SoftBank Sprint and the Future of Telco

What is Softbank’s strategy with its 20 billion dollar acquisition of Sprint?

As I mentioned in a previous post, there are clearly significant macroeconomic leverage points with respect to Softbank’s strategy

TREMENDOUS LEVERAGE:

  • Yen to dollar exchange rate is shockingly close to a 10-year low
  • Corporate tax rate in Japan is quite high
  • Bank of Japan prime lending rate is between 0.0 and 0.1 percent
  • Japan networks and mobile user behavior is very advanced

But clearly this is not just a financial deal. So what does Sprint represent to Softbank?

Sprint is the Financial Platform.

If you look at the consolidated revenue chart, below, Sprint catapults the combined entity to almost double Softbank’s previous revenue to $80 Billion USD. This is an absolute revenue engine. The scale synergies are mostly illusory as we are talking about cross border operations, but the combined entity will have a high degree of free cash flow and produce significant leverage in the most important mobile markets in the world, Japan and USA. These two markets have the highest ARPU (Average Revenue Per User) by far of any country.┬áChina activates more IOS and Android devices per day than the US, but the installed base of these platforms is still bigger in the US.

So SoftBank gets customer growth in a region with similar ARPU to Japan–but since Japan is saturated, the growth has to come from elsewhere.

 

 

So Sprint is part of the financial platform, but for what?

The key slide is shown below… despite being one of the biggest telecommunications companies in Japan, almost 2/3 of the value of SoftBank comes from Internet company holdings. Interestingly, some of the operational synergies are unclear, for example the Alibaba Group assets can’t have much impact in either the Japan or US markets operationally.

This provides quite a deep insight into the mind of Masayoshi Son, SoftBank’s dynamic founder.

As such, the balance sheet of Softbank provides a:

Financial platform for an Internet investment portfolio.

 

 

An even further clue is the slide below where the SoftBank chairman shows the ecosystem that SoftBank represent… This is the Internet platform that sits atop the “classic telco platform”.

He does not see SoftBank as a “phone company”. He is reinventing the phone company by layers…

  1. Telecommunications Company layer -> legacy business, provides cash flow
  2. Internet company layer -> leverages the cash flow while providing an ecosystem for driving Data ARPU

So where does this go?

MBaaS: The Mobile App Development Layer

The third layer beyond this is the mobile app development layer. For years, the Internet has been building out a set of services that can all be integrated through simple interfaces like REST. This kind of integration provides a “snap together” model of the Internet that creates a true ecosystem from an apparently disparate “primodial soup” of companies as shown above.

However, all of the Internet services in the world don’t translate into success in the era of the App Store.

There’s a missing ingredient that brings the value of these layers –mobile application developer ecosystems. So where are the mobile developers today?

Mobile developers today are aggregating around a new form of platform known as Mobile Backend-as-a-Service (MBaaS). MBaaS is defined by Michael Facemire of Forrester and essentially it provides a natively pluggable SDK into popular mobile OS client platforms such as Android or IOS that enables mobile developers to instantly inject cloud services into their apps.

SoftBank itself is partnered with Kii Corporation. Kii is the world’s biggest provider of Mobile Backend-as-a-Service MBaaS with 25 million end users served. Developers can connect with Kii Developer Portal and easily add cloud services to their apps.

We are already seeing significant partnerships between independent mobile data cloud providers and major telcos, for example the recent announcement by Twilio to work with AT&T, and the partnership of Kii with NTT DoCoMo.

The telco of the future leverages the financial base of its legacy business to generate an internet ecosystem and ultimately a cloud platform for mobile app development.

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