On February 12, Rakuten shared its first-ever virtual video presentation of full year financial results from across the Rakuten Group. Leaders from 20 business units throughout the company’s diverse ecosystem of more than 70 services worldwide commented on the year’s highlights.
To share his perspective on the results, Rakuten CEO Mickey Mikitani sat down for a Q&A with Daiwa Securities Chief Analyst Taro Ishihara. This wide-ranging discussion covered the record-breaking performance of key Rakuten Ecosystem businesses such as e-commerce and fintech, as well as the investment in future growth with mobile.
What are the most important points for you as CEO when considering the performance of the Rakuten Group in 2021?
Sustained GTV (gross transaction value) growth and mobile subscribers are key. All our KPIs are important, but if I had to choose, then I would say these two are the most important.
We could always focus on maximizing the bottom line at any time, but doing so would stop our growth, so I want to keep investing for the future. I also want to invest while taking into account marginal rates of return.
I think the Rakuten Group has decided to further increase its topline and rate of sales growth over the medium to long term. Other companies are smaller and are focused on profits. Why did you switch to emphasis on the top line? What made you decide to accelerate your investments?
I think that is a global standard. In Japan, people tend to focus on value and the bottom line, but the world is still in the middle of major changes and transformation – and will change drastically over the next 5 to 10 years. If we stopped challenging ourselves and evolving, we might not be able to withstand new entries from overseas companies or other industries, not to mention domestic competition.
Unless we rise to new challenges with our business model and ecosystem by doing things no one else has ever done and provide higher added value to end users and Rakuten members, we will eventually be the ones to lose out.
Rakuten’s Mobile business is growing
Other telco carriers have recently significantly reduced prices. Was this in line with your expectations? Rakuten also announced a new plan, but what other response do you plan at this point?
With other companies, you have to apply online and you only get 20GB, so the plans are quite restrictive. There are many different brands, and people who do not use much data are paying expensive mobile service fees. We are looking to democratize mobile fees, so our plan is very simple.
Our new service plan looks aggressive, but the current pace of subscriber acquisition numbers is several times higher than before. I think it was a smart decision, considering that the cost of acquiring customers will also decrease. The investment plan is mostly in line with original plans. So, our financing plans are solid.
You have talked about the start of satellite communication and the development of Rakuten Communications Platform (RCP), but what are the specific benefits of starting satellite communication?
In partnership with AST (AST & Science), a company which Rakuten invested in, and is preparing to list through a SPAC, we will lead the world with this launch. We plan to connect directly from smartphones to satellites in medium orbit from Earth. Imagine if you could directly connect to the internet or voice calls even from uninhabited mountainous regions which have never had radio access or in planes mid-flight, or even on remote or desert islands – that’s what this is.
What kind of earnings contribution do you expect from RCP in the future?
Let’s look at Amazon as an example. It has two pillars: E-Commerce and AWS. Their revenue structure is such that cloud services generate the earnings to fuel growth of the e-commerce business. In Rakuten’s case, building on the Rakuten Mobile base, RCP will be a platform for overseas expansion, and the software we’ve developed will be offered for sale to various overseas companies. It’s hard to say at this stage whether mobile or RCP will ultimately generate more profits, but RCP may generate revenue that is equal to or better than the Mobile business.
At this stage, we are already seeing increasing sales of RCP software, in the form of OSS (open source software) and other software solutions, to clients in more than a dozen countries around the world. I think we may have some good news to share in the near future regarding mobile networks built solely with RCP.
Please tell me your thoughts on M&A.
Ten years ago, Rakuten was a business model company. But now we are a technology company. Therefore, M&A to acquire specific technologies may increase in the future.
Rakuten’s e-commerce and offline strategy
The barrier between online and offline is steadily shrinking. Some think that profitability may go down when an internet company goes offline, but I think that synergies will also emerge in mobile and finance. What do you think?
Online sales account for just 6-7% of the total GMS of the entire market size of retail product sales in Japan, so the remaining 93% is offline. Online can increase more. The e-commerce penetration rate in Japan could reach 20%, comparable to the level in Europe and the United States. It is reasonable to imagine that the market scale of e-commerce could expand almost three-fold. Even if 70-80% of transactions remain offline, our business is about how to promote products and attract customers by utilizing Rakuten payments, data and points, etc., and the potential for further scale is very large.
Even when we decided to invest in Seiyu recently [a prominent Japanese supermarket chain], as we already work with Rakuten Edy and Rakuten Point partners nationwide, we kept the investment stake at 20%. We are aiming to replicate that same digital transformation we will create, and a platform called “Digital Experience” with regional supermarkets across the country. What sets Rakuten apart from other companies is that we are not just looking for Rakuten to win but for local players to also win, i.e., a triple win – for Rakuten, local partners and end users.
Rakuten and the power of sports
How do you position the relationship between sports content and the Rakuten Ecosystem?
An increasing amount of content, such as streamed content, won’t need to be viewed in real time. However, I think sports are the only content that you really want to see in real time. I don’t want to see sports when everyone already knows the results. In that sense, sports can be said to be the king of content.
On the other hand, sports are also capable of making great contributions to society. When people recognize the positives of our sports investments – across the Group and our services – they see this is also a valuable driver that is increasing Rakuten’s brand value as a Group. And outside Japan, by aligning our brand with FC Barcelona, Golden State Warriors and the NBA, Rakuten brand has now achieved 70% and 60% brand awareness in Europe and the United States respectively. So I believe sports branding is a big advantage for Rakuten.
Fintech, mobile payments and e-money
Last year, mobile payments became a hot topic. Please tell us about Rakuten’s approach to mobile payments.
I think there are various entry and exit points. Where does the wallet spend come from? Thinking about it, first we had a bank, then a credit card. We have now taken the strongest market positions in both of these. Rakuten Bank has already exceeded 10 million accounts, and in the future, 15 or 20 million accounts should be possible. Rakuten Card could have 25 or 30 million members. After that, I would like to bundle all of them, whether you pay with a plastic card, a QR code, Edy or Suica. For example, instant charging with points has started. At point member stores, it is now possible to pay with points. This is now available at millions of outlets throughout Japan. We can provide a broad choice of options. Actually, since you can now buy Bitcoin with Rakuten Points, I would like to make it possible next to pay at convenience stores with virtual currency.
Rakuten also has a bank, credit cards, personal finance, securities, insurance, payments and provides virtual currency exchange services. We may be the only company in the world that offers everything in such an integrated manner. These services are all connected with Rakuten Points, and since they are also connected as an account for your finances, combined they are a powerful force and the level of security is high. That is our strength, and it should make a significant contribution in terms of profits in the future. For example, even with credit cards, membership acquisition comes from within the ecosystem and funding can be done from Rakuten Bank in the form of securitization. We can say that the formation of these businesses is close to completion.
For more from Mikitani and Rakuten’s leadership team, as well as business-by-business breakdowns of Rakuten’s FY2020 performance, watch the video linked above.