Betting on Number Ones: The SoftBank Saga
Focusing on market leadership.
SoftBank is a well-known company in the world of technology. But this was not always the case. SoftBank started out as a telecom operator in Japan by acquiring Vodafone’s Japanese operations. It managed to gain a solid footing in the Japanese telecom market that was dominated by NTT Docomo thanks to the latter’s resistance in adopting the iPhone, which SoftBank capitalized upon. The company then went on to acquire Yahoo Japan. Things really became rosy for it when its stake in Alibaba provided some of the best returns ever which in turn catapulted SoftBank onto the center stage in technology.
Buoyed by the success of SoftBank’s telecom operations, Yahoo Japan and Alibaba, SoftBank went on a buying and investing spree which saw it investing in several companies and in some cases downright acquiring them. Some of SoftBank’s investments include companies like Snapdeal, Ola, and One Web, while its acquisitions included companies like Sprint and ARM.
Monopoly or nothing
Often in technology, there is never a solid number two company in a particular segment. A number of tech companies today have more than 50 percent market share in whichever field they are in. For instance, when it comes to search, Google commands more than 50 percent of the search market. Similarly, when it comes to social networking, there is no doubt that Facebook and its various properties like WhatsApp and Instagram command more than 50 percent market share of social networking. And when it comes to e-commerce, Amazon controls more than 50 percent market share in the US as does Alibaba in China.
The network effects of being the largest player in a particular segment of technology, coupled with the data that the larger company gets to continuously improve its product/service simply leave very little chance for the number two company to have a meaningful fighting chance. SoftBank seems to be realizing the same and has begun organizing its various properties so as to ensure that whichever field it is in, it will be in a leadership position.
Investing in Number Two…
Despite SoftBank’s recent moves to ensure that it is the leading player in whichever field they enter, the company started by acquiring or investing in number two companies. The first acquisition was Sprint. Sprint was the number three telecom operator in the US, lagging behind Verizon and AT&T. SoftBank’s bet was just like it had turned around Vodafone Japan; it would manage to turn around Sprint in the US. But despite numerous attempts, SoftBank’s attempt to turn around Sprint never materialized. The company was never able to improve its network despite its vast spectrum holdings and customer churn kept increasing every year.
While Sprint was facing difficulties in managing to execute its turnaround, another US telecom operator called T-Mobile which used to be number four when SoftBank acquired Sprint embarked on a transformational turnaround under a new CEO named John Legere. Legere managed to turn around T-Mobile by improving its network, reducing churn and attracting customers through a number of “un-carrier” moves. Last year, T-Mobile surpassed Sprint as the third largest telecom operator in the US and has been on an upward trajectory ever since.
With a new CEO at the helm, Sprint has made a minor comeback this year, but most people mostly agree that it has lost the larger battle in the American telecom market. It is estimated that SoftBank spent around USD 20 billion to buy Sprint and spent billions more on Sprint’s debt restructuring. But all in vain.
Just like Sprint, yet another high-profile investment of SoftBank in a number two player was Snapdeal. While Snapdeal at one point of time was a close number two to Flipkart in e-commerce in India, things started going south ever since Amazon made its entry. Fierce competition from Amazon meant that Snapdeal kept losing market share while Flipkart despite losing growth to Amazon, somehow managed to cling onto its market share.
To remain competitive and win back market share, Snapdeal had a glitzy rebranding and marketing campaign last Diwali, but even that was of no use. As things stand now, the Indian e-commerce market is largely a two-horse race between Amazon and Flipkart, with little or no chance for Snapdeal to remain a sustainable standalone entity. To add to Snapdeal’s and to some extent, SoftBank’s woes, Snapdeal’s Freecharge acquisition also kept losing value as PayTM kept growing larger. Freecharge which at one point of time inching towards a billion Dollar valuation is now expected to be acquired by PayTM for less than USD 100 million.
But actively pursuing Number Ones
It has become increasingly clear that SoftBank, at least for the past year or so has been actively trying to become a leader in whichever field it is present in. This is highlighted by the acquisitions and investments the company has made recently.
Right off the bat was the ARM acquisition in July 2016. ARM is the perfect example of a leader in its respective field. Almost every smartphone on earth is powered by ARM. It does not matter if you are using a USD 700 iPhone or a USD 70 Android device – they are all powered by ARM. With Intel having missed the mobile boat, ARM has a clear monopoly in the chip design market for mobile SoCs or low power SoCs in general. With the expected surge in Internet of Things (IoT) devices which would require low power SoCs, ARM is again expected to win the market. The IoT market is expected to be many times bigger than the smartphone market and with ARM having a licensing business model, even if the potential license fee on IoT devices would be low, the sheer volume of IoT devices expected in future should give great returns.
Apart from the acquisition of ARM, SoftBank has also started investing in companies that are clear leaders in their respective markets. The most obvious example of this was SoftBank’s monstrous USD 5.5 billion investment in Didi Chuxing during April 2017. Ever since Uber exited the Chinese market by selling its Chinese operations to Didi, it has had a clear monopoly on the Chinese market. It is now clear that no other ride-hailing company would be able to match Didi’s network and size in China. Unless and until autonomous cars bring in some unforeseen disruption, Didi Chuxing would be China’s only cab aggregator for the most part and with such a monopoly, it could easily earn billions of Dollars in future.
Another market leader that SoftBank has invested in recent times has been India’s Paytm. Just last month, Softbank invested a whopping USD 1.4 billion in Paytm which has been one of the largest funding rounds ever for any Indian startup. Now that the demonetization storm has mostly settled, the winners in India’s e-wallet industry are becoming clear and Paytm by far has the lead. The sheer number of transactions and users it has, puts it in a different league altogether. The network effect works strongly in favor of Paytm as it has the largest number of users which attracts physical stores to accept Paytm and more physical stores accepting Paytm, in turn, attracts more people towards the app. It is a self-reinforcing cycle that keeps getting stronger every passing day.
With credit card and debit card penetration being some of the lowest in India, PayTM has a great chance at making mobile payments the norm and has heavily invested in signing up physical retailers for the same. Now that PayTM has received a Payments Bank license as well, it can provide a host of financial services which in turn could be monetized in future.
Blending companies to create market leaders?
I have explained how SoftBank over the past year has been actively pursuing market leaders by either acquiring them or investing in them. The company is also trying to merge number two players with others so as to get them enough scale to get them in the market leader league.
This is starting to take place in the US where SoftBank is actively trying to merge Sprint and T-Mobile. The company had tried for a Sprint and T-Mobile merger in the past as well but could not do so during the Obama administration which was extremely pro-competition and viewed any reduction in the number of operators negatively. However, with the Trump administration being pro-business, there is a good chance that T-Mobile and Sprint’s merger might be approved. If approved, the combined entity would have enough subscribers to compete with AT&T and Verizon, as well as a treasure trove of spectrum and synergies worth billions of Dollars. It would finally give SoftBank a truly fighting chance in the American telecom market where it has already invested billions of Dollars in the form of Sprint’s acquisition.
Apart from Sprint, Softbank is also engineering a merger of Snapdeal and Flipkart. It is now an open secret that Flipkart would be merging with Snapdeal or acquiring it sooner or later. SoftBank is behind the merger and would also invest in the combined entity once the merger is over thereby giving it a significant stake in Flipkart which is currently the leading e-commerce company in India. SoftBank is also engineering a merger of Freecharge with PaytmTM.
More often than not, it is the largest player that comes up trumps (pun unintended) in the world of technology. Being number two requires a lot of investment with very little return. Small wonder then that SoftBank is trying its best to make sure that all the companies that it has invested in or acquired are the leaders in their respective segments. Just how many of these companies end up delivering in future and by how much is something that remains to be seen.