Here comes the Son

IT WAS a vintage performance from Masayoshi Son, the 58-year-old founder and chief executive of SoftBank, a Japanese telecoms and technology firm. He was speaking to members of SoftBank Academia, an in-house executive school set up five years ago with the chief purpose of finding his successor. On October 22nd Mr Son riffed at length on how the world will change in the era of the Singularity, when artificial intelligence will exceed the human kind—by around 2055, he reckons.

Mr Son described how SoftBank will reinvent itself well before then from an old-line, pre-Singularity Japanese telecoms company into SoftBank 2.0, a superior, global and web-enabled being with a lifespan of 300 years or more. His mind-blowing predictions include one that robots will let their owners lead lives of unparalleled luxury, as masters with slaves did in ancient Rome. (Indeed, SoftBank is about to launch “Pepper”, a popular robot capable of expressing emotions, in America.)

Science fiction or reality? Despite his relatively low profile outside Asia, it is unwise to ignore Mr Son. He spotted the potential of Alibaba, a Chinese e-commerce giant, early. He has pulled off the largest foreign takeover by a Japanese firm yet seen. Even his aborted projects have grandeur: last year SoftBank talked about buying DreamWorks, a big Hollywood studio, and in 2013 it tried to buy Universal Music, the world’s largest record company.

Mr Son also matters to the wider future of corporate Japan. As part of a sweeping plan to revive a stagnant economy, Japan’s prime minister, Shinzo Abe, is trying to prod Japanese firms to take more risk, to spend their hoards of cash and to venture overseas. This is precisely what SoftBank is doing under Mr Son’s leadership.

He takes chances, and gears up SoftBank’s balance-sheet: with a ratio of net debt to operating earnings of around 3.5 times, it is one of Japan’s most heavily indebted firms, and is highly leveraged by global standards. It has become slightly less outlandish of late to be a business leader in the mould of Mr Son. But Japanese managers will seize on a failure as a sign that conservatism is best. Much of corporate Japan would be gratified to see Mr Son stumble, not least because his Korean origins have long kept him outside clubby business circles. His perceived success or failure will surely help to determine whether Mr Abe achieves his goals.

So far, SoftBank’s 34-year lifespan has had three distinct phases. First it was a small Japanese packaged-software distributor in the early 1980s. Then it grew as an internet conglomerate with hundreds of stakes in web firms, including Yahoo, becoming the American firm’s biggest shareholder. The dotcom crash of 2000 wiped out much of the value accumulated, but that same year Mr Son happened to invest $20m in a then-fledgling Alibaba. In 2014 Alibaba’s initial public offering valued SoftBank’s stake at more than $50 billion.

SoftBank’s third incarnation was as a mobile-telecoms operator, starting with its purchase in 2006 of the ailing Japanese operations of Vodafone, of Britain. Many observers thought the debt Mr Son took on to buy it would spell his demise, but he built what is now called SoftBank Mobile into Japan’s most profitable telecoms firm.

Similar naysaying accompanied his takeover in 2013 of Sprint Nextel, a struggling American operator, for $22 billion—the biggest foreign acquisition by a Japanese firm to date. So far there has been scant sign of a turnaround. Mr Son’s plan was to merge the firm with T-Mobile US, but America’s telecoms regulator reportedly refused even to consider the deal. Quarterly figures on November 3rd showed Sprint continuing to lose money, as it slashed prices to stop subscribers quitting.

That setback has not deterred Mr Son from his world-altering ambitions. To help fulfil them, he has brought into SoftBank Nikesh Arora, Google’s former chief business officer. In May he effectively named Mr Arora as his successor and gave him the title of president. In Japan the median level of pay for bosses of big firms is around $1m, so Mr Arora’s pay for his first six months’ work, of nearly $140m, made headlines. According to an adviser to some of SoftBank’s investors, they were taken aback to see Mr Arora paid a sum equivalent to around a third of the total dividends SoftBank paid for the entire financial year.

Mr Son has argued that the profits booked from Mr Arora’s investments since he joined have already more than made up for his compensation. In August Mr Arora returned the favour by pledging, as a measure of his commitment to Mr Son, to buy ¥60 billion ($483m) of shares in SoftBank.

As for Academia, Mr Son bluntly informed its members at its October gathering that it had failed to find a suitable successor, going on to explain how he had met, and selected, Mr Arora. In turn Mr Arora recalled how Mr Son drove 65 miles (105km) one night to have dinner with him in California. Analysts who cover SoftBank joke that Mr Son talks about his new hire rather like a new girlfriend.

Mr Son’s whims are not a surprise in Japan, where the corporate world has grown accustomed to his ways. He has long been known as a maverick, the only Japanese business leader to invite comparisons with Bill Gates of Microsoft or the late Steve Jobs of Apple. Yet the bets on Sprint and, now, on Mr Arora are as sizeable and risky as any he has made. That worries investors, who tend not to be keen on a 300-year business plan that means expensive investments in the short term, but whose returns may not come in their lifetimes. They are also said to be concerned about the sums Mr Arora will be paid in the future.

As a result, SoftBank’s shares trade at a hefty discount to book value. According to Atul Goyal of Jefferies, an investment bank, given SoftBank’s stake in Alibaba, which is worth more than ¥6 trillion, and its investments in Yahoo Japan, Sprint and other firms, the current market capitalisation of SoftBank, at ¥8.2 trillion, implies that its entire, profitable Japanese telecoms business is worth nothing.

Mr Goyal sees good reasons for investors to keep the faith with Mr Son. “It is difficult to find anywhere else a combination of Son’s record as an entrepreneur, a turnaround operator and an investor—investing in the internet, where even Warren Buffett fears to tread—and with his track record of success,” he says. Mr Son is said to be so frustrated at how far investors have marked down the shares that at one point this year he reportedly contemplated a management buyout—characteristically, it would have been one of the largest such deals in history.

A world-wide web of happiness

It is clear that of all the business roles Mr Son has played, he most relishes investing in web businesses, preferably those that promise to add to the sum of human happiness while delivering Alibaba-sized returns. SoftBank plans to invest around $3 billion a year for several years, analysts reckon, chiefly in Asian e-commerce. Now, though, SoftBank is no longer investing in entrepreneurs running businesses from their living rooms, as Jack Ma was when Mr Son first invested in Alibaba. It must compete with a host of Silicon Valley venture capitalists each time it invests.

That is partly why Mr Son needs Mr Arora and his prodigious social network. In June this year the pair invested $1 billion in Coupang, South Korea’s wannabe Amazon, in return for a fifth of the company. Coupang, which has yet to make a profit, became the best-financed startup in the world after Uber and Flipkart, an Indian e-commerce firm. Yet South Korea’s online-retail market would have to grow by well over a third before SoftBank makes much of a return on its investment.

Other big bets have been on e-commerce in India and Indonesia. Without Mr Arora, Mr Son has said, he would not have been able to take as big a stake in Snapdeal, another Indian e-commerce platform, which Mr Son has hailed as the Alibaba of India. When he tried to follow up one investment with a second this summer, existing investors at first refused to be diluted. Mr Son would have given up until Mr Arora used his network to prevail.

Some venture capitalists snipe that for SoftBank, its big and growing position in Indian e-commerce may be inspired as much by Mr Arora’s personal ties to the country as by the market’s potential. Others reckon that as he contemplates his seventh decade, Mr Son is putting his desire to change the world ahead of moneymaking. “Each of these bets is a bet-the-farm kind of wager, and he is making lots of them,” says a veteran venture capitalist in Tokyo.

The latest firms he has invested in face far more competition than did Alibaba, which was partially sheltered by the Chinese government from foreign competition. No such protection necessarily prevails elsewhere. (SoftBank declined our request to interview Mr Son or Mr Arora for this article.)

Another recent deal that raised eyebrows, even in Silicon Valley, where money is splashed around with abandon, came in the field of “fintech”—the application of digital technology to financial services. SoftBank has put almost $1 billion into SoFi, one of many online lenders striving to be “the Uber of banking”. SoFi is at least profitable; yet the scale of the funding caused surprise.

Making bets of such size and speed makes Mr Son quite unlike most Japanese bosses. Yet in one respect the firm may have followed a very Japanese tradition; overpaying for a foreign business after paying insufficient attention to the local climate in which it operates.

Sprint’s woes began long ago, with its merger in 2005 with Nextel Communications, after which it backed WiMAX, a mobile-broadband technology that never caught on with customers. Since SoftBank bought its 80% stake in Sprint, the American firm’s share price has fallen almost by half. A newly revitalised T-Mobile US overtook it this summer by number of customers, leaving it fourth out of the country’s four main operators.

Mr Son seems to have underestimated the difficulty of pulling off a turnaround of Sprint in America’s hyper-competitive telecoms market, dominated by two behemoths, Verizon and AT&T. It is certainly a far harder task than when SoftBank Mobile leapfrogged Japan’s two sleepy market leaders, KDDI and Docomo. Much of Mr Son’s success there came from exploiting the two incumbent firms’ myopia on Apple’s iPhone. One SoftBank-watcher recalls how their executives said the iPhone would never catch on in Japan because it had no hook on which young women could hang cutesy mascots. The iPhone quickly soared to dominance, and took SoftBank Mobile from a 19% share of the market in 2008 to 26% now. “Son was the only guy in Japan who could speak to Steve Jobs”, says Jesper Koll, of WisdomTree, an asset-management firm, who has served on a board with Mr Son.

He’s not in Kansas yet

Sprint is a huge bet, even for a risk-taker like Mr Son; and if he cannot engineer a turnaround in an industry he knows so well, it will bode ill for his other investments. But he has yet to show that he has the energy to oversee a revival of the sort he pulled off with Vodafone’s Japanese offshoot.

Last year Mr Son appointed as Sprint’s boss Marcelo Claure, a Bolivian-born entrepreneur and football-club owner who, thanks to Mr Son’s investment in the mobile-handset distributor he founded, is said to be the richest Hispanic person living in America. Mr Claure has launched a price war and a big network-investment programme that are burning through the firm’s funds. Sprint had $34 billion of debt at the end of fiscal year 2014, and in 2015-16 is expected to spend another $9 billion of its cash. Sprint’s dire financial position may even prompt regulators to reconsider their bar on it merging with T-Mobile US. Even so, the path to recouping SoftBank’s original investment looks arduous.

The only way that Sprint can recover is if Masayoshi Son is right on top of it, says a Japanese businessman with knowledge of the industry. Mr Son has spent weeks in late-night conference calls devising solutions for Sprint’s network, but has also said that he is “a busy guy”, questioning why he should put all his efforts into the American telecoms market when the situation “looks bad”. In October, in an apparent attempt to convince investors of his determination to fix Sprint, Mr Son said he had bought a house near its headquarters in Kansas City. But there is no sign of him taking up full-time residence.

Mr Arora is among those at SoftBank who have questioned whether it would be better to sell Sprint, if a buyer could be found. How much influence on such issues he will have is hotly debated in Tokyo, as is the question of whether he will indeed succeed Mr Son. Some think Mr Son can, and perhaps will, drop him eventually if he disappoints. Others say that if he did so, he would never persuade any other tech luminary to take Mr Arora’s place; and thus that their fortunes are now tied—they will rise, or sink, together.

Mr Son’s initiative to bring in and anoint a successor while still in his prime is a sign of confidence, says one of his inner circle. It contrasts with many bosses in Japan who are unable to move on. Some years ago, Tadashi Yanai, the founder of Uniqlo, a fast-fashion giant, promised to retire in 2014 around the age of 65, then decided no one was good enough to take the job. It is conceivable that Mr Son may yet reach the same conclusion, given what an observer of the company describes as his habit of becoming intensely taken up with someone only to lose interest later on.

It will also be difficult for Mr Arora to navigate the internal politics at SoftBank, which remains Japanese in character, despite Mr Son’s global outlook. It has been reported that the company was considering moving its investment arm to London, to cut the group’s tax bill as well as helping to make it less Japanese. That this leaked out was widely seen as a sign of deep internal discontent at Mr Arora’s influence.

Still, SoftBank’s highly profitable position in Japanese telecoms, and the continuing strength of Alibaba in China, both offset the gloom from Sprint and provide the funds for Mr Son’s foreign adventures. In the domestic market, SoftBank Mobile is expected to produce $3 billion-$4 billion of cash a year now that its investment in the network is largely complete. If the cash materialises—and SoftBank has suffered poor cashflow in the recent past—this will more than make up for the money it is spending elsewhere: in the year to June the group’s free cash rose by a quarter, to the equivalent of $19 billion.

However, SoftBank’s Japanese profits and those of its rivals have lately drawn unwelcome attention from the government. In September Mr Abe announced that he had instructed the telecoms minister to study how to achieve lower pricing. Monthly bills for smartphones in Tokyo are among the world’s highest. Mr Abe will need to tread carefully, analysts reckon, for it would not take much to badly weaken Docomo, which makes much lower profits than the other two firms. Yet Mr Abe’s move has added to worries that growth for SoftBank at home is levelling off, with both numbers of new subscribers and revenues per customer now falling.

For the moment, though, Messrs Son and Arora seem able to funnel the riches earned from Japanese smartphone users to some of the world’s most talked-about startups and their founders. “We stay young with that new blood and SoftBank will be the summation of those young, passionate entrepreneurs,” enthused Mr Son last month. It is perhaps the best testament to him that his fan club in Academia shows no sign of attracting fewer recruits. To the young executives in Japan, his bold strategies make him a hero in a risk-averse corporate culture. Some of them doubtless reckon that, despite Mr Arora being the chosen one, they may yet be in with a chance of leading the company.