Rakuten Group - Company History

A flat ¥50,000 a month, and the 6,150 shops it drew

In February 1997 Mikitani Hiroshi (三木谷浩史), thirty-one years old and newly resigned from the Industrial Bank of Japan[1], incorporated M.D.M. Inc. with capital of $82,631 (¥10m) at Atago in Minato-ku, Tokyo[2], and in May of the same year opened Rakuten Ichiba[3]. Thirteen shops were trading on the day it opened[4]. Where the virtual malls run by department stores took listing fees in the order of $8,263 (¥1m) a month[5], Rakuten set a flat $413 (¥50,000) a month — an order of magnitude lower[6]. An editing tool called RMS, which required no programming, let shopkeepers build their own storefronts[7]; the target customers were the individual proprietors of local shopping streets, and the threshold for opening a shop was lowered to suit them. The contract required six months of system fees to be paid in advance in a single sum[8], which funded working capital without recourse to outside money and secured recurring profits in two consecutive years from the financial year ended December 1998[9]. The first year's shops were won the hard way, by sales staff calling on shopping streets one door at a time.

This pricing brought a surge in the number of shops: 320 by December 1998, 1,800 by December 1999, 4,800 by December 2000[10] and 6,150 by January 2003[11]. Listing-fee revenue accumulated in direct proportion to that count[12], and until this point the earnings of the mall-only business rested on it continuing to rise. In June 1999 the company changed its name from M.D.M. Inc. to Rakuten, Inc.[13] In April 2000 it registered over the counter with the Japan Securities Dealers Association[14] and raised $459.4M (¥50bn) in the offering[15], against sales of only $10.5M (¥1bn) for the January-to-June period of that year[16]. Even through a continuing consumer slump, gross merchandise sales on Rakuten Ichiba grew from $430.4M (¥52bn) in 2001 to $598.7M (¥75bn) in 2002, a rise of about 40 per cent[17], reaching a scale comparable to a department store in Ginza, Tokyo[18].

The ¥9bn Infoseek acquisition, and Yahoo! closing in

While the use of the $459.4M (¥50bn) raised over the counter was still undecided, managing director Yamada Yoshihisa (山田善久) said, buying is easy, but money is not something you should spend just because you have it[19], and was in no hurry to deploy it. Then, in October 2000, a survey by Nielsen//NetRatings of the United States showed Yahoo! Shopping overtaking Rakuten Ichiba in user numbers to take first place[20]. With its first-mover position under threat, Rakuten announced at the end of November 2000 that it would acquire the loss-making portal operator Infoseek outright for $83.5M (¥9bn)[21]. For a company that had made a point of profits, taking on a business carrying a recurring loss of $6M (¥650m) over the year from October 1999 to September 2000 was a change of line. Mikitani described the aim of the acquisition as to become an integrated media company with shopping at its core[22], signalling that the money raised in the offering would go on closing the gap with Yahoo! in the power to draw traffic.

At Infoseek after the acquisition, Mori Manabu (森学) — not a man from that company but an ordinary Rakuten employee — was picked out to lead the turnaround, and took a business with an operating loss of about $12.1M (¥1bn) in the year to September 2000 to an operating profit of $375,160 (¥47m) in the June-to-September quarter of 2002. Even so, the dependence on the number of shops — lose the power to draw traffic and the merchants who were the source of revenue would leave — had already been pointed out at the end of 2000[23]. In March 2001 the company opened Rakuten Travel[24], beginning to diversify away from a single shopping business. From 2001 the growth in shop numbers slowed, and commentary questioning the revenue model itself — one that depended on the shop count — became conspicuous[25].

From “property” to “franchise”, and the three-domain structure completed

In February 2002 Rakuten announced that it would revise the flat $399 (¥50,000) fee it had charged since 1997, moving to a usage-based charge that added a system fee for shops selling more than $7,982 (¥1m) a month[26]. It was a switch from a property model, letting space at a fixed rent, to a franchise model that earned in step with the merchant's sales[27], and Mikitani himself took the front line, doubling as head of the sales division from July 2002[28]. The change had been preceded by roughly a year of simulation by a special team[29], and Mikitani described the judgement of the time: from the founding I thought the flat-fee system would have to be changed sooner or later. I was prepared to see it through even if the number of shops halved[30]. The sales organisation was rebuilt from winning new merchants to consulting for existing ones; one e-commerce consultant covered around 150 shops, and about 60 of the company's roughly 290 employees were put on the work[31].

The new fees applied from April 2002 and were first charged in May[32]; in that month departures exceeded openings by 58 shops, but from June the net figure rose again[33]. Consolidated sales for the year ended December 2003 were $156.1M (¥18bn) and recurring profit $38M (¥4bn)[34], close to double the previous year. In this period Mikitani had set a medium- to long-term target of $862.7M (¥100bn) in recurring profit — the level of Japan's top thirty companies outside the financial industry[35]. In September 2003 the company took control of My Trip Net, operator of the accommodation-booking site Tabi no Mado (旅の窓口)[36], and in November of DLJdirect SFG Securities (now Rakuten Securities)[37], spending a little over $517.6M (¥60bn) in a short span[38] to bind shopping, travel and finance together. Total transaction value reached $364M (¥42bn) in the October-to-December quarter of 2003, up 76 per cent on the same quarter a year earlier[39].

In September 2004 Rakuten paid $68.4M (¥7bn)[40] for all the shares in Aozora Card[41], the card-loan company held by Aozora Bank and Orix. Rather than lean on the co-branded issuance with Sumitomo Mitsui Card begun that August, it meant to run a card business of its own. The company it bought was a small loss-maker — incorporated in December 2001, with a loan book of $182.1M (¥20bn) and 23 employees at the end of March 2004 — and the price was modest beside the $278.6M (¥32bn) for Tabi no Mado or the $285.5M (¥33bn) for DLJ Securities. In that same year of 2004, with professional baseball reorganising, Rakuten entered the game. On 24 September it applied to join the Nippon Professional Baseball Organization, setting out a plan for a new club based in Sendai, Miyagi prefecture[42]. The review came down to a head-to-head with Livedoor, and the deciding factor was the difference in earning power: against Livedoor's recurring profit of $47.2M (¥5bn), Rakuten expected $134.1M (¥15bn) for the year ending December 2004, and weight was given to its capacity to absorb losses that averaged $29.6M (¥3bn) across the five Pacific League clubs. The owners' meeting of 2 November approved the entry of the Tohoku Rakuten Golden Eagles unanimously[43], and the first new club in fifty years, since 1954, was born. That December Rakuten listed on the JASDAQ Securities Exchange, moving from over-the-counter registration to a formal market[44].

From ¥307.5bn to ¥1.66tn — a balance sheet remade by finance

With the three-domain structure established, consolidated total assets swelled from $2.8B (¥308bn) in the year ended December 2004 to $15.0B (¥1.66tn) in the year ended December 2005[45]. It was the consequence of taking credit, payments, securities and banking inside the group: by the year ended December 2006 the finance segment alone held $3.6B (¥417bn) of assets in credit and $4.5B (¥528bn) in securities. Consolidated sales also grew sixfold, from $1.2B (¥130bn) in 2005 to $7.2B (¥782bn) in 2016[46]. Against that, impairment on the acquired Lycos Japan and on overseas television-shopping operations[47] produced an extraordinary loss of $782.9M (¥81bn) in the year ended December 2008 and a net loss of $531.3M (¥55bn) — the first loss since the founding[48]. Sales that year were $2.4B (¥250bn) and operating profit $456.8M (¥47bn)[49], so the core business stayed in the black; the loss was the clearing-up of investments.

In 2008, the year of that first loss, Rakuten underwrote a capital increase at the troubled eBank[50]. The bank had posted a net loss of $198.7M (¥23bn) in the 2007 financial year, and its capital adequacy ratio had deteriorated to 6.4 per cent at the end of June 2008; of a capital raising of up to $387.1M (¥40bn), Rakuten carried $193.6M (¥20bn) in preferred shares. For a company that had been running securities and credit, this was its first investment in a bank. In February 2009, having obtained the Financial Services Agency's approval as a major shareholder, it converted the preferred shares into ordinary shares and consolidated the bank as a subsidiary with 48.69 per cent of the voting rights[51]. The bank changed its name to Rakuten Bank in May 2010[52] and became wholly owned through a share exchange that October.

In January 2010 Rakuten acquired bitWallet, bringing the electronic money Rakuten Edy into the group[53]. In telecommunications it made the IP-telephony operator Fusion Communications (now Rakuten Communications) a subsidiary in August 2007[54], and in insurance it took control of Airio Life Insurance (アイリオ生命保険, now Rakuten Life Insurance), until then an equity-method affiliate, in October 2012[55]. From the year ended December 2013 it moved to International Financial Reporting Standards[56] and reported in two segments, internet services and internet finance. Operating profit in the FinTech business reached $601.8M (¥66bn) in the year ended December 2016, and finance became a pillar of earnings standing alongside merchandise.

The goodwill from ¥200bn of overseas acquisitions, and the 2011 net loss

Through the first half of the 2010s Rakuten made overseas acquisitions one after another: PriceMinister of France in July 2010[57], the e-book company Kobo in January 2012[58], the mobile-messaging company Viber Media in March 2014 (on the order of $850.3M (¥90bn))[59], and the North American online cash-back service Ebates in October of the same year (on the order of $944.8M (¥100bn))[60]. Alongside these it acquired Wuaki.TV, a Spanish video-streaming operator (now Rakuten TV Europe), in June 2012[61] and Viki in September 2013[62], gathering up digital content in Europe and North America. In 2010 Mikitani declared English the company's official internal language, holding out a conversion into a global firm. In the year ended December 2011 impairment on the overseas e-commerce business produced an extraordinary loss of $1.1B (¥84bn) and tipped the company into a net loss of $13.8M (¥1bn)[63].

PriceMinister's brand was closed in 2021, while Ebates continued as Rakuten Rewards in North America. Interest-bearing debt swelled more than threefold, from $4.0B (¥390bn) in the year ended December 2013 to $11.2B (¥1.23tn) in the year ended December 2018[64]. At home, the Tohoku Rakuten Golden Eagles won the Japan Series for the first time in November 2013[65], and 214,000 people gathered for the victory parade through Sendai. That December the company moved its listing to the First Section of the Tokyo Stock Exchange[66]. In June 2017 it established Rakuten LIFULL STAY (now Rakuten STAY) to enter the private-lodging business[67].

The “no-touch model”, and the ecosystem idea taking hold

From the founding years Mikitani had made the inventory-free business model the axis of what he chose[68]. Neither travel nor securities carries physical distribution with it[69]; Rakuten Ichiba held no stock; and the book inventory behind Rakuten Books was left entirely to the wholesaler Nippan. Mikitani said plainly, I like the “no-touch model”, where you hold no inventory[70], and went further: I think a company's value is ultimately decided by ROE. In the end only two things matter — whether the company has social justice, and whether it is distributing returns to shareholders[71]. He set a target of $9.2B (¥1tn) in combined gross transaction value across Tabi no Mado and the shopping mall[72], and said that with the moves into finance and travel a large part of the acquisition puzzle had been filled in[73].

Rakuten Super Points, begun in November 2002[74], became a common currency of cross-use — points earned on Rakuten Ichiba could be spent on travel, securities, cards and banking — and, with the membership ID binding the businesses together, formed the prototype of the Rakuten ecosystem[75]. In 2005, the year it took on a baseball club, advertising expenditure rose to $71.7M (¥8bn), close to four times the previous year, and most of it is thought to have been related to the Tohoku Rakuten Golden Eagles. Against the $282.8M (¥33bn) of advertising spent over the five financial years to December 2007, market capitalisation grew from $726.4M (¥91bn) at the end of 2002 to $6.1B (¥719bn) at the end of 2007, and the company was rated first for the growth in market value it obtained per yen of advertising. The year ended December 2017 set new records, with revenue of $8.4B (¥944bn) and operating profit of $1.3B (¥149bn)[76]. In March 2018 it made Asahi Fire and Marine Insurance (now Rakuten General Insurance) a subsidiary[77], completing a line-up of cards, banking, securities, life insurance and general insurance.