Softbank Eyes Mobile Phone Business, Despite Startup Cost Burden

Masayoshi Son, President and CEO of Softbank Corporation

On September 5, 2005, Softbank Corporation made its first license application for entering the third-generation mobile-phone market, preempting other companies planning to a similar move. But observers question how the IT and communications services giant will fund the investment, thought to require at least 300 billion yen.
Under the terms of Softbank's application for a wireless license, Softbank is planning to build at least 15,000-20,000 base stations around Japan. With services to roll out from 2006, it plans to quickly attract 10 million subscribers, by offering products such as combined mobile phone and wireless LAN terminals.

 President Masayoshi Son is bullish about his prospects in "the market I wanted to enter first of all."The Ministry of Public Management, Home Affairs, Posts and Telecommunications plans to allow one or two new companies to enter the 1.7-gigahertz mobile-phone service sector, and Softbank and eAccess are both leading candidates.
There are already nearly 90 million mobile phone subscribers in Japan, and the market is thought to be close to saturation. Nonetheless, the trio of NTT DoCoMo, au and Vodafone are still growing fat from it. Even the laggard Vodafone, which has lost subscribers to its two rivals, posted operating profit (consolidated basis) as high as 157.6 billion yen in fiscal 2004 (April 2004 to March 2005). Softbank's view, in the words of a spokesperson, is that "you can still make money from mobile phones."

 However, what concerns the regulatory authorities is Softbank's earnings performance. In the year ended March 2005, it booked a fourth consecutive operating loss of 25.4 billion yen and net loss of 5.9 billion yen (consolidated basis). In June in the current fiscal year, it scraped a single-month profit of 500 million yen, as its Asymmetrical Digital Subscriber Line (ADSL) service finally picked up traction, attracting approximately 5 million subscribers, and a promotional campaign involving free handouts of modems ended. But this profit level is not high. By contrast, following a string of acquisitions, its net interest-bearing debt stands at 531.6 billion yen, a four-fold increase from one year earlier. Moreover, the companies it has taken over are performing poorly.

Son is betting on vendor financing. His allies are playing up this funding method, in which a seller loans to the buyer out of confidence in the buyer's business prospects, as if it were a magic charm. This is how it would work for Softbank: Vendors of base stations and switching equipment-transmission equipment manufacturers-would lend it money in the expectation that it would buy their products and repay the loans from future profits. Telecommunications carriers can make investments with fairly limited capital.

 In the past, US telecommunications equipment vendors such as Cisco Systems and Lucent Technologies enjoyed strong sales using this method, but with the implosion of the IT bubble, some of them built up mountains of non-performing loans. The Ministry of Public Management, Home Affairs, Posts and Telecommunications will make its decision on licensing new mobile-phone operators at the end of the year. Until then, media attention is likely to focus on how convincing Son is in portraying a success scenario for his ambitions.