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6 October 2020

Rakuten looks less disruptive in 5G services than in the network

The entry of ecommerce giant Rakuten into the Japanese market has been a powerful accelerant for the open RAN fire, providing a proof point that an end-to-end, open, multivendor network can be built.

Yes, it may not be (yet) quite as cloud-native as it is billed to be; it may have cost a huge sum in terms of engineering and integration; and Rakuten has the advantages of being a greenfield MNO. All these factors mean its achievement is scarcely replicable by the majority of operators elsewhere. But nevertheless, it injects confidence into the market, and Rakuten will be packaging up its components and knowledge within the Rakuten Communications Platform (RCP), to make open 5G more accessible to other MNOs.

The next big question is whether Rakuten Mobile can turn its modern, software-based, agile network into gold. Will it support transformation of both cost and revenue, and so provide an even more important source of confidence for the operator community? And will Rakuten, having launched commercial 5G services last week, prove to be as disruptive in terms of market competition, as it has been in architecture?

The initial approach to 5G is conventional for a disruptive third or fourth player. Like Free Mobile in France, Reliance Jio in India and T-Mobile in the USA, Rakuten will leverage the cost efficiencies of its network to undercut competitors in its baseline pricing, and so hope to gain quick market share gains.

The operator announced its Rakuten UN-LIMIT V service plan, which offers customers access to 5G services for the same ¥2,980 ($28.20) monthly fee as its existing 4G tariff, Rakuten UN-LIMIT 2.0. It claims the 5G plan is 71% cheaper than competitive offerings. Existing 4G subscribers can use the 5G service at no additional cost.

This has strong echoes of its launch of 4G services in March. The headline tariff then was ¥2,980 ($27.50), less than half the cost of equivalent offers from the three existing MNOs – NTT Docomo, KDDI and Softbank. For instance, a one-person, two-year contract with NTT Docomo, under its Gigaho brand, includes 30GB of data and costs ¥6,980 per month. In addition, the first 3m people who signed up received the first year of service for free (a tactic that mirrored Jio’s 4G launch), and that promotion has been extended to cover 4G/5G sign-ups.

Of course, there are limits to ‘unlimited’. If a user is out of range of a Rakuten base station – on a domestic or foreign roaming network – a limit of 2GB per month will kick in and data speeds will be throttled. This will be an issue in the early period when the company is relying heavily on its roaming deal with KDDI for coverage.

Rakuten is promising initial downlink rates of 870Mbps, going up to 2.8Gbps peaks from November.

The new 5G services, which are initially supported by a 5G NR Non-Standalone network using Nokia’s 4G core, are initially available in six prefectures, including parts of Tokyo, Kanagawa, Saitama, Hokkaido, Osaka and Hyogo. Later they will be extended to other cities and regions, and in mid-2021, to a Standalone architecture based on the 5G cloud-native core that the operator is co-developing with NEC.

Rakuten Mobile said it has avoided the complex terms and conditions that often characterize the mobile business, offering a single service plan “that is simple, intuitive and easy-to-understand for all customers, whether they are in Japan or travelling internationally”. Here it is channelling T-Mobile USA’s ‘Uncarrier’ approach as much as its soul-mate Reliance Jio’s cost efficiencies.

CMO Naho Kono said: “Customers are particularly happy with the simplicity of our plan, the cost performance, the single fee for unlimited data and the speed it delivers… We wanted to revolutionise smartphone fees in Japan.”

It remains to be seen whether sharp pricing alone will be enough to disrupt the established order in such a saturated and established market, especially one where the other MNOs, particularly NTT Docomo, are also architecturally ground-breaking, and heavily focused on radical cost reduction. Rakuten may find less scope to weaken the established operators than Reliance Jio or Free Mobile found when they went up against slow-moving incumbents in markets where service innovation had been rare.

Low cost tariffs and simple propositions make an initial splash and help to build a customer base, they are hardly innovative marketing strategy. Far more interesting will be the way Rakuten, will build up a digital services portfolio, harnessing its existing assets, that can go beyond those of its rivals. One sign that its marketing creativity may be less strong than its architectural creativity is the small number of devices at launch. The company has unveiled its own 5G smartphone, branded Rakuten Big, but the only other device on offer at launch is the Sharp Aquos R5G smartphone.

Analysts at Wall Street firm New Street Research wrote in a client note: “Given Japanese incumbents charging a small premium for 5G, this represents a slight intensification of Rakuten’s competitive presence. The company has also announced the launch of their own 5G handset, Rakuten Big for $650. There is only one other 5G handset supported. Given Rakuten’s lack of high  smartphones we think the impact on the incumbents will be limited.”

They also question how soon Rakuten Mobile can deliver meaningful revenue, or reverse losses, for its parent firm. “The only rationale for mobile losses to come down is for opex to fall,” they wrote. “But by the end of 2021 Rakuten must more than double the size of the network, roughly triple the customer base, sign a deal with Apple for the iPhone and launch 5G. It would therefore be surprising if opex were to decline.”

Rakuten is worryingly reticent about how close it is to its target of 3m subscribers by year end. The last time it reported subscriber figures was at the end of June, when it had hit 1m users. In August, the parent company swung to an operating loss of ¥32.6bn ($310m) for the second quarter, from a profit of ¥3.2 ($30.3m) a year earlier, largely because of mobile roll-out costs.

But the important thing to remember about Rakuten is that its primary objective is not to be a leader in 5G connectivity subscriptions per se. It is a modern operator not just in converging cloud and connectivity in its architecture, but also in its business model. It has come, of course, from the ecommerce, content and cloud services world, and deploying 4G and 5G will be all about strengthening those businesses – first in Japan and then in other key markets, where it can work with conventional operators to add a connectivity play to its services, leveraging uptake of the RCP.

Its next step will be to expand in other countries, as its ecommerce and content businesses already have. It has hired Azita Arvani to be general manager of Rakuten Mobile in the Americas, to build a business initially in the USA. The company has already discussed sharing its open architecture with partners in other markets, starting with Singapore, and potentially using it as a spearhead to set up shop.

Rakuten needs to expand its digital services business based on ecommerce, content and payments. It can leverage its own cellular 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 mobile, Rakuten has been able to 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 applied the cloud-native techniques learned in its web business to its mobile build-out, to increase cost-effectiveness and commercial agility. Its network is fully integrated with Rakuten’s existing cloud and edge networks, plus it is building out a huge edge network. 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.

Rakuten’s competitors, then, are not so much Docomo and KDDI, as Amazon and Alibaba – and that is not a local contest in Japan, where it scarcely needs its own mobile network to protect its strong ecommerce lead, but a global one.

Rakuten claims cost advantages which enable low tariffs:

Rakuten has insisted that, despite the large integration team required to implement its multivendor network (several hundred engineers plus the services of Tech Mahindra and others), its cloud-native approach will bring down the lifecycle costs of its networks compared to those of rivals with legacy infrastructure to maintain. Its capex target is set at ¥526bn ($4.7bn) over five years, which contrasts with NTT Docomo’s projection of spending ¥200 ($1.8bn) a year in 2019 to 2024 on 5G alone.

The cost efficiency is also helped by deals with several utilities to use their infrastructure to support the mobile roll-out. And while it is likely to invest in further spectrum, for now, gaps in its spectrum, or its build-out, will be filled by its MVNO agreement with KDDI.