Comparison of the LINE and Rakuten economic spheres

As we enter 2024, I think there have been major changes in what have been called the four major economic zones. Could you first give us a brief overview of those trends?

Arai: As we enter 2024, what were previously called the four major economic zones have been merged with T-Point and V-Point to form a new economic zone called the five major economic zones, called the "New V-Point." It is said that the New V-Point economic zone will threaten the Rakuten economic zone, which has had a particularly stronghold among the economic zones.

Among them, the LINE economy was a hot topic last year when it was said to be merging with Yahoo to form a new economic sphere. Could you tell us about its origins?

Arai: The origins of each economy are roughly the same. The LINE economy has LINE, and the Rakuten economy has Rakuten Ichiba, and they have platforms as factors that form the economy. Having a platform means having personal IDs and purchasing data. Here too, there are factors that form the economy. The mechanism that forms the economy is that the action steps from when a customer recognizes a product to when they purchase it, that is, the services in each funnel, can be completed within the same platform.

In the case of LINE, an economic sphere is formed when LINE users who see a LINE ad shop with LINE Pay, and then participate in campaigns and earn LINE points by using the LINE credit card, creating a flow. The LINE economy has a lineup of services that rivals Rakuten, including LINE Shopping, LINE Securities, LINE Pocket Money, LINE Smart Investment, LINE Coupons, and LINE FX, and these services can be accessed from the "wallet" on LINE.

What was the establishment of the Rakuten economy?

Arai: In the case of Rakuten, in addition to the growth of each business in the Rakuten Group, the concept of the "Rakuten Ecosystem" was born around 2006 when the company entered the professional baseball market, in order to maximize customer value as a group. By strategically customizing the SPU (Super Point Up Program), a system that increases the Rakuten point redemption rate on "Rakuten Ichiba" by using each Rakuten service multiple times, Rakuten users' behavior was guided to form an economic sphere.

For example, the fact that shopping in the Rakuten Ecosystem allows users to achieve a redemption rate that is impossible in other economic spheres was a major reason for encircling users. In addition, the Rakuten Ecosystem overwhelms other economic spheres in the variety and richness of its services, including Rakuten Ichiba, Rakuten Travel, Rakuten Bank, Rakuten Card, Rakuten Books, Rakuma, and Rakuten Securities.

Is there a goal that both Rakuten and LINE are aiming for in the economic spheres they are forming?

Arai: In the case of LINE, the official statement is that "We aim to realize a world where all aspects of life are completed through LINE," but in reality, LINE is an absolute communication tool used by approximately 97 million people, which is just under 80% of the population of Japan, so I think they are already forming a "living sphere" that goes beyond the economic sphere.

Last year, they also merged with Yahoo, and you could say that they are placing emphasis on forming a living sphere that goes beyond the economic sphere as their goal. On the other hand, Rakuten says that they "aim to achieve synergistic effects such as maximizing the lifetime value per member through the Rakuten economic sphere," and since they have now established a solid position among the five major economic spheres, it can be said that they have almost achieved their goal as an economic sphere.

However, I think that Rakuten's next goal is to form a living sphere beyond the economic sphere, and in order to achieve this, the rise of Rakuten Mobile is essential.

What are the main services of LINE and Rakuten that are performing the best?

Arai: When LINE was first launched, its main business was content, such as games and stamps, but now its advertising business is its mainstay. LINE advertising, which can be sent to 97 million monthly active users in Japan, boasts an overwhelming reach.

In addition, due to the synergistic effects of integrating with Yahoo, which boasts approximately 85 million monthly active users in 2023, advertising-related sales revenue in 2023 is expected to increase by 3.7% year-on-year.

What are the strengths of LINE advertising?

Arai: As mentioned earlier, it is the reach of LINE, which is completely integrated into everyday life. This is backed up by data. It is said that just under 80% of SNS users in Japan are LINE users, and of those, just under 40% are users who only use LINE. In other words, 40% of users can only be reached through LINE, which shows that it can reach users who cannot be reached through other SNS advertising.

In addition, LINE users are used daily by a wide range of age groups. Among them, there is data that shows that more than 70% of female users in their teens to 60s use it daily. From this, it can be said that the ability to approach a wide range of users is a strength of LINE advertising.

In addition, the ad delivery functions and delivery surfaces are very diverse. For example, there are more than 10 places where ads can be delivered to LINE, such as talk lists, LINE NEWS, LINE VOOM, wallet, LINE Manga, LINE Points Club, LINE Shopping, LINE flyers, etc. There are many users who do not use SNS other than LINE or the Internet, and many users with influencer elements in various delivery locations, so it is also a strength that you can expect the power of diffusion.

What about Rakuten?

Arai: Rakuten's main business is online shopping and financial businesses. Originally developed from a company that operated an EC mall, Rakuten Ichiba's sales have been growing steadily every year, and in the financial results from January to December 2023, sales were 2.713 trillion yen, up 7.8% from the previous year and the highest ever. It's fair to say that the strengths of the Rakuten Ecosystem are reflected directly in the figures.

The strength of the Rakuten Ecosystem is that, as one of the earliest companies to develop the concept of an economic sphere, each service is firmly rooted in people's everyday lives. For users who live in the Rakuten Ecosystem, services such as Rakuten Market and Rakuten Travel are integrated into their daily lives, making it difficult for them to switch to other economic spheres. Another strength of the Rakuten Ecosystem is the convenience of being able to access over 70 different services with a single ID.

Furthermore, financial services such as Rakuten Card, Rakuten Pay, and Rakuten Bank are also businesses where the strengths of the Rakuten Ecosystem are being demonstrated due to the recent trend towards cashless transactions and the spread of point services.

LINE will discontinue LINE Pay. Will this have any impact?

Arai: I don't think it will have much impact on users. I think users could have predicted the end of LINE Pay sooner or later when the merger with Yahoo was announced. LINE Pay has 44 million registered users in Japan, and only 6.5% of them are actually using it. As a cashless payment app, the number of users is the same as or slightly lower than Merpay.

LINE Yahoo has already shifted its focus to PayPay, and has also implemented a function that allows you to charge LINE friends from PayPay. It has been pointed out that Pay Pay is not supported due to its collaboration with "Money Forward ME" and "Zaim", and its linkage with some credit cards, but such information will not have a significant impact on users.

As mentioned earlier, the merger of LINE and Yahoo was to some extent predictable, with the end of services and apps with similar functions. At the same time as the announcement of the merger, the plan to open a new bank, "LINE Bank", was also canceled, and the end of LINE Pay and LINE Prepaid (Visa) seems to be a given for users. In fact, it took about three years from the business integration, so some users may still be wondering, "What's the reason for the delay in terminating LINE Pay?"

Why did it take so long to terminate LINE Pay?

Arai: It has been pointed out that it was due to the power dynamics between the old LINE side and the old Z Holdings side. The business integration of LINE and Yahoo was carried out by the old LINE parent company, Naver of South Korea, and the old Z Holdings parent company, SoftBank, with shares held on an equal basis, but it is believed that this equal merger hindered the streamlining of overlapping businesses of each company.

In fact, even after the business integration, the business environment continued to worsen, with businesses not being streamlined and efficiency not improving, and in October 2023, the two companies were integrated into one company as LINE Yahoo, which means that they have finally begun to streamline overlapping businesses.

In addition, while LINE Pay and PayPay have been in fierce competition, the fact that they have ultimately been consolidated into Pay Pay, which has the financial strength to do so, has led to some point that the competition in smartphone payments, including LINE Pay and PayPay, has been settled to a certain extent, and that the move has been made to the next stage, that is, competition in the "economic sphere."

However, there are problems surrounding the economic sphere business, such as a series of personal information leaks due to collaboration with Naver, and the Ministry of Internal Affairs and Communications has asked the company to review its relationship with the company. In addition, due to these issues, the integration of LINE and PayPay accounts, which was originally scheduled for 2024, has had to be postponed.

Since this is the part that is most anticipated in the LINE Yahoo business integration, the longer it takes to resolve this issue, the more it will undoubtedly affect the economic sphere concept that LINE Yahoo is aiming for.

How about the stagnation of Rakuten's mobile business?

Arai: Until now, Rakuten Mobile has been seen as a drag on Rakuten's online shopping and financial businesses, which have maintained solid sales despite continuing to incur losses, due to the large amount of upfront investment. However, some analysts believe that the company is showing signs of recovery, with the loss shrinking significantly in one year from 106 billion yen in operating profit for the fourth quarter of fiscal year 2022 alone to 68 billion yen in operating profit for the fourth quarter of fiscal year 2023 alone.

It has been pointed out that this is due to the company's significant reduction in its own network investment and its switch to a policy of making full use of roaming by signing a contract with KDDI. Another positive factor is the steady increase in the number of contracted lines, which has been achieved by offering family discount measures, etc. For Rakuten, which makes up an economic sphere with various services, the mobile business as infrastructure is essential to further strengthen its economic sphere and create new added value.

Since the beginning of its entry into the telecommunications business, the company has been in the red and there have been rumors of withdrawal from the industry, and in recent years it has been ridiculed for filling the gaps in its mobile business with its online shopping and financial businesses, but because it is an essential business, it had to make a little effort to enter the market. However, as mentioned above, there are certainly some ray of hope, with the deficit shrinking and the number of contracts increasing, and if the mobile business turns profitable, there is no doubt that it will move from being an economic sphere to forming a living sphere, just like LINE.

LINE and Rakuten each have their own challenges, and resolving these challenges will lead to the strengthening of their respective economic spheres, which economic spheres could be their current rivals?

Arai: It is definitely the new V-Point economic sphere. As mentioned at the beginning of this project, what were previously called the four major economic spheres have been called the five major economic spheres since the beginning of 2024 with the addition of the new V-Point.

The new V-Point has 154 million members, and in addition to the existing T-Point partners, you can earn points at Visa affiliated stores. Furthermore, when you use Sumitomo Mitsui Card to pay, you can earn both "shopping points" and "payment points", and the points you earn can be used at both the existing T-Point partners and Visa affiliated stores. With this integration, a very strong economic sphere has been formed.

The background to this is a sense of caution about the fact that major mobile phone companies in the payment field are expanding their business areas by pushing point redemption to the forefront. In addition, the environment surrounding consumer payments has changed dramatically with the spread of cashless payments, and users are increasingly using payment services that offer benefits such as points and discounts.

Sumitomo Mitsui Financial Group has also recognized this trend and is positioning mobile payment apps as a pillar of V Point popularity, aiming to create a point service that blends into everyday life.

Will competition between economic spheres accelerate from now on?

Arai: That is true, but the competition between economic spheres is currently in a transitional period to a certain extent, and the companies that form each economic sphere are beginning to work hard on the next stage of economic sphere formation, the formation of living spheres.

For example, LINE's integration of LINE accounts and Pay Pay accounts, and Rakuten's mobile business turning a profit, should both strengthen economic spheres and lead to the formation of living spheres. And when these are realized, I think it will lead to the formation and competition of living spheres.

Shunichi Arai

Has a 10-year career as a reporter for financial industry magazines. He later became independent and is active in various media as a freelance economic reporter. He also holds seminars on the theme of "How can small and medium-sized enterprises survive by utilizing DX?" Personally, he is addicted to point activities.

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