Rakuten stumbles (again); vRAN isn’t the problem, but it’s not a magic bullet if the basics aren’t right; implications for Dish & other new entrants
Rakuten is the highest profile virtualised Radio Access Network project in the world, and CEO Mikitani’s MWC tub-thumping lifted vRAN to the top of the ‘hot topic’ list for 2019. Speakers at our recent 5G conference (key takeaways from the telecom team HERE and the tech team HERE), and plenty of other news flow, have indicated that virtualisation of the core and the RAN is the way forward for lower unit costs and more flexible, secure, and scalable networking.
We don’t see this as a change of trend – unit costs have been falling relentlessly for several decades – but virtualisation is one of the key drivers for continued declines over the next decade. Virtualisation has a large and growing band of global enthusiasts too, including heavyweight operators, and an increasingly wide ecosystem.
Precisely because Rakuten put vRAN front and centre in its extravagant pitch to MWC earlier this year, it’s natural to suspect that vRAN is at the root of its disappointing trajectory since then. But, just as vRAN isn’t central to Rakuten’s story, in our view (see HERE), it also isn’t why the launch is late and impact being downgraded. This diagnosis matters for the Japanese market, but it also matters for vRAN globally.
The one thing investors and industry observers need to understand is that vRAN is not a magic pill for new entrants. New entrants still struggle with the same dilemma: How to offer a high-quality service, comparable to incumbents, while continuing to roll out their infrastructure. vRAN or not, this is the challenge, and most successful new-entrants benefited from very advantageous roaming agreements (e.g. Iliad in France), not revolutionary technology. vRAN is nevertheless a likely game changer for the industry as, once at scale, it allows operators to increase capacity and density in their networks very cost efficiently, the same way virtualized cloud data centers can scale out effortlessly. New Street’s Technology Infrastructure team will be writing more about this topic soon.
So how does this pertain to Japan? Once again, we have downgraded our view of the extent of disruption the incumbent telcos likely face when Rakuten launches. Our thinking remains therefore that Rakuten will impact Japanese incumbent revenues, but the time line is being extended and in the meantime the impact is likely insufficient to derail the theme of rising shareholder returns, especially in the context of rising IoT and platform revenues, as well as the potential for 5G to be monetised in Japan.
The vRAN ecosystem will be relieved to hear though that vRAN is not the reason for our less positive view of Rakuten’s entry. Every indication, (including key vendor Altiostar’s input to our conference) is that Rakuten’s vRAN is functioning properly, and that the causes of delay and difficulty lie elsewhere. Details are in our note (HERE), but in short Rakuten’s issues are to do with the basics: an expensive (and clunky) roaming deal, inability to build capacity as rapidly as initially targeted, higher than expected growth in traffic, and lack of a commercial deal with Apple, still the dominant force in the Japanese handset market.
What this all means is that the likely impact of Rakuten’s launch on the incumbents initially is muted, but for Japan and Rakuten-specific reasons, not because of a problem with the novel network architecture. Meanwhile, incumbents are seeing improving revenue trends. The market anticipates this going into reverse when Rakuten launches but with rising IoT/enterprise revenues and with 5G about to launch and a limited Rakuten impact we think trends may even improve. The Japanese MNOs have been driven by positive earnings momentum; we expect that to continue and stay constructive on all the Japanese incumbents, while also positive on the long-term future for vRAN.
Dish has been the most vocal proponent of the benefits of vRAN in the US. We think Dish will have a massive cost advantage over the other national wireless carriers, that will allow them to price disruptively (see detailed report HERE). Only a small part of this cost advantage stems from vRAN though. The challenges ahead for Dish will be similar to those Rakuten is facing: they will revolve around civil engineering (deploying tens of thousands of cell sites still requires an army of men in trucks), capital raising, and the business model.
The remainder of the Global Weekly Review can be found HERE along with all past and future reports. Our updated valuation comp sheets can be found HERE.
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