by Katie Benner
When Japanese telecom company SoftBank Corp. announced two big acquisitions last week – a $1.5 billion deal for Finnish game maker Supercell on Oct. 15 and a $1.3 billion deal for hardware distributor Brightstar on Oct. 18 – it seemed like just another tech giant shopping around for ways to diversify and grow. But SoftBank is no ordinary company when it comes to M&A. The latest moves of its CEO Masayoshi Son show that the company is looking for ways to become a force in mobile content, an interest that could someday spark a corporate makeover.
Over the past three decades Mr. Son has used acquisitions to anticipate secular changes in the tech industry, a pattern that is evident in the company’s annual reports, executive letters, and earnings results. The architect of SoftBank’s M&A and investment strategy, Ronald Fisher, did not return calls for this story, but company documents show how investments have spurred prescient shifts in corporate strategy and big changes to the core business.
SoftBank is currently the world’s third largest wireless carrier, but that has not always been the case. Mr. Son has transformed his company about every decade thanks to acquisitions that were, at first, ancillary to the core business. In the mid-1990s, the company was a publishing company. By the mid-2000s, it was an Internet powerhouse. “Through investing in information industry-related businesses we gather intelligence about transformative opportunities and new future trends,” Mr. Son wrote in the latest annual report.
It’s not common to see a corporation constantly reinvent itself, but those that do so successfully are among the world’s best, most exciting businesses. General Electric was once a light bulb maker and now it’s one of the country’s largest issuers of consumer credit. IBM made typewriters and now it runs data analytics for large companies. A few much younger companies are trying to be chameleons, too. Amazon is still an online merchant, but it’s making big bets on digital media and hardware. Google is still a search company, but it is also a serious software maker.
Before we consider what Supercell and Brightstar could mean for SoftBank, it’s important to understand how acquisitions have led to corporate change. SoftBank was established in 1981 as a PC software distributor in Japan. In order to expand into the United States, Mr. Son bought PC trade show operator COMDEX in 1994, and technology trade magazine publisher Ziff-Davis in 1995. The deals got SoftBank into the U.S., and put the company squarely in the flow of information about emerging technology companies.
Information from COMDEX and Ziff-Davis convinced Mr. Son that the Internet, not hardware, would fundamentally change technology. The CEO of Ziff-Davis arranged for Mr. Son to meet with Yahoo founders Jerry Yang and David Filo, and in 1996 SoftBank became Yahoo’s largest shareholder and got a controlling stake in the new venture Yahoo Japan.
By 1998 SoftBank was a media company. Publishing and events accounted for about 71% of income. Yahoo Japan and investments in online properties like E*Trade and GeoCities led Mr. Son to believe that everyone would someday be online. So he invested in broadband and fixed-line telecom companies from 2000 through the middle of the decade, in anticipation of a need for high-speed connectivity.
By the mid-2000s, SoftBank was an Internet company with nearly all of its operating income coming from Yahoo Japan, online commerce sites, and online advertising. At the same time it was using acquisitions to become a telecom company with a presence in mobile. The media division barely registered in terms of revenue or income.
This history brings us to the SoftBank of today, a wireless operator that became a global player when it completed a $21.6 billion acquisition of Sprint this June. The company generates 64% of revenue and 62% of earnings from the mobile communications business. Last week’s deal for Brightstar — a device middle man between hardware makers, retailers, and wireless companies — could increase SoftBank’s influence with manufacturers by combining the purchasing powers of SoftBank and Brightstar. That’s a good position to be in given that a lot of consumers (and, presumably many SoftBank wireless customers) are hunting for phones. Research firm eMarketer says only 20% of the world currently uses smart phones.
But the Supercell deal shows that SoftBank is preparing for a future where wireless may not dominate the company’s financial picture. Marc Einstein, a consultant with Frost & Sullivan, said the deal illustrated that “mobile operators need to be more forward looking.” He predicted that revenues from mobile services will fall in the next four or five years.
Supercell strengthens SoftBank’s subsidiary GungHo, a company that began as an online auction site and morphed into a game maker several years ago. GungHo makes one of the world’s best selling mobile games “Puzzle & Dragons.” The app generates more than $3 million a day, according to Macquarie analyst David Gibson, and has been popular in Japan. Now GungHo can reach players in Europe, where Supercell’s games “Clash of Clans” and “Hay Day” are among the most popular.
“Games are a way to access growth,” says Andrew Hawn, who works at the consulting firm the Futures Company. Citing data from eMarketer, he says about 40% of mobile device users will play games on their devices this year, a number expected to hit nearly 60% in four years.
SoftBank’s VC funds have invested in lots of companies that — like Supercell and GungHo — reach consumers through mobile devices. Familiar names include Gilt Group, RebelMouse, Mobile Day, FitBit, and Paper.Li. There are also lots of media companies in the portfolio like BuzzFeed, the Huffington Post, Rap Genius, and Now This News. While other VC investors in these companies are hoping for big returns, SoftBank is also using information from these investments to figure what kind of company it will become next.
With the Sprint deal so recent, it’s hard to imagine a world where wireless is no longer SoftBank’s most important business. Supercell doesn’t necessarily mean that SoftBank will be the next Nintendo (though we shouldn’t rule it out). But it does show that Mr. Son is trying to figure out how consumer adoption of mobile content will change his company, even though the world simply sees him as the operator of a global wireless powerhouse. For those who want to understand the next phase of tech and anticipate SoftBank’s next core business, keep an eye on the company’s acquisitions. They’ll do much more than just support a wireless giant.
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