[WATCH] Q3 FY2021 Results: CEO Mickey Mikitani on how recent moves in fintech, mobile and more are building the foundation for growth
3 days ago
On November 11, Rakuten live-streamed its 2021 third quarter financial results from across the Rakuten Group. Leaders from business units representing the company’s diverse portfolio of more than 70 services worldwide presented highlights from the quarter (details at end of article) and offered a glimpse of what’s to come.
To share his perspective on an eventful quarter, which saw the launch of Rakuten Symphony, announcement of preparations for the listing of Rakuten Bank, and Rakuten-led mass vaccination initiatives across Japan, Rakuten Group chairman and CEO Mickey Mikitani sat down for a Q&A with Taro Ishihara, Chief Analyst at Daiwa Securities. Below are some of the highlights.
For the launch of Rakuten Symphony, what kind of scale are you considering for allocation of personnel and capital? What kind of partner do you envisage for capital and business alliances?
Rakuten Symphony is disrupting the norms of the global mobile industry and beginning to establish itself as a key player. When we take part in external events, we can feel the high level of interest in Rakuten Mobile and development of a common understanding that the technology we’re using is the way of the future. Even as other companies try to catch up to us, Rakuten Symphony’s biggest competitive advantage is the validation provided by Rakuten Mobile’s experience. And the potential market is estimated to reach 15 trillion yen in 2025. The customer contracts we already have in place are on the scale of hundreds of billions of yen.
Rakuten Symphony is aiming to offer the most essential network infrastructure, from our base in Japan. We are seeing demand for this from numerous customers. As for the business model, we’re able to take responsibility for the project end-to-end like we are in Germany, or we can offer parts like the base station software or hardware. We’re also building up our team now.
Are there bottlenecks in receiving orders for future projects? Are there currently any resources you’re lacking? And will you be able to address any shortages?
We’re able to sell software exclusively, or we can undertake entire projects end-to-end. What makes this different from selling other software is that minor tuning is required, in line with regulatory environments which differ by frequency band and by country. We are also working together with Accenture and Tech Mahindra. We provide the software and the technology, and leave the actual implementation to them. This is a big business opportunity for them as well, and they are investing considerable people resources.
Have you already received inquiries for a second or third large scale project?
We have already agreed to proofs of concept with global mobile operators, and there are several projects in the testing stages operating dozens of base stations. We’re also providing parts of the network to customers. I believe the number of end-to-end projects will increase in the future but as they require considerable time and effort, we will need to balance these with sales of software alone in order to effectively manage personnel and resources. We will select projects appropriately.
Moving to e-commerce, I have something of a tough question. Although profitability in improving, as competition in the space continues to intensify, there is still concern that investment here might not be profitable. Do you think that, ultimately, your company’s profitability will improve, so that big companies which have invested will see improved profits? Or, although profitability is low, do you think e-commerce is important as the gateway to fintech and mobile services? Please explain your thinking on the positioning of e-commerce.
Although we do not disclose the profitability of individual services, Rakuten Ichiba has achieved a considerable level of profitability. Even during the pandemic, profit growth rates have exceeded revenue growth, and economies of scale are working. We’re not feeling as much pressure from the competition as everyone seems to think.
That said, investment in logistics has been a huge issue up until now. I did believe this was an unavoidable requirement but our joint venture with Japan Post is addressing this issue, becoming a very large step toward improving profitability.
Annual domestic e-commerce GMS is now approaching 5 trillion yen, and we are thinking about how to take that to 10 trillion yen.
Next, to fintech. You announced plans to list Rakuten Bank. Could you explain now the background of your decision to take the bank public?
Banks fall under the jurisdiction of the Financial Services Agency — they’re part of a highly regulated industry. At the same time, Rakuten Bank supports the Rakuten Group through securitization. Rakuten Bank requires sufficient capital, and the higher the capital levels, the more profitable it can be. As the Rakuten Group is also investing in other businesses, we decided to list the bank and take in capital from external sources in order to drive further profitability with the capital increase.
On to the balance sheet. It’s being impacted by heavy investment in mobile. Please tell us about your ideal capital adequacy ratio and financial strategies.
That’s another reason why we chose this timing to announce the potential listing of Rakuten Bank. While we think about how to raise capital for each individual business, we can also secure funds for growth by solidifying the capital of Rakuten Group. In terms of capital strategy, listing Rakuten Bank will be a historical turning point.
Please tell us about the outlook for future earnings of your overseas businesses.
We have seen both successes and failures among our overseas businesses. We’ve properly evaluated those failures, and chosen to either sell or close them down. However, there are things you can’t fully understand without trying. Rakuten Viber and Rakuten Viki are profitable or close to profitable, and will make an appropriate contribution to future profit. If we look at Rakuten Kobo across the globe, the customer’s only choice is Kobo or Amazon. In several countries Kobo has a large market share and is close to profitability. Rakuten Rewards in the U.S. contributes significantly to profits. As we see each business move toward profitability, we will carefully foster that direction and work to create a structure to deliver profitability across our entire overseas business.
I think there are many business opportunities for DX (digitalization transformation) support in the development of real services, but does Rakuten support that idea?
We are implementing a DX project with [prominent Japanese supermarket chain] Seiyu. We aim to improve payments at stores and make all systems DX compatible. We are also expanding this not only at Seiyu, but also with other retailers. We will create an AI-supported platform to control online marketing, payment integration, data-driven purchasing, price control, etc., and deploy it in various places. Japan does not have an e-commerce penetration rate of 30-40% like China, so it is important to have a hybrid model. In that respect, it is significant that Rakuten Card’s market share target is 30%. With offline purchases, our credit card business earns a fee, and with online purchases, we book revenue. We also aim to develop our advertising business to align across online and offline. I think we can also become a future leader in providing the necessary mobile platform.
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