Japan epitomizes the old MNOs’ need to respond to the disruptors

In Japan, so often the center of mobile industry innovation, the challenges of the 5G era are exemplified. The three MNOs – NTT Docomo, KDDI and Softbank – are known for technical innovation but exist in a saturated, over-regulated market, and now have to cope with the imminent entry of a newcomer, ecommerce giant Rakuten, which plans to build on its existing MVNO business now it has secured its own spectrum.

Rakuten is the epitome of the modern digital operators which could shake up this industry in the 2020s (Reliance Jio of India being another). It has a significant digital services business based on ecommerce and payments. It can leverage its own 4G network to expand the mobile aspects of these services and so drive increased usage and new customers. In turn, it can leverage those users to drive uptake of its own mobile services. This is what Amazon and Alibaba could look like if they pursued their tentative experiments with mobile connectivity.

As a company which has already built its business on digital platforms, and with the luxury of starting from scratch in 4G, Rakuten will roll out a very different network from those of its competitors (though it will remain reliant on its roaming deal with KDDI, for many years, to achieve national coverage).

It has chosen Nokia as its primary deployment partner, and that is significant – of the big three, Nokia is the most advanced in adapting its product line and its services to a software-driven platform that rests on open ecosystems and digital techniques pioneered in the cloud. If Nokia can build on those strengths and keep ahead of Ericsson, Huawei and Samsung, it will be in a position to extend its addressable market to new telcos, as well as to non-MNOs such as large enterprises (see separate item above on Nokia WING).

Under the newly announced agreement, Nokia will provide Rakuten Mobile Network – set up last week as an autonomous subsidiary – with a fully turnkey cloud-native network, including planning, deployment, integration and management services.

Rakuten has spoken before about how it will apply the cloud-native techniques learned in its web business to its mobile build-out, to increase cost-effectiveness and commercial agility. Its network will be based on Nokia’s Cloud-RAN, its cloud-native core, and its AirScale remote radio heads, and will be fully integrated with Rakuten’s existing cloud and edge networks. That will provide the new operator with a readymade platform to support telco cloud and edge computing services, with optimized connectivity – which will give it the edge in delivering services, such as high quality video streaming or low latency IoT applications, which are heavily reliant on strong QoS and on localized processing.

Nokia and Rakuten said they also plan to work together to develop additional core network functions which will slash the cost of operations compared to those of legacy networks and their operators. Examples include the application of end-to-end automation and artificial intelligence (AI) techniques to the network itself.

“We are delighted to work with Nokia on co-creating and deploying an open virtualized radio access network,” said Rakuten Mobile Network director Yoshihisa Yamada.

“Together, we have managed to disaggregate the current RAN platform by separating hardware and software, and implementing the radio software as a virtual network function (VNF) running on Rakuten Cloud Platform (RCP).”

The operator has secured 2×20 MHz of spectrum in the 1.7 GHz band in three of Japan’s eight telecoms operating regions and is in the process of acquiring airwaves in more regions, plus unpaired frequencies in 3.4 GHz. The regulator awarded the new licences to stimulate competition and break what a government representative called the “cooperative oligopoly” of the incumbent trio. Rakuten plans a commercial launch in October and is targeting 96% population coverage within six years, and 10m subscribers by 2028.

It believes it can leverage cloud-native approaches to deploy its networks at low cost – a targeted ¥526bn ($4.7bn) over five years, which contrasts with NTT Docomo’s projection of spending ¥200 ($1.8bn) a year for the next five years on 5G alone. The cost-efficiency will also be helped by deals with several utilities to use their infrastructure to support the mobile roll-out. Rakuten may then go on to buy 5G spectrum. It has been testing its end-to-end network with Viavi (see Wireless Watch February 4 2019).

For now, gaps in its spectrum, or its build-out, will be filled by its MVNO agreement with KDDI. Japan’s second MNO is in the strange position of enabling the newcomer and having to respond to the new competitive threat from a far more agile, cloud-oriented provider. The two companies’ deal goes well beyond a traditional MVNO contract. KDDI will “provide roaming services to Rakuten for its 4G mobile network”until March 2026, the companies said, enabling the latter  “to offer a nationwide LTE service from launch”. Meanwhile KDDI will use Rakuten’s payment platform and network of around 1.2m affiliated stores in Japan to launch its own barcode and QR payment service, called au PAY, in April 2019.

“By promoting the mutual use of both companies’ payment services, the companies aim to improve customer convenience and accelerate their vision of a cashless society,” Rakuten said. Rakuten will also provide its logistics services to KDDI’s Wowma online shopping channel from April 2019.

But it will be important for KDDI not to become over-reliant on its new competitor. It is also looking to diversify its revenue streams and adjust to the digital era in other ways, though with a heavy focus on payments throughout. It has set out plans to move into ‘adjacent’ sectors to telecoms, with financial services top of the list. Last week, it announced that it plans to take a 49% stake in online securities company, at a cost of about $800m; and it will raise its stake in mobile-centric online bank Jibun Bank to 63.78% (Jibun is a joint venture between KDDI and MUFG Bank). Both will be paid for via share offerings.

The telco has formed a dedicated financial services unit called au Financial Holdings, to house Jibun (to be rebranded au Jibun), au PAY and four other finance subsidiaries – KDDI Financial Service, WebMoney, KDDI Asset Management and KDDI Reinsurance. It also has an affiliate company called Lifenet Insurance.

The company is aiming to harness its network and user base to diversify in other areas too, though – like Orange and others – it sees financial services as the low hanging fruit, despite regulatory and competitive barriers, and the strong presence of NTT Docomo in this field. Other target industries include automotive, ecommerce, energy and education, and broader IoT platforms. Last year it acquired KCJ Group, which owns the KidZania education centers and the energy company Eneres. All these moves are designed to boost revenue and network ROI, but also to increase customer retention, especially in the face of the threat from Rakuten later this year. KDDI will be very aware of how a new provider – like Reliance Jio – with low prices and a modern set of digital services, can lure subscribers quickly away from established operators.

KDDI is clearly expanding its remit far more slowly than rival Softbank, with its giant Vision Fund (and near term plans to launch a second fund). Softbank is investing in technology vendors and digital service providers round the world and behaving more like an investment company than a telco, though those investments are designed to support the grand ambitions of Softbank chairman Masayoshi Son to define the platform for global next generation services based on AI, Tactile Internet, robotics and extreme automation.

By contrast, KDDI’s venture arm is focused on funding businesses which may enhance its own core business, and its diversification moves are targeted with adding new revenues that are enabled by its telecom networks, not taking it out of telecoms altogether.

Announcing the operator’s fiscal third quarter results at the end of January, KDDI president Makoto Takahashi said the strategy was to integrate telecoms services with “life design” options such as finance, ecommerce and video entertainment. This is how operators new and old – from Reliance Jio to Orange to Telstra – aim to enhance the value of their networks and monetize their users better, a process which 5G, if well deployed, could accelerate.

“If customers use…multiple non-telecom life design services that have strong affinity with telecom services, we can increase touch points with our customers and strengthen our customer retention because of the stronger engagement,” Takahashi said. He has appointed Kae Morita as general manager of the whole life design business.

That division does not house all the new revenue generators, however. KDDI has been introducing a widening range of digital services to its core Personal Services operating unit, including energy services and payments. In the 2018 fiscal year, Personal Services was the strongest contributor to revenue and profit, both of which grew healthily, while Life Design segment was the fastest-growing in revenue terms.

Nokia lands deal with KDDI:

As well as supporting Rakuten’s deployment, Nokia is a major supplier to the three established operators. Most recently, it has announced a 5G development and supply agreement with NTT Docomo, while Softbank will use Nokia and Ericsson gear, replacing Huawei, in 4G expansion. It has a long term partnership with KDDI too, and last week, it landed a huge deal with the telco for its fixed broadband technology.

The aim is to upgrade MDUs (multi-dwelling units) to speeds of 830Mbps. The announcement notes that, while over 30m households receive fiber (FTTH or FFTTB) services, between 5m and 6m more rely on Japan-specific VDSL2 copper technology, and those now need upgrading. Nokia says its system will minimize the impact to existing VDSL systems, enabling operators like KDDI to carry out upgrades through a simple CPE replacement, with vectoring technology to reduce the cross-talk interference that knocks down data speeds over copper networks.

So, with roughly 5.5m VDSL2 households, it looks as though KDDI plans on upgrading its entire copper footprint using Nokia technologies.

The KDDI deal comes hot on the heels of Israeli chipmaker Sckipio Technologies winning a deal with Korea’s SK Broadband in November, claiming the first commercial deployment of using the full 212 MHz in Asia-Pacific.

In a market update from the Broadband Forum (BBF) earlier this month, the group highlighted growing popularity among operators, reporting that there are now 42 solutions for the 106 MHz profile which are certified by BBF as being interoperable. The report spotlighted the UK’s BT Openreach, which is deploying fiber to 3m UK premises and has pledged to pass around 10m homes with by 2021 – enabling 330Mbps services over its current fiber-to-the-cabinet network. Other operators using, as cited in the document, include Orange, SandyNet, Frontier, Post Luxembourg, Swisscom, Skywire Networks, and Australia’s National Broadband Network (NBN).