Introduction
For those familiar with my work on Konichi-Value, you know my disapproval of Rakuten and its management, especially CEO Hiroshi Mikitani. I've previously criticized his blame-shifting and use of tactics like assigning pointless tasks to push employees to quit, but this time, I intend to dig deep into not only his shortcomings, but the shortcomings of Rakuten Group as a whole.
If you’re interested in the Rakuten stock, I've discussed the company's massive debt and risk of collapse in this article:
Once a digital pioneer in Japan, Rakuten's fall is mainly due to unchecked ambition and mismanagement. The company, known for its diverse e-commerce and online services, found success through innovation and strategic partnerships. However, under Mikitani's leadership, costly mistakes in the mobile and logistics sectors began to overshadow its triumphs.
Drawing from sources like Diamond magazine and Asahi Shinbun, this article delves into Rakuten's downfall. We'll explore its troubled mobile ventures, the contentious partnership with Japan Post, and the impact on its reputation.
Rakuten's story, from an incredible success story to a trainwreck on the brink of disaster offers valuable insights into balancing risk-taking and corporate responsibility, reminding us how thin the line between winning and losing can be.
Table of Content
Chapter 1: The Beginning of the End: Rakuten's Mobile Meltdown
Chapter 2: It Gets Darker: Fraud Within Rakuten Group
Chapter 3: Rakuten Tricks Japan Post into Billion Yen Loss-Making Scheme
Chapter 4: Rakuten's Desperate Spinoff: Profitable Securities Division Sacrificed for Short-term Survival?
Chapter 5: Could a Buyout be Rakuten’s Only Way Out?
Conclusion
Chapter 1: The Beginning of the End: Rakuten's Mobile Meltdown
*Rakuten Group refers to the company while Rakuten Mobile, Rakuten Ichiba, Rakuten Bank or Rakuten Securities are entities within Rakuten Group.
Rakuten's mobile division was supposed to take the Japanese mobile market by storm, but instead became a money pit for the company’s finances.
In a desperate bid to stem the bleeding of its mobile business, Rakuten Group Chairman and President Hiroshi Mikitani had resorted to a series of questionable measures, including slashing costs, cutting personnel, closing stores, and even implementing employee quotas for new contracts. While these strategies might have helped offset the massive losses in the short term, they also risked undermining the very foundation of the company's telecommunications network.
Mikitani's frustration had become more and more evident as 2022 progressed. At Rakuten’s mandatory morning meetings, he railed against the lackluster performance of Rakuten’s "Mobile referral campaign" aimed at increasing new cell phone subscriptions by strong bonus campaigns and forceful quotas for his employees.
Rakuten had lost over 360,000 subscribers in the first six months of 2022. The reason for this loss was that Rakuten suddenly cut its “0 yen mobile plan”, a plan to give customers a chance to experience Rakuten Mobile’s network for free for up to 1GB of data per month. With a quota system in place for employees to bring in new contracts, the company had hoped to recover some these subscriptions.
However, by December of 2022, the campaign had not achieved the desired results, further fueling Mikitani's ire.
In a controversial move, Rakuten announced that it would postpone the installation of cell phone base stations by a year. This decision, aimed at reducing costs quickly, could have had serious implications for the company's ability to provide a reliable telecommunications network. Although Rakuten claimed that the postponement was due to its 4G population coverage rate already reaching 98%, the consensus among the public was that Rakuten had by far the worst coverage of the four major carriers in Japan.
But the cost cutting didn’t only undermine Rakuten’s mobile network coverage reputation. It also extended to personnel and storefronts, with mass transfers of employees from Rakuten Mobile and the termination of contracts for outsourced workers. Additionally, the company had closed more than a hundred Rakuten Mobile stores across Japan.
While these efforts may have reduced costs in the short term, they would have dire long-term consequences. For instance, Rakuten’s plan to phase out its partnership with another major mobile carrier, KDDI, to cover areas Rakuten mobile did not yet cover was contingent upon the sufficient coverage of its own base stations. However, with the postponement of base station installations, Rakuten risked undermining the reliability of its mobile network, potentially driving even more customers away.
In times of crisis, it's understandable that companies take drastic measures to ensure their survival. However, Rakuten's decisions seemed shortsighted and could have ultimately jeopardized its future as a telecommunications provider. By resorting to these desperate measures, the company called into question its commitment to its customers and its ability to serve as a reliable social infrastructure.
Chapter 2: It Gets Darker: Fraud Within Rakuten Group
However, Rakuten’s subscriber losses was just the tip of the iceberg of the company’s problems.
In March 2023, a fraudulent billing scandal in Rakuten’s mobile sector was uncovered following the bankruptcy of Nippon Logistics, a medium-sized logistics company.
Rakuten Mobile suffered a total of 4.6 billion yen in damages from Nippon Logistics' fraudulent billings. The fraud took place just as Rakuten Mobile was accelerating the construction of base stations in preparation for the launch of its cell phone service in April 2020.
The connected people and companies are still anonymous to the public as the investigation is ongoing, but three main people were involved in the fraudulent money transfer behind the construction of Rakuten Mobile's base stations: Mr. A, a former employee of Rakuten Mobile; Mr. B, the president of a transportation company; and Mr. C, a former executive in charge of Rakuten at Nippon Logistics. Mr. A and Mr. B masterminded the fraudulent transactions.
The massive fraudulent scheme suddenly collapsed in 2022, with Rakuten Mobile launching an investigation into Mr. A and discovering the illegal money transfers. Nippon Logistics was forced into bankruptcy, and Company T, the vessel through which Mr. A and Mr. B conspired, ceased all business operations.
Company T was also involved in another fraud within the Rakuten Group, connecting the two incidents of financial irregularities at Rakuten Express (Rakuten’s former shipping and logistics arm that was terminated in May 2021) and Rakuten Mobile.
Rakuten Group has remained vague on the details of this matter, with the former executive officer involved in the fraud quietly leaving the company without disclosing the internal situation at Rakuten Express. The fact that the fraud in the mobile business was uncovered without a thorough investigation is likely the result of Rakuten Group's "organizational cover-up."
Without a thorough investigation, many are speculating that the fraudulent behavior was well-known inside Rakuten group and only floated up to the public when things became too big to handle. This massive fraud casts a dark shadow over the group's future and ability to recover…
Chapter 3: Rakuten Tricks Japan Post into Billion Yen Loss-Making Scheme
![[Speaking Out] Serious Security Pitfalls Behind Japan Post-Rakuten Partnership | JAPAN Forward](https://substackcdn.com/image/fetch/$s_!zXDq!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F987642d6-1e12-41ee-ac82-54648770d5f1_1200x800.jpeg "[Speaking Out] Serious Security Pitfalls Behind Japan Post-Rakuten Partnership | JAPAN Forward")
Rakuten Group’s perhaps most famous segment is its e-commerce business, also called Rakuten Ichiba. Even though Rakuten Ichiba churned out healthy and growing profits, bad bets and attempts to transfer its profits to building out Rakuten’s mobile network put a lot of pressure on it.
On March 12, 2021, Rakuten Group announced a partnership with Japan Post, Japan’s biggest postal and logistics service provider. The biggest fruit of this alliance was the 150-billion-yen cash investment Japan Post provided by signing the alliance agreement. From the beginning, the funds were to be used entirely for the development of Rakuten Mobile’s cell phone base stations and other telecommunications equipment. After the disbursement of funds, Rakuten's capital investment in the cell phone business from April 2021 to the end of September 2022 amounted to 73.5 billion yen, and there is no doubt that the company has now burned through the entire amount of this investment.
However, that was not the only benefit for Rakuten. The company terminated its own delivery network, Rakuten Express, in May 2021 following the alliance with Japan Post. Rakuten and Japan Post established a joint venture company, JP Rakuten Logistics LLC (50.1% owned by Japan Post and 49.9% by Rakuten). In July of the same year, Rakuten transferred its own logistics centers to JP Rakuten Logistics LLC and was thus relieved of the burden of its unprofitable logistics business.
While Rakuten was making great strides in e-commerce, Japan Post, which took over JP Rakuten's logistics centers from Rakuten and included them in its consolidated group, saw its performance deteriorate. The operating loss of Japan Post’s Postal & Logistics segment was 6.3 billion yen, down from a profit of 7.2 billion yen in the same period a year earlier. It is believed that JP Rakuten's losses are growing as unprofitable logistics centers continue to expand.
In conclusion, the alliance between Rakuten and Japan Post was clearly a one-sided deal. Rakuten had been relieved of the burden of its logistics business and secured funds for its cell-network expansion, while Japan Post continues to struggle with Rakuten’s former loss-making logistics centers.
In all likelihood, Japan Post’s leadership is not too happy about this and might be looking for additional compensation or divest in the joint venture completely. If so, as Mikitani is presently looking for Rakuten’s next cash-infusing "savior" to help the company stay afloat, it might spell the end for Rakuten Group faster than anyone is anticipating…
Chapter 4: Rakuten's Desperate Spinoff: Profitable Division Sacrificed for Short-Term Survival?
In the mess that is Rakuten Group, there are two silver linings: Rakuten Securities and Rakuten Bank.
During the 2010s, the small-amount investment tax exemption program, known as NISA, was expanded in Japan, which greatly benefitted internet securities firms like Rakuten Securities. The company experienced rapid growth in its number of accounts, attracting younger investors. Mizuho Financial Group (FG), which holds a 19.99% stake in Rakuten Securities, eyed the potential growth and influence of Rakuten’s economic sphere.
In 2022, it was announced that Rakuten Securities planned a spin-off from Rakuten Group and go public along with Rakuten Bank. Mikitani marketed this move as a smart business decision to strengthen its reach, but in reality, it was likely a desperate attempt to save the company from drowning in debt by getting a quick cash infusion. Rakuten bank and Rakuten Securities are Rakuten's most profitable segment, and a spinoff does not make sense from a business standpoint.
However, Mizuho FG was very eager to help finalizing a spinoff. The company had for long been aiming to attract younger customers, but due its aging infrastructure and leadership reluctant to change, the company has so far been unsuccessful. By investing in Rakuten’s banking division, it could tap into Rakuten’s much younger customer base, and some in the financial industry are even speculating that the company is looking to take control not only of Rakuten Securities, but also to gain control over Rakuten Card, Rakuten Group's most valuable asset.
For Rakuten Group, the planned listing of Rakuten Securities and Rakuten Bank could further distance the company from its famous Rakuten points program, which had been a major draw for its customers.
Rakuten’s point program, where points are mainly generated by using Rakuten Bank’s credit card and then increased if used inside Rakuten Group’s ecosystem is key to keep customers using the company’s other services, such as its e-commerce marketplace or its mobile network.
With Mizuho FG pushing for the spin-off, it is very likely that it aims to decouple both Rakuten Securities and Rakuten Bank from Rakuten Group’s ecosystem and instead benefit Mizuho’s service offering, something that would severely hamper Rakuten’s future customer accusation strategies.
However, as Rakuten Group is on the brink of bankruptcy it may not have any other choice. The IPO of Rakuten Securities and Rakuten Bank is not yet finalized, but if all goes according to plan, it will happen on April 21st this year.
Chapter 5: Could a Buyout be Rakuten’s Only Way Out?
As the financial pressures on Rakuten continues to mount and the company struggles to find a viable path forward, a more and more likely scenario that is being discussed vividly is the possibility that KDDI or another telecommunications carrier could step in as a savior for Rakuten.
However, given the massive costs of a potential acquisition and the substantial debt that Rakuten has accumulated over the years, any potential suitor would have to weigh the benefits of such a deal against the considerable risks involved. Additionally, Japan’s Ministry of Internal affairs and Communication (MIC) would definitely have a say in how competition and mobile spectrum allocation would be affected if such an acquisition took place.
Also, Rakuten Group is truly Hiroshi Mikitani’s baby, and his name is basically synonymous with the company. He would likely do everything in his power not to let this happen.
In any case, Rakuten's current financial situation is unsustainable, and the company's future depends on its ability to secure the necessary funds to continue its operations and investments. As the company explores various options, including IPOs for its financial subsidiaries, asset sales, and capital infusions, the possibility of a "savior" emerging to help Rakuten through its financial troubles remains to be seen.
Whether it will be a familiar name like Japan Post, KDDI or Mizuho FG, or a new player in the telecommunications industry like Softbank, Rakuten Group's future might be less in the hands of its CEO, Hiroshi Mikitani, and more dependent on whomever has the capital and courage to buy them.
Conclusion
The saga of Rakuten's expansion and subsequent struggles under the leadership of Chairman and CEO Hiroshi Mikitani paints a vivid picture of ambition and missteps. Mikitani's decisions have led to the company's questionable ventures, particularly in the mobile and logistics sectors.
Rakuten Mobile, launched in April 2020, has been a significant drain on the company's resources. While its low-cost unlimited data plans managed to attract 3.5 million subscribers by June 2022, this success has come at a cost. Mikitani's leadership saw the company invest over 1 trillion yen ($8.7 billion) in building its cell phone infrastructure with the goal of reaching 15 million subscribers. By September 2021, Rakuten Mobile had already accumulated an operating loss of 139.2 billion yen ($1.2 billion).
The alliance with Japan Post further highlights the consequences of Mikitani's leadership. While securing an investment of 150 billion yen and offloading the loss-making logistics centers to Japan Post, Rakuten has failed to deliver on the promise of an efficient, streamlined logistics network for its e-commerce platform, Rakuten Ichiba. This has left Japan Post to grapple with the challenges of operating a distribution network it has little experience in, while the benefits of the alliance for Rakuten Ichiba stallholders remain unseen.
Moreover, Rakuten's domestic e-commerce performance, while impressive, has come at the expense of others. The company's operating profit margin for domestic e-commerce has maintained a double-digit level, but this success is built on the back of store operators and Japan Post who must shoulder the burden of logistics…
With an insatiable thirst for growth, Mikitani's leadership has led to a trail of broken promises and disillusioned partners. As Rakuten continues to search for its next "savior" to keep the empire afloat, this tale serves as a stark reminder of the potential consequences of unchecked ambition and hubris in the world of business.
Rakuten Group’s future now hangs in the balance of external forces and the story might be in its last chapter... As this chapter unfolds in front of our eyes, it remains a cautionary tale for others to tread carefully in their quest for success, lest they face a similar fate.
Rakuten Bank, a subsidiary of Rakuten Group, to be listed on Tokyo Stock Exchange on April 21