Matthew Brett is an investment manager in the Japanese Equities team at Baillie Gifford. We cover the unique way Rakuten has built a conglomerate over its short history, how its points system ties its services together and keeps users engaged, and the opportunities and challenges posed by its ambitious mobile network rollout.
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Business Breakdown: Rakuten
Background / Overview
Rakuten, founded in 1997 by Hiroshi Mikitani, a former investment banker, emerged during Japan's late-1990s dot-com boom, a period marked by limited capital and fewer entrepreneurial ventures compared to the U.S. Unlike Japan's traditional conglomerates, which often trace their origins back over a century, Rakuten is a modern internet conglomerate rooted in the TMT (technology, media, telecom) wave. Headquartered in Tokyo, Rakuten has grown into a ubiquitous brand in Japan, offering services spanning e-commerce, financial services (credit cards, banking, brokerage), travel, and, since 2014, mobile telephony. Its flagship platform, Rakuten Ichiba, launched as a curated marketplace akin to a professionalized eBay, emphasizing high-quality merchants. The company went public in 2000, capitalizing on early internet enthusiasm, and has since expanded through strategic acquisitions and organic growth, primarily within Japan.
Rakuten's business model is distinguished by its loyalty points system, which integrates its diverse services, fostering customer retention and cross-service usage. This ecosystem approach has made Rakuten a one-stop shop for Japanese consumers, with a single user ID enabling seamless access to its offerings. Despite attempts at international expansion in the late 2000s (e.g., acquiring Buy.com and Play.com), Rakuten faced challenges against established global competitors like Amazon, leading to a retrenchment to its domestic stronghold. The company's bold entry into mobile telephony, building its own network since 2019, represents a significant pivot, aiming to disrupt Japan's oligopolistic mobile market.
Ownership / Fundraising / Recent Valuation
The transcript does not provide specific details on Rakuten's current ownership structure, recent fundraising, or precise enterprise value (EV) multiples. As a publicly listed company since 2000, Rakuten's shares are traded on the Tokyo Stock Exchange. The lack of international success and heavy investment in the mobile network have likely influenced its valuation, with the mobile segment's losses currently depressing overall profitability. The interviewee, Matt Brett, suggests a sum-of-the-parts (SOTP) valuation approach, assessing each business unit (e-commerce, finance, mobile) separately, alongside simpler metrics like market cap relative to sales. However, no specific EV or multiples are cited, and valuation remains speculative due to the mobile segment's immaturity.
Key Products / Services / Value Proposition
Rakuten operates three primary segments, each with distinct value propositions:
- Internet Services (E-commerce and Travel, ~50% of sales):
- Rakuten Ichiba: A curated e-commerce marketplace hosting professional sellers with customizable storefronts. Its selective merchant onboarding ensures quality, differentiating it from less curated platforms like eBay. The value proposition lies in trust, variety, and integration with the loyalty points system.
- Rakuten Travel: A booking platform for hotels and travel services, leveraging the ecosystem to offer points-based discounts. It benefits from Japan's high customer service standards and Rakuten's brand trust.
- Value Proposition: High-quality, trusted platforms with seamless point accrual and redemption, encouraging repeat usage.
- Financial Services (~30% of sales):
- Rakuten Card: A credit card business, acquired in the mid-2000s, now highly profitable after initial challenges. It integrates with the ecosystem, offering points for transactions.
- Rakuten Bank and Brokerage: Online banking and brokerage services, capitalizing on Japan's slow but growing digital financial adoption.
- Value Proposition: Convenient, trusted financial products with point-based incentives, enhancing customer stickiness.
- Mobile Telephony (~20% of sales):
- Rakuten Mobile: Launched as a mobile virtual network operator (MVNO) in 2014, it transitioned to a full-fledged network operator in 2019 using open RAN technology. Priced at roughly half the rates of Japan's major operators, it targets cost-conscious consumers.
- Value Proposition: Low-cost, high-quality mobile service with ecosystem integration, leveraging existing customer data for rapid onboarding and trust.
The loyalty points system is the linchpin, allowing customers to earn points across services (e.g., travel bookings, credit card purchases) and redeem them elsewhere (e.g., Ichiba purchases). This creates a self-reinforcing ecosystem, increasing customer lifetime value and reducing churn.
Segments and Revenue Model
Rakuten's revenue model varies by segment:
- E-commerce (Ichiba): Earns transaction fees and commissions from merchants, with revenue tied to gross merchandise value (GMV). The curated model ensures higher-quality transactions, supporting premium pricing.
- Travel: Generates booking fees and commissions, with revenue driven by transaction volume and average booking value.
- Financial Services: Revenue comes from interest on loans, credit card transaction fees, and brokerage commissions. The credit card business is particularly high-margin due to scale and point-driven usage.
- Mobile: Subscription-based revenue from mobile plans, with pricing significantly lower than competitors (approximately 50% of major operators' rates). Revenue is currently limited by low subscriber numbers (7.7 million out of a 200 million device market).
The loyalty points system enhances revenue by encouraging cross-segment usage, increasing transaction frequency and wallet share. For example, mobile subscribers tend to use other Rakuten services more, amplifying overall revenue.
Splits and Mix
- Segment Mix (Revenue):
- Internet Services (e-commerce + travel): ~50%
- Financial Services (credit card, bank, brokerage): ~30%
- Mobile: ~20%
- Profitability Mix: The transcript does not provide EBITDA splits, but the e-commerce and financial services segments are profitable, with the credit card business noted as "highly profitable." The mobile segment is loss-making due to high upfront capital expenditure (CapEx) and low subscriber penetration.
- Geographic Mix: Predominantly Japan-focused, with international ventures (e.g., Buy.com, Play.com) largely unsuccessful and scaled back.
- Customer Mix: Broad, targeting Japanese consumers across demographics, with a focus on tech-savvy, cost-conscious users for mobile services.
- Historical Trends: E-commerce and travel have grown at just under 20% annually over the past 20 years, though growth is slowing to double digits. Financial services track similar growth rates, while mobile is expected to accelerate post-breakeven.
KPIs
Key performance indicators include:
- E-commerce: GMV growth, merchant retention, transaction frequency, points redemption rates.
- Financial Services: Credit card transaction volume, loan growth, customer acquisition costs.
- Mobile: Subscriber growth (currently 7.7 million, targeting 8-10 million for breakeven), churn rates, network coverage, upload/download speeds, customer satisfaction.
- Ecosystem: Cross-service usage rates, points accrual/redemption, super-heavy user growth.
The mobile segment shows early traction, with improving churn and customer satisfaction, indicating potential acceleration as network reliability solidifies.
Headline Financials
- Revenue: Rakuten has grown sales every year since its 2000 IPO, through economic cycles including the global financial crisis and COVID-19. The transcript cites historical growth for e-commerce and travel at just under 20% CAGR over 20 years, now fading to double digits (~10-15%).
- EBITDA/Operating Margin: Historically, operating margins ranged from 15-20% (late 2000s to 2015). Currently, margins are negative due to mobile segment losses. The company targets a 20% operating margin long-term, considered achievable once mobile reaches breakeven.
- Free Cash Flow (FCF): FCF is currently negative due to significant CapEx in the mobile network build-out. The network is now largely built, reducing future CapEx to maintenance levels, which should improve FCF as mobile subscribers grow.
- Capital Expenditure: High upfront CapEx for the mobile network, now transitioning to lower maintenance CapEx. Financial services also consume some capital, unlike typical internet businesses.
Metric | Historical (2000s-2015) | Current (2025) | Long-Term Target |
Revenue Growth | ~20% CAGR (e-commerce) | ~10-15% | Double-digit |
Operating Margin | 15-20% | Negative | 20% |
FCF | Not specified | Negative | Positive |
CapEx | Moderate | High (mobile) | Low (maintenance) |
Value Chain Position
Rakuten operates midstream in the digital value chain, acting as a platform connecting merchants, service providers, and consumers. Its primary activities include:
- Platform Management: Curating merchants for Ichiba, managing travel bookings, and operating financial services.
- Technology Infrastructure: Supporting the loyalty points system, mobile network, and integrated user ID platform.
- Customer Engagement: Driving trust and loyalty through points and high service standards.
Rakuten's go-to-market (GTM) strategy leverages its ecosystem, using points to cross-sell services and reduce customer acquisition costs (CAC). Its competitive advantage lies in trust, built through years of reliable service, and the points system, which creates switching costs. In the mobile segment, Rakuten is vertically integrated, owning its network infrastructure, unlike its earlier MVNO model, which relied on third-party networks.
Customers and Suppliers
- Customers: Japanese consumers, with 10s of millions across services. Mobile targets cost-conscious users, while e-commerce and finance appeal to a broad demographic. Super-heavy users, who engage across multiple services, are a growing segment.
- Suppliers: Merchants on Ichiba, travel providers, and technology vendors for the mobile network. Japan's efficient logistics and high service standards reduce reliance on proprietary distribution, unlike Amazon.
Pricing
- E-commerce: Commission-based, with fees tied to GMV. Pricing reflects merchant quality and ecosystem benefits.
- Travel: Competitive booking fees, enhanced by points-based discounts.
- Financial Services: Interest rates and transaction fees, with points driving usage.
- Mobile: Priced at ~50% of competitors, targeting price-sensitive customers. Contracts are flexible, with no long-term lock-ins, aligning with Japan's high service expectations.
Pricing power stems from trust, ecosystem integration, and differentiation (e.g., curated merchants, low-cost mobile). Demand is relatively inelastic due to loyalty points and high switching costs.
Bottoms-Up Drivers
Revenue Model & Drivers
Rakuten generates revenue through:
- E-commerce: Transaction fees and commissions, driven by GMV (volume) and merchant fees (price). Growth is organic, fueled by increasing online penetration (~15-20% of retail sales in Japan, below the U.K.'s higher penetration).
- Travel: Booking fees, driven by transaction volume and average booking value. Growth tracks e-commerce trends.
- Financial Services: Interest, transaction fees, and commissions, driven by user growth and transaction frequency. Points increase wallet share.
- Mobile: Subscription fees, driven by subscriber growth (currently 7.7 million, targeting 8-10 million for breakeven). Low pricing drives volume, with potential for rapid growth post-breakeven.
Key Revenue Drivers:
- Volume: Driven by end-market growth (e-commerce penetration, mobile adoption), ecosystem stickiness, and low mobile pricing. Switching costs (points, trust) reduce churn.
- Price: Competitive, with mobile pricing at ~50% of incumbents. Ecosystem benefits (points) enhance perceived value, supporting premium pricing in e-commerce and finance.
- Mix: E-commerce and finance dominate revenue, but mobile is the growth driver. Super-heavy users amplify cross-segment revenue.
Cost Structure & Drivers
- Variable Costs:
- E-commerce/Travel: Merchant payouts, payment processing fees, and marketing. These scale with GMV and transaction volume.
- Financial Services: Transaction processing and loan provisioning. Lower variable costs due to digital delivery.
- Mobile: Customer acquisition costs (promotions, subsidies). Low variable costs per subscriber once the network is built.
- Fixed Costs:
- Mobile: High upfront CapEx for network build-out, now shifting to maintenance. Operating costs (network operations, staff) are significant but fixed.
- E-commerce/Finance: Platform maintenance, R&D, and administrative overhead. These benefit from economies of scale.
- Cost Analysis:
- Mobile's high fixed costs drive current losses, but low variable costs per subscriber suggest strong operating leverage post-breakeven.
- E-commerce and finance have moderate fixed costs, with high contribution margins due to low variable costs.
- EBITDA Margin: Negative currently due to mobile losses. Historical margins (15-20%) reflect e-commerce and finance profitability. The 20% target assumes mobile breakeven and continued scale in other segments.
FCF Drivers
- Net Income: Negative due to mobile losses, despite profitable e-commerce and finance segments.
- CapEx: High historically for mobile network build-out, now low (maintenance-focused). Financial services require ongoing capital, unlike pure internet businesses.
- Net Working Capital (NWC): Moderate, with efficient cash conversion due to digital transactions. Mobile may see NWC fluctuations as subscriber growth accelerates.
- FCF: Negative currently, but expected to turn positive as mobile CapEx declines and subscribers grow, leveraging high fixed-cost operating leverage.
Capital Deployment
Rakuten has prioritized growth investments:
- M&A: Early acquisitions (brokerage, travel, credit card) built the ecosystem, while overseas ventures (Buy.com, Play.com) underperformed. Recent focus is domestic.
- Organic Growth: Mobile network build-out is the primary organic investment, with high upfront costs but long-term potential.
- Capital Allocation: Balanced between maintaining profitable segments (e-commerce, finance) and investing in mobile. No mention of buybacks or dividends, suggesting a growth-focused strategy.
Market, Competitive Landscape, Strategy
Market Size and Growth
- E-commerce: Japan's e-commerce penetration is ~15-20% of retail sales, growing steadily but lagging the U.K. (higher due to population density). Total market size is significant, with room for growth as digital adoption accelerates.
- Financial Services: Growing with digital banking and credit card adoption, driven by convenience and COVID-accelerated trends.
- Mobile: ~200 million devices (120 million population, multiple devices per person). The market is mature but oligopolistic, with high pricing creating space for disruption.
Market Structure
- E-commerce: Fragmented, with Rakuten and Amazon as key players. Rakuten's curated model and points system differentiate it.
- Financial Services: Competitive, with Rakuten among leaders in credit cards and online banking.
- Mobile: Oligopolistic, dominated by NTT Docomo, KDDI, and SoftBank. Rakuten's 3.85% market share (7.7 million/200 million) is small but growing.
Competitive Positioning
Rakuten positions as a trusted, value-driven ecosystem:
- E-commerce: High-quality merchants and points system create differentiation.
- Financial Services: Strong brand and ecosystem integration drive loyalty.
- Mobile: Low-cost disruptor, leveraging existing customer base and trust.
Market Share & Relative Growth
- E-commerce: Rakuten is a leader, with steady share growth as penetration rises.
- Financial Services: Strong position in credit cards, growing in banking.
- Mobile: Low share (3.85%), but potential for rapid growth if trust and network quality solidify.
Competitive Forces (Hamilton’s 7 Powers Analysis)
- Economies of Scale: Strong in e-commerce and finance, with shared infrastructure and points system reducing costs. Mobile has high fixed costs, but scale will drive profitability.
- Network Effects: Indirect network effects in e-commerce (more merchants attract more customers) and mobile (adoption accelerates with trust).
- Branding: Rakuten's ubiquitous brand and trust are key differentiators, especially in Japan.
- Counter-Positioning: Mobile's low-cost, modern technology challenges incumbents, who are slow to respond due to legacy infrastructure.
- Cornered Resource: Loyalty points system and customer data are unique assets, enhancing cross-service usage.
- Process Power: Curated e-commerce and efficient ecosystem operations provide operational advantages.
- Switching Costs: High due to points system and ecosystem integration, reducing churn across segments.
Strategic Logic
Rakuten's strategy focuses on ecosystem expansion and disruption:
- Mobile Investment: A high-risk, high-reward bet to disrupt an oligopolistic market, leveraging existing customer trust and points.
- Ecosystem Reinforcement: Points system and single user ID drive cross-service usage, increasing customer lifetime value.
- Domestic Focus: Retrenchment from unsuccessful international ventures emphasizes Japan's unique market dynamics (trust, high service standards).
Valuation
The transcript lacks specific valuation data, but Rakuten's valuation hinges on:
- SOTP: E-commerce and finance are profitable, with mobile as the swing factor. The mobile segment's potential to capture 10-20% market share could significantly boost value.
- Market Cap/Sales: Used to gauge reasonableness, though no figures are provided.
- Mobile Profit Pool: Japan's mobile market profitability suggests significant upside if Rakuten achieves scale.
Current negative margins and FCF likely depress valuation, but the 20% margin target and mobile breakeven could drive re-rating.
Key Takeaways and Dynamics
- Ecosystem-Driven Model: The loyalty points system is Rakuten's unique differentiator, creating switching costs and driving cross-service usage. This self-reinforcing ecosystem is rare among conglomerates, aligning diverse segments under a single value proposition.
- Mobile Disruption: The mobile network investment is a bold bet to disrupt a high-margin, oligopolistic market. Its high fixed-cost structure offers significant operating leverage, with low variable costs per subscriber post-breakeven.
- Trust as a Moat: Rakuten's brand trust, built over decades, is a critical barrier to entry, particularly in e-commerce and mobile, where consumer reluctance to switch is high.
- Domestic Strength: Japan's unique market dynamics (high service standards, slow digital adoption, cultural barriers) favor Rakuten's curated, trust-based model over global competitors like Amazon.
- Risk-Reward Profile: The mobile segment's losses obscure the profitability of e-commerce and finance, creating a complex investment case. Patience is required for mobile to reach scale, but the upside is substantial.
Rakuten's business model thrives on integration and trust, with the mobile segment as the key growth driver. Its ability to leverage existing customers and data positions it to capture significant value, provided it navigates the mobile market's challenges successfully.
Transcript