Rakuten is bleeding. As of 2019, Japan’s response to Amazon reported losses of around $ 2.1 billion (at today’s exchange rate) on sales totaling $ 34 billion, as a costly construction project ‘a new mobile network has exhausted resources. He expects to break even by 2023, when most of the big work has been done. But New Street Research doesn’t care. The analyst firm now expects operating losses to continue until 2026. Ultimately, it believes Japan will once again become a three-player market.

What’s wrong ? With its cutting edge technologies, Rakuten was supposed to be a slim and super fit rival for overweight incumbents in Japan. Instead, it flaps its wings like a downed sumo wrestler. And yet, its technology has a major cost advantage, according to New Street Research. A model he built with BlueNote, an industry consulting firm, confirms Rakuten’s claim that its capital expenditure is 40% less than a traditional operator on a per-site basis, said the analyst firm in a research note this month. The model also proved that Rakuten’s operating costs are 30% lower, New Street Research insists.

The problem is not the technology but the lack of spectrum, according to this note. Rakuten only has a quarter of each competitor’s 4G spectrum and no low-band spectrum. This has forced Rakuten to rely on a roaming service provided by KDDI and increases its cost per gigabyte.

Rakuten CEO Hiroshi Mikitani has lost $ 2.1 billion on his mobile project so far.
(Source: Rakuten)

Rakuten’s delay in rolling out 5G adds to the problem. While its 4G network numbered more than 30,000 base stations in November, and is expected to reach 96% of the population in the coming weeks, Rakuten had only deployed 1,000 5G sites as of March of last year. New Street Research estimates that figure has risen to just 2,000 since then and could reach 4,000 by March. But even this doubling would leave Rakuten far behind its competitors in deploying the most efficient technology. KDDI aims to have 50,000 sites operational by the same date. SoftBank’s target is the same.

All in all, that means Rakuten must spend at least 1.5 times as much as any other player per gigabyte, and possibly twice as much, according to New Street Research. That could change if it can access low-band spectrum and accelerate its 5G rollout. Yet neither seems likely. Existing regulators are not moving quickly to rearrange spectrum, and Rakuten lacks funds to accelerate deployment.

Doubts about virtualization

What is not clear from the note is why New Street Research and BlueNote are so convinced that a Rakuten-type operator without its constraints would have far lower costs than a traditional telco. The researchers allude to the “structural advantages of vRAN over traditional architecture” and say they are ready to share details of their model. Many observers will be skeptical.

This is largely because there is only a portion of the total budget that can be virtualized (the vRAN to which the note refers). Dell’Oro, another market research firm, recently estimated overall wireless investments to be around $ 150 billion per year. Of that amount, only between $ 30 billion and $ 35 billion typically goes to the radio access network. The remainder includes transport costs and the mobile core, which could fall thanks to more efficient technologies. But this also covers the physical infrastructure ?? towers, steel, cement ?? this software and the cloud can never eat.

Table 1: Breakdown of Rakuten Investment Savings

Traditional Rakuten Percent change Rationale for change
Total investments 100 60 -40%
Software 30 30 0% N / A
Equipment 45 17.5 -60% Less site equipment thanks to virtualization and pooling of capacities / resources
Deployment 25 12.5 -50% Less site equipment thanks to virtualization and pooling of capacities / resources

Doubts still surround the business case for RAN virtualization. In theory, operators could save money by removing IT resources from mobile sites and pooling them in data centers, using less equipment for the same footprint. This re-architecture is Rakuten’s only explanation for its claims of a 40% reduction in capital spending. But it seems much easier in high fiber Japan than in many other countries, where it could require a huge “fronthaul” investment. Chips currently available also don’t measure up to the custom silicon of a traditional array, according to several industry executives.

Scott Petty, Vodafone’s chief digital officer, has publicly expressed his skepticism about the performance of general-purpose processors based on Intel’s x86 architecture. “Some of the vendors made some pretty far-fetched statements at the start that it was 30% faster, 30% cheaper, and it just wasn’t true,” he told Light Reading at the start. ‘a press conference in late 2021. “Now they have to deliver, but it will require dedicated silicon. It won’t be Intel chips.”

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Savings could result from network sharing facilitated by the deployment of an open and virtualized RAN infrastructure. A telecommunications executive, who spoke on condition of anonymity, said operators can run different software products on shared hardware ?? something impossible in a traditional network. Yet Rakuten does not currently appear to be sharing its RAN with its Japanese rivals.

The company’s own figures on the size of the market also raise questions. Showcasing its in-house technologies and partners to other service providers, Rakuten valued the addressable market at between $ 80 billion and $ 100 billion last year and predicted that it would be worth $ 130 billion to $ 150 billion in 2025. Its breakdown implies a sharp increase in RAN spend alone. But it would be counterintuitive if virtualization takes off and allows operators to reduce capital expenditure per site by 40%.

Source: Rakuten Note: Figures and subsequent breakdown should show that for every 100 currency units spent on a traditional network, an operator would only spend 70 on Rakuten technologies.

Source: Rakuten
Note: The numbers and subsequent breakdown should show that for every 100 currency units spent on a traditional network, an operator would only spend 70 units on Rakuten technologies.

The automation challenge

The argument for reducing operating costs is probably stronger. Rakuten acknowledges that investing in edge data centers and transmission would increase some expense, but says it can achieve savings in rent, electricity, and field maintenance with less equipment. A more software-based network can also be easier to automate.

Yet the anonymous Light Reading telecoms source says the case for automation has yet to be proven. Greater reliance on software could simply change the profile of the workforce. Vodafone, in particular, intends to recruit thousands of software engineers over the next few years, in part to avoid relying on systems integrators when deploying Rakuten-like technologies. He rejected suggestions that its membership would drop dramatically.

Table 2: Breakdown of Rakuten Operating Savings

Traditional Rakuten Percent change Rationale for change
Total operating expenses 100 70 -30%
Rent and electricity 40 30 -25% Less site equipment reducing footprint and total power consumption
Data centers 5 ten 100% Increased use of edge locations for low latency use cases
Transmission 5 15 50% Increased use of peripheral locations and transmission
Operations center ten 5 -50% Automation and scale of resource centralization
Field interview 35 ten -70% Less site equipment and automation in maintenance

Rakuten appears to be more automated and requires fewer employees than a traditional network operator. Its entire operations team had only 175 employees as of March 2020, said Tareq Amin, chief technology officer of Rakuten Mobile. He would never employ more than around 350 people, he told Light Reading at the time. Each of his rivals uses thousands of them, he then estimated.

Unlike Rakuten, these companies ?? as well as brownfield operators in other parts of the world ?? still retain various aging technologies that cannot be easily removed or disabled. Their 2G and 3G systems are perhaps the most obvious examples. But the old fixed networks are also a burden today. In the UK, BT is likely to close as many as 4,500 of its 5,500 exchanges with the transition from copper to fiber, said Colin Sempill, CEO of Neos Networks, a rival to BT that has installed its own equipment in hundreds of these facilities.

All of this could represent a significant cost advantage for entirely new networks that have adequate spectrum assets. This explains why New Street Research is so bullish about America’s Dish and Germany 1 & 1, new players that don’t have the same constraints as Rakuten and seem more focused on 5G. “This means that for these two challengers, we believe vRAN creates opportunities for disruption,” the company says in its research note. “Just not in Japan.”

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?? Iain Morris, International Editor, Light Reading