Thursday, October 5, 2023

What Explains Rakuten's Market Share?

Some might argue that mobile operator Rakuten has low market share in the Japanese mobile market because of its “risky” bet on a virtualized network architecture and open approach to radio access networks. 


But others might argue it is as much an example of the rule of three or stable competitive markets


Of course, according to the market share pattern suggested by the PIMS (Marketing Science Institute and Profit Impact of Market Strategies (PIMS)) database, the Japan mobile service provider market remains “unstable” or “in flux” as it does not have the familiar market share structure seen in mature industries, where the relationship between the top three firms has a pattern of 4:2:1. 


Mobile Operator

Market Share (March 2023)

NTT Docomo

41.6%

KDDI (au)

30.5%

SoftBank

27.9%

Rakuten Mobile

1.5%

Other MVNOs

8.5%


In other words, established and stable competitive markets show a pattern where the market leader’s market share is double that of provider number two. In turn, number two has share double that of provider three. 


That is similar to what economists have suggested is true of oligopolistic markets. In a classic oligopolistic market, one might expect to see an “ideal” (normative) structure something like:


Oligopoly Market Share of Sales

Number one

41%

Number two

31%

Number three

16%

source: economicsonline

As a theoretical rule, one might argue, an oligopolistic market with three leading providers will tend to be stable when market shares follow a general pattern of 40 percent, 30 percent, 20 percent market shares held by three contestants.


Under most circumstances, firms that have a higher share of the markets they serve are considerably more profitable than their smaller-share rivals, according to the Marketing Science Institute and Profit Impact of Market Strategies (PIMS) database.


And it is that disparity in profitability that allows the leader to weather pricing attacks, while making disruptive attacks often perilous. Most big markets eventually take a rather stable shape where a few firms at the top are difficult to dislodge.


So it would not be unusual or odd to think telecom markets could be stable, long term, with just three leading providers. The reasons are perhaps very simple. 


Since profit margins also tend to correspond in a linear way with market share, we can argue that--in stable markets--the market leader will have profit margins double that of the number-two provider, and four times that of provider number three. 


If so, it becomes perilous for providers two or three to cut retail costs to take share from the supplier, which generally can easily afford to match the attacker price points for as long as needed, until the attacker simply cannot continue. 


By definition, the leader has twice to four times the revenue and profits of the other firms. Under such circumstances, a price attack by market share holders two or three is going to harm all providers, but generally cannot dislodge the leader. 


In other words, in a mature market, when the stable share pattern has developed, number two and number three market share holders will generally have more to lose than to gain by disruptive attacks launched against the market leader. 


That is, in part, what leads to the market stability. 


So even if the Japan mobile service provider market is not yet so established it cannot change--indeed the share pattern suggests it is not yet finished evolving--Rakuten’s number-four position would be explainable by the rule of three. 


That might suggest an ultimate stable pattern something like 40-30-20 market shares for the leaders, whomever they wind up being, and in what order. That leaves 10 percent share for all the other market contestants. 


So technology and architecture are not necessarily the reason for Rakuten’s market share. Other more-prosaic issues, such as a lack of spectrum, relative to the other providers, also exists. Some would argue it is capacity quantity, not quality, which is the difference between Rakuten and the other leaders. 


Mobile Operator

Mobile Spectrum Holdings (MHz)

NTT Docomo

280

KDDI (au)

210

SoftBank

230

Rakuten Mobile

150

Other MVNOs

30

Total

800

Source: Ministry of Internal Affairs and Communications (MIC) Japan


Some would point to network footprint being less developed than the networks of the three market leaders. And coverage shortfalls always are issues for mobile service providers. 


Others might also note that Rakuten has no low-band spectrum, which is an issue for indoor signal reception. 


Also, Rakuten is not able to use a “lower price” attack successfully, as the other providers have been willing to meet those attacks, as theory suggests would be the case.


Globally, in markets with four established mobile service providers, the market share pattern would be something on the order of 30-30-15-10 or 40-30-25-20, leaving roughly 10 percent share for all the other providers. 


Globally, the patterns might take the form of:


Provider

Share %

Share %

one

35

30

two

25

25

three

20

20

four

10

15

Top four

90

90


The point is that Rakuten’s market share is not necessarily the result of technology decisions. Lack of spectrum, type of spectrum, capital resources and marketing challenges are equally plausible explanations for the lowish market share.


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