(Bloomberg) -- Japan’s mobile carriers are bracing for what may be the biggest industry shakeup in a decade after billionaire Hiroshi Mikitani’s Rakuten Inc. unveiled plans to become the country’s fourth major mobile-phone operator.
The online retailer, which already operates a mobile service by leasing existing networks, said on Thursday it will participate in upcoming government auctions to win its own wireless infrastructure. Rakuten plans to raise as much as 600 billion yen ($5.3 billion) by 2025 to fund the project, and attract at least 15 million subscribers after it launches in 2019, it said.
Japanese mobile carriers fell on the news, with SoftBank Group Corp. dropping 2.3 percent, while NTT Docomo Inc. lost 2.3 percent and KDDI Corp. slumped 2.8 percent, the most in a year. Rakuten also declined, sinking 4.9 percent to the lowest level since March. Telecom equipment companies rallied on the news, with Comsys Holdings Corp. climbing 3.8 percent.
“Assuming the government allows this to proceed, it will be the biggest industry news since SoftBank bought Vodafone in 2006,” said Koji Yoshimoto, head of Tokyo-based research firm MMD Labo. “Even with 600 billion yen, Rakuten probably can’t go it alone, so they’re likely to partner with perhaps NTT Docomo. But for SoftBank and KDDI it is a more direct threat.”
Rakuten faces hurdles with its expansion into the highly saturated telecom market. As of September, there were 1.3 mobile contracts in Japan for every citizen, according to data from the Telecommunications Carriers Association. The company will also need to persuade existing customers to embrace its phone services.
The prospect of improved fees and services was welcomed by the government, which has been pushing for more competition.
“Households are weighed down by mobile phone charges,” Japanese Chief Cabinet Secretary Yoshihide Suga said Thursday. “But there isn’t much competition because the three large carriers put forth similar plans and fees.”
In 2015, Prime Minister Shinzo Abe said mobile phone contracts were too expensive and called for them to be cut. Since then, prices of phone-service contracts have fallen for 25 straight months, on a year-on year basis. The government set up a task force which pushed to increase competition by raising the number of mobile operators who don’t have their own wireless network infrastructure.
“The Japanese authorities were already putting pressure on existing carriers to cut tariffs, so having Rakuten coming into the market is heaven sent,” said Amir Anvarzadeh, head of Japanese equity sales at BGC Partners Inc. in Singapore. “Competition in Japan’s wireless market is only going to get more fierce as it has in the U.S.”
He said Rakuten’s aggressive push into mobile is being driven by pressure from Jeff Bezos, whose Amazon.com Inc. has been winning over Japanese customers through free shipping and online streaming. That’s left Mikitani with little choice but to prop up cash flow by seeking ventures outside its main business, said Anvarzadeh.
Rakuten already has a track record of successfully branching off into other industries, mostly notably in financial services where it operates a credit card and brokerage business. Financial products accounted for 35 percent of Rakuten’s revenue for 2016, and Anvarzadeh said the company should be able to win over existing customers with its mobile business.
A move into the mobile business will require a “very large amount” of capital investment, said Yoshihiro Nakatani, senior fund manager at Asahi Life Asset Management Co. “No company has ever succeeded other than the three major carriers” in Japan, he said. “The risks involved are quite high.”
Rakuten declined to comment on whether it will issue bonds for its mobile project, according to spokeswoman Chiemi Kobayashi. “We will study various means in consultation with credit ratings companies and financial institutions from which we are planning to borrow,” she said.
Rakuten has operated a discount mobile carrier service since 2014, where it leases network infrastructure from NTT Docomo, according to Mitsubishi UFJ Morgan Stanley. Rakuten was the biggest player among discount carriers with 17 percent of the so-called Kakuyasu SIM services market, according to MMD Labo’s Yoshimoto.
Rakuten’s ability to meet its 15 million subscribers goal may come down to further undercutting rivals, which they could have more freedom to do by winning the government auctions.
“Having their own infrastructure means they can be a lot more aggressive with the pricing,” said Anvarzadeh."
©2017 Bloomberg L.P.