TOKYO -- Japanese online shopping giant Rakuten is poised to throw down the gauntlet to its major mobile phone rivals by launching an eye-catchingly low-price offer for consumers as it prepares to make a full-scale foray into the business by the end of April.
Rakuten's flagship service, which allows large volumes of data traffic, will be priced at 2,980 yen ($27.60) per month, less than half the price of similar services offered by major Japanese mobile operators.
Rakuten is bracing for losses in the mobile business for the time being due to a heavy investment burden, and the company's low-price strategy is aimed at bringing a large volume of customers into its "ecosystem."
But Rakuten's full-scale entry into the mobile business comes amid uncertainty over its online shopping business, which has so far propped up the company's earnings, as well as its deteriorating business performance.
The Japan Fair Trade Commission has filed a request with the Tokyo District Court for an emergency suspension order to halt Rakuten's new free delivery policy for certain purchases, which has drawn fire from many tenants at its Rakuten Ichiba cybermall.
Predictions by experts in the telecommunications industry have been sharply split over Rakuten Mobile's closely-watched price strategy in a mobile phone industry long dominated by three players.
One expert said, "Rakuten will have no choice but to offer a price plan that has an impact if it aims to 'knock out' rivals, because a new entrant cannot win through a half-baked policy."
But according to another expert, "Rakuten's burden of investment in base stations and others is heavy. It will not be able to offer so low prices because it pays roaming connection fees to KDDI in places where it does not have its own telecommunication network."
Although it is difficult to make a simple comparison between rival offers, Rakuten's service that allows large volumes of data traffic will be priced at less than half the prices for similar services provided by NTT Docomo, KDDI and SoftBank.
Rakuten may appear bullish, but its low-price strategy can also be taken as a sign of its challenging predicament.
One Rakuten executive said, "The fortunes of the (Rakuten) group depend on the mobile business. We must provide an outstanding service."
In addition to the Rakuten Ichiba online shopping mall, the company is currently engaged in more than 70 businesses, including credit cards, insurance and sports, and it boasts about 100 million customers in terms of the number of IDs it holds.
The company is aiming for ripple effects on its entire group by undertaking smartphones and communication -- infrastructure fundamental to daily lives -- and offering sufficient privileges through mutual use.
The problem is that Rakuten Ichiba, the company's mainstay business, has stumbled and lost some of its former stability. Last Friday, Japan's Fair Trade Commission filed a request with the Tokyo District Court to issue urgent action to halt Rakuten's new free shipping program for purchases from Rakuten Ichiba. It was unusual for the commission to seek a court judgment before issuing a cease-and-desist order under the antimonopoly act. Rakuten said in a statement that it "believed there is no legal issue" for its plans, putting itself on a collision course with the commission.
Rakuten believes changing its shipping fee policy is essential for competing with Amazon Japan, its archrival in online retail. Rakuten Ichiba has about 50,000 merchants selling to its many customers, and the online retail business is one of two key revenue earners for the group, along with its financial business. If a prolonged confusion should ensue, its brand image and competitiveness may be hurt. and so Rakuten aims to win many customers for the mobile carrier service as quickly as possible with attractive pricing to make up for a fall in online retail revenues.
In the year ended last December, Rakuten saw its highest-ever consolidated revenue, but also suffered its first net loss in eight years. The result was dragged mainly by impairment loss on its shareholdings in U.S. ride hailing company Lyft and investments for the mobile carrier business. While its fintech business, including mobile payments, banking and securities brokerage, fared well, its mobile business suffered losses totaling 60 billion yen, increasing about 340% from a year earlier. Rakuten plans to raise a total of 600 billion yen to invest in the mobile carrier business between 2018 and 2025. Investments to develop its communications network is heavy, and the financial load is expected to grow further.
At a briefing for institutional investors on Feb. 13, Chief Architecture Officer Tareq Amin said the investment was purely capital expenditure, and that Rakuten will become the cheapest of the world's 1,400 mobile carriers. He added the company will not need any more money than it has already planned.
Rakuten has adopted a cloud-based technology called "virtualization" for its communication networks, and the company says it can reduce initial costs by 30% and operational costs by 40% by installing software on its low-priced general-purpose servers so that they will have similar functions as those on specialized equipment.
But Rakuten has many hurdles to overcome. Japan's Ministry of Internal Affairs and Communications gave administrative guidance to the company after Rakuten Mobile's trial service experienced a temporary failure on Dec. 10. The company is also being required to improve communication quality after 70 or so users in Osaka and Nagoya experienced communication failures earlier this month.
Chairman and CEO Hiroshi Mikitani has repeatedly said that he wants to have a dramatic impact on Japan's already crowded mobile phone market with new, low-cost services, but it seems Rakuten's success depends on whether it can provide out-of-the-box services only new entrants can offer and take advantage of its existing businesses.