This episode breaks down Rakuten, a Japanese internet giant. Fund manager Matt Brett says the biggest debate is its money-losing mobile network, but he thinks it could become an 'ecosystem accelerator' using Rakuten's existing e-commerce and finance customers. Key holdings: Rakuten Ichiba (e-commerce, ~50% of revenue, steady ~20% annual growth for 20 years), Rakuten Finance (credit cards/banking/securities, ~30% of revenue, profitable), and Rakuten Mobile (~20% of revenue, priced at half of rivals, but only 7.7 million customers vs. breakeven of 8-10 million). Matt warns that past overseas expansions (like buying buy.com in the US) mostly failed, so Rakuten now focuses on Japan.
At a Glance This edition of Business Breakdowns provides an in-depth analysis of the Japanese internet giant Rakuten. Matt Brett, a portfolio manager at Baillie Gifford, notes that Rakuten is a unique company born out of Japan's late-1990s internet bubble, with its core adhesive being a loyalty poin
Baillie Gifford Japan Trust fund manager Matt Brett dissects Japanese internet giant Rakuten. Core judgment: Rakuten’s mobile network business is the biggest point of contention, but Matt believes it is not a make-or-break bet — the key lies in whether the company can leverage its e-commerce and financial services customer base to transform the mobile business from a "loss-making fourth-place operator" into an "ecosystem accelerator."
Matt Brett argues that Rakuten's founding context determined its strategic DNA—it is one of the few companies that survived and thrived during Japan's late-1990s internet bubble.
Key Data: Since its listing, Rakuten has achieved sales growth every single year, including during the global financial crisis and the COVID period.
Matt emphasizes that Rakuten's Points System is the core of its diversification strategy—it genuinely connects seemingly unrelated business lines.
Matt notes: "Some companies try to build an ecosystem, and it ends up very messy—services don't communicate with each other. But Rakuten in Japan has always used a single user ID, making it very easy for users to access multiple services."
Matt stated bluntly that Rakuten's overseas expansion around the 2010s was a case of "learning the wrong lesson"—strategies that succeeded domestically completely failed abroad.
Key data: Currently, Rakuten's core business is essentially domestic, with its overseas operations significantly scaled back.
Matt offers a candid assessment of Rakuten's mobile business—the biggest point of contention for investors, but he believes the market may be underestimating its long-term value.
Matt argues that the market is overly focused on "when will breakeven be reached," while overlooking a more important variable—the acceleration of customer acquisition.
Matt offers a counterintuitive perspective: "Don't just look at Rakuten as a mobile operator versus other operators. Look at it the other way—what else can other operators offer besides mobile? Many operators are trying to bundle e-commerce services, but Rakuten already has a strong position in these areas."
Matt outlines Baillie Gifford's valuation approach for Rakuten—relying not on a single metric but on multi-angle cross-validation.
| Segment | Revenue Share | Characteristics |
|---|---|---|
| Internet-related (E-commerce + Travel) | ~50% | Grew at slightly under 20% annually over the past 20 years; growth has slowed but remains double-digit |
| Financial (Credit Cards + Banking + Securities) | ~30% | Growing in tandem with the e-commerce business |
| Mobile | ~20% | Still in a loss-making phase; the biggest variable |
Matt uses three methods for cross-validation:
1. Sum of the Parts: Valuing each business line separately and summing them up
2. Simple Price-to-Sales: Comparing total sales to market cap to gauge reasonableness
3. Profit Pool Approach: Assessing the total profit pool of Japan's mobile industry and estimating Rakuten's potential share
"If an investment opportunity is attractive, you can usually see it from several different angles. Being too precise is more likely to lead to errors—the key is to roughly understand the value and prospects of each piece of the business."
Matt explicitly identifies several key risk points:
1. Mobile business remains the biggest variable: Whether it can grow from 7.7 million customers to above breakeven (approximately 8–10 million) is the core issue at present.
2. Lessons from overseas expansion: If Rakuten attempts a similar strategy again, it may repeat past mistakes.
3. Capital consumption: The financial business itself also consumes capital, and combined with mobile investments, free cash flow is likely to remain negative for the foreseeable future.
4. Competitive landscape: The three major operators may cut prices in retaliation or launch more competitive bundled services.
| Position | Guest Stance | Key Data |
|---|---|---|
| Rakuten (Overall) | Bullish long-term, but acknowledges mobile business as the biggest risk | Annual sales growth since listing; historical OPM 15-20%; current mobile subscribers 7.7 million vs. Japan's total device base of 200 million |
| Rakuten Ichiba (E-commerce) | Bullish, viewed as a core stabilizer | Annual growth slightly below 20% over the past 20 years; accounts for approximately 50% of revenue |
| Rakuten Financial (Credit card/Banking/Securities) | Bullish, viewed as a synergy engine | Accounts for approximately 30% of revenue; credit card business is already highly profitable |
| Rakuten Mobile | Neutral to slightly optimistic, but acknowledges uncertainty | Accounts for approximately 20% of revenue; priced at half the level of the three major carriers; breakeven point at approximately 8-10 million subscribers |
| Amazon | Mentioned as a competitor | Has a presence in Japan, but Rakuten maintains its position through local advantages |
| SoftBank | Mentioned as a historical analogy | Successfully broke through by acquiring Vodafone Japan's assets + exclusive iPhone agreement |
| KDDI | Mentioned as a historical analogy | Previously succeeded in capturing market share from Docomo |
| Docomo (NTT) | Mentioned as an incumbent | Original monopolist in Japan's mobile market |
1. "Don't go to the United States" (Matt Brett) — Lessons from Rakuten's overseas expansion: A strategy that succeeded domestically (points system + brand trust + weak competition) completely failed when facing strong incumbents abroad. This is Matt's five-word business book for Japanese internet entrepreneurs.
2. "The mobile business is like building an apartment building — if you start renting before the building is finished, tenants will leave once they arrive" (Matt Brett) — The problem with Rakuten's early mobile promotion: excessive marketing before the network was fully built led to high churn rates. Now that the network is complete, customer retention is beginning to improve.
3. "Going from 5% to 10% market share is the hardest; going from 10% to 20% is actually easier" (Matt Brett) — Matt believes mobile customer acquisition has an acceleration effect. Once the trust threshold is crossed, word-of-mouth reduces acquisition costs. Japan's mobile market history (KDDI, SoftBank) supports this view.
4. "Don't just compare Rakuten as a mobile operator against other operators — instead, look at what other operators can offer" (Matt Brett) — Rakuten already has strong positions in e-commerce, finance, travel, and other areas. The mobile business is a complement to the ecosystem, not an isolated bet. It has been confirmed that mobile users tend to use more of Rakuten's other services.
5. "Profit is the money you make when you run out of ideas" (Matt quoting Peter Thiel) — Rakuten's problem is having too many expensive ideas. But Matt believes expansion within Japan (e-commerce → finance → mobile) is more likely to succeed than overseas acquisitions, because "this is their own backyard."
6. "If Rakuten had never done finance and mobile, profits and stock price would be much higher today — but the question is how long your time horizon is" (Matt Brett) — In the short term, these investments have weighed on financial performance; in the long term, they may create more durable competitive advantages and larger profit pools.
7. "Japan's e-commerce penetration is rising slowly, but the direction is consistent with the global trend — this gives investors high conviction" (Matt Brett) — Japan's digitalization is slower, but the trend is clear. Matt believes that knowing the "destination" is roughly the same, only the "arrival time" differs, which actually presents an investment opportunity.
8. "Rakuten's points system is the real glue — additive or even multiplicative, depending on how many services you use" (Matt Brett) — This is the core mechanism of Rakuten's diversification strategy and a key differentiator from competitors like Amazon.