PCS used to be. But in the long run, that only goes in one direction.
The more viable customers have been eaten away by the Big Two. In a few years, I think it will be truly game over, and the U.S. consumer is not going to be the winner.
You’ve talked about a high-bandwidth wireless future with speeds at 100 megabits per second. How do we get there in the U.S.?
We have the technology. If we are allowed to reach bigger scale, get more economies of scale, more cost efficiency on [operating expense] per subscriber and invest in the network, we are ready. We have done it in Japan. We need scale that gives us revenue to pay back incremental capex. And we need capital to buy additional spectrum.
Price competition is so tough in Japan. It used to be four players. Then it became three players, with even tougher competition on network and price. So we have to reinvest very heavily in the network, and therefore it’s so much better than in the U.S. In the U.S., Verizon has 60,000 towers. Japan is the size of California and has a population one-third the size of the U.S.—we have 200,000 towers. And our competitors are also fighting fiercely. So we have to reinvest in the network.
Here in the U.S., the Big Two are busy paying dividends back to their shareholders. I don’t blame them. They are big public companies. They have a fiduciary duty to their shareholders. However, consumers aren’t the winners in that scenario. The shareholders are the big-time winners.
Do you talk to Charlie Ergen at Dish? Is there a possible deal there?
Yes, we have interest in partnering with anyone that makes sense. But first we have to improve our basic service, which is wireless.
How’s the state of the technology industry in Japan. Is entrepreneurship coming back?
The electronics companies, which were the big pride of Japan, they are going away. Sony, Panasonic, Toshiba, NEC, Sharp, Hitachi, all were big brands for consumer electronics. Now there are Korean companies, Chinese companies. All those Taiwanese companies have enough technology, and there is not enough innovation in Japan. When the Japanese founders were still active at those companies, they had an innovative passion. They took risks to come up with new technology and they got obsessed and they went at it. But those founders are gone and the companies have become big, boring bureaucracies. It’s like [chief financial officers] are running those companies.
Are there any reasons for hope in Japan for a tech revival?
The only thing Japan can be proud of is that it has one of the lowest per-megabit costs on fixed-line broadband and best fiber coverage. Fixed-line broadband has one of the highest speeds, lowest costs. I was the pioneer for that. If we had let NTT Docomo take the responsibility, Japan was the most expensive country for Internet infrastructure and had the slowest speeds. I challenged NTT and totally changed the environment. Now I’m stimulating Japanese mobile infrastructure, so Japan has the best LTE network and the lowest number of call drops.
What do you think of Xiaomi, the smartphone upstart in China?
I’m very impressed. I’d say in five years, if I had to bet on one technology company other than Apple and Samsung, it would be Xiaomi. That is my next best bet. It’s very innovative, very technology oriented, with aggressive pricing and distribution. And they have a big enough home market that they can gather enough strength. It’s like Alibaba. They have a big enough market to get to scale quickly—and after that, they can expand globally.
Did you try to invest in Xiaomi?
It’s very expensive. And we are not investing in hardware companies. We are more software-based and infrastructure-based. If I wanted to expand into that capital area, Xiaomi would be the best opportunity.
Are you concerned about a potential bubble in technology, like the one that hurt Softbank in 2000 and 2001?
In the year 2000, when the Internet bubble happened, profit wasn’t really there. Now if you look, most of the key companies are delivering good profits. It’s for real now. And those big-name Internet companies have the luxury of investing in high-value startups that might become an innovative force. And they want to use their leverage and distribution power to help them succeed.
What motivates you? You have been tremendously successful, yet you are still placing big bets.
We have done nothing. We are very small. There are many things left to do. I don’t have any achievements I can be proud of. I’m still feeling very embarrassed that we are not doing anything meaningful. Someday I will do something meaningful. In truth, I still feel ashamed that we have done nothing. This is just the beginning.