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Japan mobile wars: KDDI teams with newcomer Rakuten

'Better than having them join Docomo,' says President Takahashi

Rakuten was set to challenge Japan's big three mobile carriers. Now it has partnered with one of them -- KDDI.

TOKYO -- KDDI and Rakuten said Thursday they will share each other's assets while competing to offer services in their respective fields, as the telecom operator debuts e-commerce services and the online retailer enters the mobile space.

The deal will allow Rakuten to use KDDI's network for its entry into the mobile market next fall, while KDDI can employ Rakuten's e-payment and logistics infrastructure.

Rakuten initially considered a tie-up with NTT Docomo, one of Japan's other two carriers along with SoftBank, but ultimately seems to have chosen KDDI because their businesses are more complementary.

"If we did not team up with Rakuten, they probably would have partnered with NTT Docomo," KDDI President Makoto Takahashi said. "Rather than that situation, it is better if we team up with them ourselves."

KDDI is Japan's second-largest mobile phone carrier, with about 53 million subscribers. Rakuten boasts about 98.7 million registered users for its virtual mall and other websites with financial, payment and logistics resources that appealed to the mobile service provider.

KDDI, a latecomer to increasingly popular smartphone payment services, will roll out QR code-based "au Pay" in April 2019. The company aims to recover lost time by leveraging Rakuten's network of stores to launch nationwide from the start.

"We were interested in the 1.2 million stores affiliated with Rakuten. This will be a new structure where we compete while cooperating," Takahashi said at a press conference Thursday. He added, however, that the two companies will be competing in the communications field.

KDDI President Makoto Takahashi announces the partnership with Rakuten. (Photo by Keiichiro Sato) KDDI President Makoto Takahashi announces the partnership with Rakuten. (Photo by Keiichiro Sato)

KDDI also looks to expand sales on its Wowma! internet marketplace by using the logistics network Rakuten has cultivated through its online retail business. Customers will be able to set two-hour windows for deliveries, for example.

In return, Rakuten will rent KDDI's mobile network so it can offer service nationwide immediately while building out its own infrastructure, a task that will take several years and cost more than 1 trillion yen ($8.87 billion). The roaming services will be provided until the end of March 2026.

Japan's mobile market is not expected to grow as the country's population declines, but investing in and maintaining infrastructure is expensive. Facing this turning point, and pressure to lower prices, carriers are now competing to create new services in such areas as smartphone payments and online sales that use communications infrastructure.

"Mobile has driven growth until now, but increasing added value will lead to expansion going forward," said Takahashi.

KDDI generates about 80% of its operating profit from mobile services in the domestic market. Its subscribers also tend to switch more than Docomo's. The company's stock price sank 16% on Thursday on anticipation that it will soon have to lower prices after Docomo said Wednesday it would lower rates 20% to 40% from fiscal 2019.

The Ministry of Internal Affairs and Communications granted 4G bandwidth to Rakuten in April, paving the way for the company to become Japan's fourth mobile network operator. The online retailer was expected to offer prices 30% lower than the existing three carriers, challenging their dominance.

As telecommunications companies deepen partnerships with those outside the industry, however, the race has shifted to integrating other services like payments and content. U.S. carrier AT&T has purchased media conglomerate Time Warner earlier this year, for instance. As cell phone use plateaus in developed countries, network operators are entering an era where they cannot expect continued growth just from their communications business.

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