SoftBank's Son Masayoshi Aims to be Number One

On October 15, 2012, Son Masayoshi, president of the telecommunications giant SoftBank Corp., announced his company would acquire Sprint Nextel Corp., the number-three wireless carrier in the United States. The $20.1 billion deal catapults SoftBank, Japan’s number-three wireless carrier, into third position in the US market; the company will also rank third globally, behind China Mobile Ltd. and US-based Verizon Communications Inc., respectively.

Nothing Less than First Place

There are a number of reasons behind SoftBank’s acquisition of Sprint Nextel. Perhaps the core reason was Son’s personal ambition for SoftBank to be the world’s top telecommunications firm. At the press conference announcing the deal, he stated several times: “I’m a man, so I want to be number one.”

Softbank has been on the march in Japan as well, rapidly increasing its number of mobile subscribers following its acquisition of Vodafone Japan in 2006. After acquiring the struggling telecommunication company, Willcom in 2010, SoftBank was finally poised to overtake KDDI to grab second place in the Japanese market. In 2012, SoftBank and Willcom had 36 million subscribers, but industry insiders had been murmuring that Son was “unrealistic” in pledging that SoftBank eventually would overtake NTT Docomo’s 60 million subscribers to grab the number-one position. But the bold step of acquiring a major US telecommunications firm has turned SoftBank into a global cellular giant.

Another reason for the acquisition of Sprint Nextel, according to Son, is that it makes it possible for SoftBank to procure smartphones and base stations for use in both Japan and the United States. Such large-scale purchases make it possible to drive down the prices paid by SoftBank.

But some Japanese manufacturers argue that such joint procurement is impossible; they point to the divergence between Japan and the United States in terms of telecommunications systems as well as the differences in the specs and functions that users in each country want. Certainly, smartphones in Japan are equipped with many unique specs not found in other countries, such as “1seg” terrestrial television broadcasting and the “Osaifu-ketai” function that allows mobile phones to be used for contactless electronic payments. Many are finding that mobile phones without such functions can be difficult to sell in Japan. In short, the smartphones designed for Sprint would not sell well in Japan, just as the Softbank phones could not be sold in the United States.

A TD-LTE iPhone for the US and Japanese Markets? 

Another reason for the acquisition of Sprint Nextel, related to the differences between those two markets, is that SoftBank hopes to globally expand a new high-speed 4G network called “TD-LTE” (Time-Division Long-Term Evolution).

It appears that China Mobile is aiming to aggressively roll out a TD-LTE network in China. If China does adopt this system, demand will emerge throughout the country for base stations and antennas, offering manufacturers the prospect of large-scale orders. This, in turn, is expected to lower the cost of TD-LTE equipment. TD-LTE developments are not limited to China; the technology is also being introduced in India. In Japan as well, Softbank is providing a TD-LTE service, which it markets as “Softbank 4G.”

In the United States, Clearwire Corporation has been developing a TD-LTE service, but work on installing the network has lagged due to the difficulty of attracting investment. Sprint Nextel holds a majority share of Clearwire, so the recent SoftBank deal may allow Clearwire to direct more funds toward its TD-LTE network.

Some have said that the desire to hasten the introduction of a TD-LTE system in the United States was the factor motivating Son’s acquisition of Sprint Nextel. But if so, it raises the question of why SoftBank had to go so far as to sink a massive investment in a US wireless carrier. 

That answer may be related to the fact that Apple Inc. is apparently developing a TD-LTE–compatible iPhone. The product is being planned with the Chinese market in mind, but the lack of progress on TD-LTE installation worldwide has raised doubts at Apple about whether to go ahead. If Apple does create a TD-LTE iPhone, the product would also be compatible with the SoftBank 4G service in Japan.(*1) Compatibility with TD-LTE would make SoftBank’s network offering more appealing, with higher speeds and less troubles. SoftBank is looking to use this to suddenly gain a leg up in its heated competition over customers with KDDI, which also offers the iPhone.

If TD-LTE becomes one of the standard communications technologies, joint procurement from manufacturers would be facilitated. This would also mean that the same specs could be used for iPhones in Japan as those in the United States, setting the stage for benefits to accrue from joint procurement.

A SoftBank Strategy to Boost Sprint Nextel Subscribers?

Of course, expansion of the TD-LTE network is not Son’s only objective, he will also aim to increase the number of Sprint Nextel subscribers and secure a new revenue stream.

In Japan, SoftBank’s strategy has involved more than just a price war with competitors; the company has also striven to offer a menu of useful, affordable functions to iPhone users, such as SoftBank PhotoVision for receiving photos by email on digital photo frames or the “Mimamori” mobile phones designed to enhance child safety. This approach has helped the company steadily come out on top every month in the competition to win new subscribers. In this way, SoftBank has become adept at winning subscribers who use communication devices other than smartphones or conventional mobile phones. If Sprint Nextel follows the same business model it can be expected to steadily expand its base of subscribers.

In response to complaints from users about poor coverage, SoftBank made a concerted effort to raise the quality of its wireless network in Japan by increasing the number of its base stations and obtaining a wider bandwidth. Sprint Nextel has also had a reputation for offering poor connectivity, and Son will likely be keen to improve the quality of the network in the United States. But given the vast size of the country, it is not clear yet how improvements can be made.

US Market Poses Major Challenges

Opinions are divided among those in Japan’s telecommunications industry over the acquisition of Sprint Nextel. Some have praised Son for being the only one capable of undertaking such a risky move, while others think it will be hard to turn the acquisition into a success. Since mobile phones are already widely used in the United States, there is no room for the sort of rapid growth that can be expected in India or China. Moreover, smartphones such as the iPhone have thoroughly penetrated the US market and the two market leaders (Verizon and AT&T) have strong customer bases in place. As an executive at a wireless carrier put it, “There is no past precedent of a telecommunications company entering a foreign market and succeeding.” We will now have to see whether Son can turn the industry’s common sense on its head as he confronts the enormous challenges at hand.

There are still problems standing in the way of the acquisition of Sprint Nextel. On January 28, 2013, the US Justice Department, Federal Bureau of Investigations, and Department of Homeland Security asked the Federal Communications Commission to defer regulatory action on the SoftBank acquisition of Sprint Nextel to allow time for an investigation to gauge the national security implications and other factors related to the deal. (The document, “Request to Defer Action, filed by Department of Justice, Federal Bureau of Investigation and Department of Homeland Security,” is available on the FCC website.) The security apprehensions are related to the fact that SoftBank, in building the base stations and terminals for its wireless network in Japan, has partnered with the Chinese manufacturers Huawei Technologies Co. and ZTE Corp., which are said to have ties with the People’s Liberation Army. The concern is that the purchase of Sprint Nextel raises the risk that these companies might threaten the domestic security of the United States. The task for Son, now, is to somehow allay those concerns.

One indication of how seriously Son may be committed to expansion into the United States is the unconfirmed story that he has purchased a personal estate in an exclusive Silicon Valley community, as reported in a January 29 article published by the Los Angeles Times.

Attention will be focused on the next moves taken by Son as he pursues his goal of acquiring Sprint Nextel and tackling the US market.

(Originally published in Japanese on March 6, 2013. Title Photograph: Son Masayoshi at the October 15, 2012 press conference. Photo by the Sankei Shimbun.)