Infonetics: How Softbank's Son has shaken the world's top 3 economies

Stéphane Téral,
Infonetics Research

Who would have thought that Softbank entrepreneur-turned-billionaire Masayoshi Son would go the extra mile to buy a 70 percent stake in Sprint Nextel to enter the U.S. market and create the third largest mobile phone services provider in the world? Likely only a select few telecom veterans.

This is literally an extra mile because this is the first time Son-san is actually making a move outside his home turf. After piling up a huge debt to purchase Vodafone Japan in 2006, Willcom in 2010, and finally rival eAccess in early October 2012, Softbank Mobile became Japan's third largest mobile operator by subscribers. As of December 31, 2012, NTT DOCOMO had 60.9 million subscribers, followed by KDDI with 36.8 million, and Softbank Mobile with 31.3 million, including subscribers from the eAccess acquisition. In other words, Softbank Mobile, already a challenger, did not miss a chance to snap up the fourth challenger and get closer to KDDI. But now what?

And that is the challenge Son-san has been dealing with for some time: How can I continue to grow the company I created and move to the world stage?

After roughly a year of due diligence, Son-san and his closest advisors turned their attention to the United States. Why? Because in their eyes, the U.S. market offers advantages that remain unmatched in any other major economy.

On a road show last October, Son-san said, and has been repeating in similar messages since: "The U.S. is very open--the most open country, and the most fair country for challengers. Whatever's good for the consumers, the U.S. government tends to accept that--for the interests of the consumers, not for the interests of a particular company."

Since the beginning of its ascension in Japan's mobile landscape, Softbank Mobile has been a fascinating company for many observers. For instance, saying that the telephone remains the killer app in today's mobile industry is probably on of the most unique arguments you'll hear a top executive team make. In this smartphone world, this declaration may sound astonishing and obsolete. But the Softbank team will argue that everyone can make a phone call anytime everywhere, while the same is not true when it comes to using mobile broadband, because 3G coverage is not yet ubiquitous. Let's not even talk about 4G. In fact, as soon as the Japanese government awarded Softbank Mobile with a chunk of 900 MHz spectrum in the first half of 2012, the company immediately started to roll out a 3G W-CDMA network for voice coverage, as it does not have a GSM network--Japan has no GSM networks left!

Nonetheless, becoming the architect of a deal that further inflames existing tensions between the U.S. and China, and adds fuel to an ongoing dispute between Japan and China was probably an outcome Son-san never imagined. Although superficially ugly, the situation appears reasonably manageable, though will be resolved at the expense of Huawei and ZTE, both Softbank Mobile suppliers. As Huawei supplies TD-LTE to Softbank's Wireless City Planning (WCP), deployment on the Willcom assets, and FD-LTE and W-CDMA to eMobile, the company has more business in Japan than ZTE, which only supplies TD-LTE gear to WCP.

So ironically, here we are with Chinese vendors providing Japan's third largest mobile operator with mobile network gear while being banned in the U.S., a close ally. And the timing could not be more awkward! Less than 15 days after the acquisition of eAccess in October 2012, Softbank announced the Sprint deal. On March 28, 2013, the U.S. government asked for oversight as a condition for approval of Softbank's pending acquisition of Sprint over fears of spying by Chinese suppliers. And that's not all. Clearwire--currently migrating from WiMAX to LTE and in the process of being acquired by Sprint--uses some Huawei radio base stations as well.

Basically, whether it is Sprint or Softbank, both companies have significant stakes in entities that use Chinese telecom gears accounting for less than 10 percent of their capital spending on mobile network equipment. But this is not convincing enough for the U.S. government, which wants zero Chinese equipment to carry its traffic over the Sprint network because of security concerns. Needless to say, neither the Chinese vendors nor the Chinese government are happy about this.

When I visited Softbank Mobile at its headquarters in the flamboyant Tokyo Shiodome Building in March this year, geopolitics did not seem to be a major concern. The Softbank executive team made it clear: "We have no intention to mess up with the U.S. and will comply with their conditions." Instead, I found an exciting and anxious team. Exciting because it feels good to expand into the U.S., anxious because a large majority of the team does not have mastery of the English language and have to work hard to learn Shakespeare's tongue.

Stéphane Téral is Principal Analyst for Mobile Infrastructure and Carrier Economics at Infonetics Research. He is a trusted advisor at some of the world's largest telecom providers and manufacturers and authors mobile and capex research year-round.