Rakuten released its Q1 2023 results earlier this month. Mobile segment revenue increased 25.7% YoY to $710 million but was down 11.5% sequentially compared to Q4 2022. Operating loss improved 22.4% to $760 million YoY with a smaller 4.7% improvement sequentially compared to Q4 2022.
Improving Customer Experience
In the short term, improving network quality is Rakuten’s main priority. Following a recent customer survey, Rakuten has launched several initiatives to improve customer experience, most of which will be resolved by a new roaming agreement with KDDI – which includes access to the latter’s sub-1GHz spectrum for the first time. This should improve coverage, particular in-doors such as in the home and in high-traffic shopping malls, as well as underground in subways, tunnels, etc. However, Rakuten urgently needs to build its own low-band networks – i.e. in the so-called “platinum” band – starting probably in early 2024.
Selling the Family Silver
Rakuten is still in a precarious situation financially and is in the process of selling more of the family silver to fund its mobile network roll-out. This includes IPOs and the sale of stakes in some non-core assets, for example, the Seiyu supermarket chain. The company has also pushed back its target date to become profitable from the end of 2023 to an unspecified time in 2024.
Challenges of Rolling Out Greenfield Networks
Rakuten’s experience over the past three years illustrates the challenges of rolling out a greenfield network in a mature market and the time, effort and investment required to achieve coverage and reliability on a par with better-heeled rivals. Indeed, many of these challenges have nothing to do with the choice of network architecture, i.e. open RAN. As a result, there are many lessons here for Dish and 1&1 Drillisch.
The silver lining for Rakuten, perhaps, is that it is primarily a tech company and its Rakuten Symphony division is starting to deliver meaningful revenues, which are projected to accelerate during 2023. Dish and 1&1 Drillisch do not have that luxury!
Exhibit 1: Summary of Rakuten’s Customer Churn Survey
The full version of this insight report, including all highlights and viewpoints is published in the following report “Rakuten Unveils Plan To Boost Subscriber Growth” available to clients of Counterpoint Research’s 5G Network Infrastructure Service (5GNI).
CSPs are showing an increasing interest in leveraging the benefits of RAN virtualization and cloud-native technologies and vendors are responding to this demand. As a result, future RAN networks are expected to evolve gradually towards Cloud RAN based solutions, which will be deployed alongside traditional, proprietary 5G networks.
In contrast to traditional RAN networks, the baseband unit of a cloud RAN base station is split into two units: a Distributed Unit (DU) and a Centralized unit (CU). Today, the vast majority of commercially deployed DU basebands run on x86 processors. However, alternatives to Intel’s x86 platform, based on ASICs, GPU and RISC-V architectures are expected to become widely available during the next three years.
Cloud RAN platforms typically use PCIe-based accelerator cards to process the compute-intensive Layer 1 workloads. There are essentially two types of accelerator architecture: look-aside and in-line:
Look-aside accelerators offload a small subset of the 5G Layer 1 functions, for example, forward error correction, from the host CPU to an external FPGA-based accelerator.
With an in-line accelerator card, all the Layer 1 data passes directly through the accelerator and is processed in real-time – a critical requirement for Layer 1 workloads. This processing is done by other processor types, for example, ARM or RISC-V based DSPs.
However, there is a marked difference in the approach of vendors towards Layer 1 acceleration, with some vendors supporting the look-aside option, some supporting the in-line option, while others plan to offer both options.
Qualcomm is in the midst of developing a suite of open RAN-based 5G infrastructure products. Two years ago, the vendor announced a new line-up of macro base station silicon with a target sampling date of mid-2022. As promised, the company started sampling its new products a few months ago with key customers and partners.
Qualcomm’s Open RAN Macro Portfolio
Qualcomm’s open RAN macro portfolio essentially consists of two products: the QRU 100 radio platform and the X100 RAN accelerator card:
QRU 100 Radio Platform – designed for use in 32TRx and 64TRx massive MIMO radios as well as much simpler 4TRx and 8TRx MIMO radios. The QRU 100 radio chip includes transceivers, Layer-1 Low PHY baseband and beamforming processors and supports advanced cellular features such as RAN sharing, DSS, etc. In the case of mmWave applications, the chip also includes the RF front-end and antenna modules.
X100 RAN Accelerator Card – an in-line PCIe-based accelerator card based on the QDU 100 chip, which processes latency sensitive and compute intensive Layer-1 High PHY baseband workloads such as channel coding, demodulation as well as mMIMO processing. This reduces the number of CPU cores required and hence the overall cost of the DU. The X100 card supports all O-RAN Alliance defined baseband function split options (including future options such as 7.3) and operates at sub-6GHz and mmWave frequencies – Exhibit 1(a).
Qualcomm is partnering with HPE and the X100 card is being tested in the server vendor’s telco-grade ProLiant DL 110 Gen 10 Plus server, which has been optimised for open RAN workloads. The DL100 server is capable of supporting four cards within its 1U server footprint. Qualcomm claims that the card consumes approximately 35W of power when 70% loaded.
The key target markets for the above products will be the public macro MNO market as well as the enterprise private network market.
Exhibit 1(a) Qualcomm’s X100 Accelerator Card and (b) Qualcomm’s OREC partners and roles
Testing and Validation Schedule
Qualcomm has been providing engineering samples of its hardware to partner vendors, which include Fujitsu, NEC and Mavenir, since around mid-2022. Extensive lab testing will start around the end of 2022 or early 2023 with commercial deployments expected to start towards the end of 2023.
In addition, Qualcomm intends to undergo extensive integration tests with its partners at NTT DoCoMo’s OREC facility in 2023. This will involve testing the X100 card on an Intel-based HPE Proliant server as part of a complete 5G base station solution configured as shown in Exhibit 1(b).
Carrier-Grade Layer-1 Stack
Very few chip vendors offer a production-grade RAN software stack. Instead, they typically offer a reference stack of Layer-1 algorithms. Hardening the Layer-1 stack is both an intensive and extensive process that requires considerable technical expertise and resources.
Traditionally, Qualcomm has provided its small cells SoCs with software, including Layer-1, for the sub-6GHz and mmWave small cells market via its FSM platform. Unlike many of its open RAN rivals, Qualcomm will continue this tradition and offer its own carrier-grade Layer-1 software stack for the QRU100 and X100 card, which can then be customized by the customer. However, this will be an evolutionary process, with features being added according to a calendar of releases and followed by extensive testing and tuning until the required performance and stability is achieved.
Qualcomm’s Role and Partner Ecosystem
Qualcomm’s role in the 5G infrastructure market will be as an open RAN chip solutions provider enabling many new radio OEMs to enter the market as well as supplying some traditional vendors. Qualcomm already dominates the small cells market with its FSM100 (and FSM200) solutions and has developed an impressive list of customers. Clearly, the goal here is to do the same in the macro base station market by offering a range of proven, pre-integrated open RAN-based chip solutions to a wide variety of vendors, thereby gaining market share at the expense of the incumbents. Partners to date include Fujitsu, NEC, Mavenir, Rakuten Symphony and Viettel.
The open RAN/vRAN story is gaining momentum as major operators such as NTT DoCoMo, Verizon and others slowly transition to fully virtualized networks. Counterpoint Research expects this to accelerate during 2023, driven primarily by operators’ interest in leveraging the benefits of cloud-native architectures – rather than any clear-cut TCO benefits. These benefits include improved network agility, scalability and automation and will enable the introduction of new types of services.
Although the cost/performance differential compared to state-of-the-art, proprietary 5G base stations will persist, operators have an urgent need to introduce innovative new services in order to monetise their 5G networks. Counterpoint Research believes that this need will drive the adoption of disaggregated, virtualized RAN networks and that the benefits and flexibility offered by this type of architecture – for specific use cases such as as low-latency 5G MEC – will likely offset the cost/performance deficit for most operators.
Dish launched commercial services in its first market, Las Vegas, in early May. Known as Project Genesis, the service costs $30 per month for unlimited data, text and voice services. Dish plans to run Genesis as an extended beta mode service for the next few months, using early adopters to provide feedback in order to improve the network’s robustness.
Dish’s Hits First FCC’s Milestone
Dish was required to provide 20% population coverage in 27 markets by June 14th as part of its regulatory commitments. Last week, the company provided confirmation that this first hurdle had indeed been achieved, adding that the Project Genesis service is now available in 120 cities in the US. However, the service offered on Dish’s network is essentially a data-only service in most markets – which nevertheless satisfies the FCC’s requirements – with voice services provided by Dish’s MVNO partners. Counterpoint Research understands that this is due to difficulties encountered in implementing seamless call transfers between the VoNR technology used on Dish’s 5G SA network and VoLTE used on partner networks. However, Dish claims that these issues have now been resolved in Las Vegas. In addition, Project Genesis offers a hotspot data service costing $20 per month. Both services are only available directly via Dish and is currently limited to just three devices: Samsung’s Galaxy S2, Motorola’s Edge+ and a 5G hotspot router from NetGear.
Falling Subscribers and Revenues
At its recent Analyst Day, Dish announced ambitious plans to increase its mobile subscriber base from just over 8 million today to 30-40 million by 2030. However, unlike its brethren Rakuten in Japan, Dish is losing subscribers and revenues are falling steadily, including in its core pay-TV business (Exhibit 1). Dish has been adversely impacted by T-Mobile’s accelerated CDMA shut down, both in terms of lost subscriber revenues, as well as incurring unexpected extra costs. To make matters worse, the company is still waiting approval from the Department of Justice (DOJ) on its joint agreement with T-Mobile relating to the CDMA shutdown.
However, this week Dish announced a new 5-year roaming deal with T-Mobile worth a minimum of $3.3 billion. Under this agreement, Dish expects to gain around 100,000+ additional Boost-branded customers as well as receive some “financial assistance” from T-Mobile. Again, this new deal requires approval from the DOJ, which is scheduled for mid-August. In recent months, uncertainty surrounding the DOJ’s approval has hindered the company’s ability to retain customers, as the worsening churn rate in Exhibit 1 shows. Clearly, Dish will be hoping that this latest deal will be approved as quickly as possible so that it can draw a line under this saga and move on.
Exhibit 1: Dish Wireless Customers and Churn Rate (3Q 2020 to 1Q 2022)
Capex, Cash Flow and Debt
With Dish’s 5G network likely to be in extended beta mode at least until the end of the year, revenues from the network will be limited. At the same time, the company’s aggressive 5G network during the next 12 months will result in high capex expenditure and coupled with declining revenues from its existing MVNO and pay-TV businesses may put pressure on cash flow. This may affect Dish’s ability to refinance the $1.5 billion of debt maturing in March 2023. Dish also needs to participate in the upcoming 2.5 GHz Auction 108 as it has less mid-band spectrum than its main rivals. However, tightening cash flows may limit its participation.
Extending Network Coverage
Deploying a 5G network using new open RAN technologies is no mean feat and the news that Dish has successfully hit its first FCC coverage target is therefore impressive. However, the company is still at the beginning of its 5G wireless journey and faces numerous challenges. Clearly, extending coverage will be its first priority. Its three biggest rivals today cover around 230-310 million people in the US, which will have risen by the time Dish reaches its statutory 70% coverage target in mid-2023.
However, Dish needs to quickly expand its 5G footprint for commercial as well as regulatory reasons, as its current limited 5G footprint will hinder its ability to compete in the retail market. This will involve deploying at least 15,000 radio sites nationally, and probably significantly more, in order to properly densify its network. Networks take time to deploy and there are always unforeseen problems, particularly with new technologies, as the issues with VoNR have shown. This is not likely to be the last such issue. In the meantime, Dish will have to rely on its MVNO partners and pay roaming costs.
Retail vs Enterprise Market
New entrants such as Dish cannot seriously compete in the retail wireless market until the user experience on its network is on a par with rivals. There are other issues too. Dish lacks a notable brand presence in the retail mobile market and currently only offers a limited number of devices. It also needs to build up its smartphone distribution channels. Clearly, these are early days and all these issues can and no doubt will be rectified – but it will take time.
As a result, Counterpoint Research believes that Dish’s commercial focus in the short-term will be on the enterprise market, where its limited network coverage may not be a problem for some companies. For example, Dish could start to offer campus wireless type private networks which could be connected to its MVNO partners’ public networks, if required. Spectrum leasing is another major opportunity, and to a lesser extent, the rural fixed wireless market, where there are synergies with its existing pay-TV business. Here, Dish could conceivably use its 12 GHz band frequencies. However, that is a contentious topic perhaps best saved for another day!
With three greenfield operators – Rakuten, Dish and 1&1 Drillisch – at various stages of deploying their open RAN, cloud-native 5G networks, 2022 could turn out to be a pivotal year for the mobile telecoms industry. However, all three will need to overcome significant challenges during the year.
Rakuten: Subscriber Growth Challenge
Rakuten’s most pressing challenge is to ramp up subscriber growth and demonstrate that an open RAN, multi-vendor network operator can compete against incumbents in a very competitive and mature market. The operator maintains that it will break-even by the end of 2023. Using a conservative target of 20 million subscribers, Counterpoint Research estimates that Rakuten needs to at least double its 4Q 2021 subscriber acquisition rate consecutively every six months in order to do this (Exhibit 1). This would involve adding more than 4 million subscribers in the last quarter of 2023. This can only happen with a concerted marketing campaign – which costs money!
On its earnings calls, Rakuten has repeatedly stated that it has no plans to initiate a marketing campaign. Counterpoint Research speculates that there may be several reasons for this:
Network coverage – despite reaching 96% 4G population coverage, it still lags its rivals, all of whom offer 99% coverage, perhaps a deciding factor for customers who frequently roam outside Japan’s metropolitan areas. Also, some cell densification will probably be required to iron out any remaining network problems. Clearly, the last thing Rakuten needs is a backlash from consumers if coverage and reliability are not up to scratch across the whole network!
High capex spending – despite plans for an IPO of its banking business plus some investment asset disposals, Rakuten’s finances are already stretched due to high mobile infrastructure capex. Success in the retail market will require a lot of investment and an expensive marketing campaign at this time might not go down well with the financial markets.
Exhibit 1: Subscriber Growth Path to Reach Break-Even by 2023
As a result, Rakuten may be biding its time. Nevertheless, at some point it will need to commit to marketing if it is going to have any hope of achieving success in the retail market. Although it offers the lowest-priced data packages, particularly for high data users, lower pricing alone does not seem to be sufficient to attract customers in their droves. This may be due to the lack of marketing but also because the number of customers interested in high-data packages at present is limited. However, this will inevitably change with the transition to 5G. And Rakuten is confident that it will benefit, as it believes that it will be able to offer much more competitive pricing than rivals due to its network cost advantages.
Dish: Imminent Deployment Targets
For Dish, the major challenge in 2022 is network deployment. In fact, network planning and deployment is a major challenge for any greenfield operator, whether traditional or open RAN, with many factors, for example, spectrum availability, outside their control. In addition, negotiations with tower companies – often involving 20-year leases – are complex and invariably take longer than expected. For greenfield operators deploying new, untested technologies, there is the additional challenge of integrating and optimizing all the new infrastructure.
At its recent earnings call, Dish maintained that it will satisfy regulatory requirements and launch commercial services in all its 27 markets by the 14th of June. However, with just over 10 weeks remaining, this looks increasingly unlikely. Counterpoint Research understands that Dish’s agreement with the FCC makes allowances for issues outside its control – such as supply chain problems – which would allow for timelines to be adjusted. An FCC extension therefore looks likely!
1&1 Drillisch: At the Network Planning Stage
Meanwhile Drillisch also looks as if it will struggle to meet its 1,000 radio site deployment target by the end of the year. The German MVNO has a regulatory requirement to provide 25% population coverage by 2025 and 50% by 2030. A complicating factor is the expected auction of 800 MHz band spectrum in Germany in 2026. Acquiring some of this low-band, high coverage spectrum would help Drillisch reduce its number of radio sites. However, there is no guarantee that it will be successful. Clearly, this makes business planning more difficult and may lead to additional delays.
A Window of Opportunity?
Greenfield operators have a window of opportunity to leverage their network advantage to capture 5G market share. However, with legacy CSPs fast migrating to cloud-native 5G, the clock is ticking for all three. Rakuten has barely started mainstream deployment of its 5G network while the other two are still on the starting blocks!
Rakuten and Dish are pioneering the development of open, cloud-native 5G multi-vendor networks and operate in highly competitive and mature markets. Although with very different backgrounds, both are broadly similarly sized companies with established businesses. Both initially joined the mobile market as MVNOs and are at varying stages of deploying their own network infrastructure. However, there are also many important differences between the two companies, particularly with respect to their network architectures and vendor ecosystems.
Rakuten vs Dish
Rakuten has deployed a 4G network and ultimately intends to migrate all customers to a cloud-native 5G SA network. Dish will deploy a 5G SA core-based network from day 1. Rakuten has developed its own telco cloud with all network functions deployed at its own data centres located at various Rakuten premises. In contrast, Dish is adopting an “off-prem” model with the whole network running on AWS data centres, at least initially.
Rakuten relies mostly on single vendors with a heavy emphasis on its own in-house developed technologies and acquisitions. It also has ambitions to become a telco platform provider generating revenues from its software and technology expertise. Dish has generally adopted a dual-vendor strategy to avoid reliance on a single supplier. Although early days, Dish could conceivably follow Rakuten’s lead in time and similarly launch its own services platform.
Rakuten: Subscribers and Network Coverage
At the end of September, Rakuten Mobile had 5.1 million subscribers, having added just 2 million subscribers during the past 12 months, despite the recent expansion of its 4G network. In a country with a population of over 125 million, this is hardly a huge amount. In contrast, market leader NTT DoCoMo has more than 83 million subscribers.
Management still maintains – probably to alleviate investor concerns – that Rakuten will break even by 2023. It thus has a 12 to 18-month window to dramatically increase subscriber acquisitions. Offering much cheaper tariffs, the company is banking on consumers switching en-masse from bigger rivals, as well as finally being able to hit its 96% network coverage target in early 2022. However, in a largely cost insensitive market and with notoriously fickle consumers, will this be enough to attract sufficient new subscribers? Although the break-even target now apparently includes revenues from its telco software platform Symphony – perhaps a saving grace – management expects losses to be at their worst in the first quarter of 2022 but to improve from Q2 onwards.
In the likely event that Rakuten deviates from its planned 2023 break-even path, it is vital that the company can nevertheless show a substantial ramp up in subscriber acquisition over the next six months to demonstrate that its aggressive loss-leading pricing strategy can work in Japan. Otherwise, there is a danger that investors will start to lose confidence in the company, which may also extend to telco customers at its Symphony business.
Against a backdrop of falling pay TV and MVNO subscribers, Dish faces challenges in both its established and new businesses. At its 3Q earnings call, the company reported 10,98 million pay TV subscribers, down 13,000 YoY and 8.77 million mobile subscribers, down 121,000 YoY. Up until now, Dish has been able to blunt the impact of its pay TV subscriber losses with higher prices. However, pricing power cannot last forever.
Dish claims that it will be able to build a fourth nationwide 5G network for $10 billion and plans to launch in its first market – Las Vegas – in early 2022. With regulatory deadlines to provide 70% population coverage by the end of 2023, it is now in a race against time to deploy its 5G network and make the business a success. As with Rakuten, network roll-out will be its biggest challenge initially. While using AWS for its core network may yield cost advantages, putting the entire 5G network in the public cloud is a risky bet, as the recent outages at AWS demonstrate.
Unlike Rakuten, Dish plans initially to target the wholesale and enterprise markets rather than focusing exclusively on the consumer market, where it lacks its rivals’ brand recognition. With its considerable spectrum assets, targeting the wholesale market looks like a no brainer. However, with limited network coverage initially, selling to enterprises will not be easy, plus Dish has no experience of working with enterprises. Despite its recent ties with AWS, it will be challenging to generate revenues from the enterprise market.
The Endgame – Big Tech Takeover?
Building a commercially successful network from scratch with new, innovative technologies that promise significant cost benefits is easier said than done. Rakuten’s progress to date has revealed a lot of issues and there are lessons here for other aspiring greenfield networks. While the contract award with 1&1 Drillisch demonstrates that there is demand for its technology, this is a business where scale and mindshare are required to be successful. With continued high cash burn and a high credit risk rating, any disappointment on the subscriber front over the next six months could hit investor sentiment as well as impact its ability to expand its Symphony business.
Like Rakuten in Japan, Dish is smaller than its main rivals and may also struggle financially, particularly as it will need to offer substantial discounts to attract customers. Counterpoint Research believes that an eventual takeover by a big tech company such as AWS, Google, Microsoft or even Apple looks the most likely outcome for Dish, while over in Japan, open RAN ambitions by domestic vendors, coupled with national pride, will probably ensure that Rakuten Mobile will survive in some form or other.
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