What Is SoftBank's Endgame in the U.S.?

With the world’s largest tech fund at his disposal (a cool $93 billion), the Japanese conglomerate's brash CEO Masayoshi Son has spent big on everything from robotics to pharmaceuticals, and now he hopes to leverage his investment in Sprint for an aggressive push into pay TV.

It's been hard to miss the flurry of aggressive moves by Japanese conglomerate SoftBank of late. On May 23, the company bought a $4 billion stake in U.S. chipmaker Nvidia. On June 8, it paid an undisclosed amount for robotics company Boston Dynamics, buying it from Google parent Alphabet. On Aug 9, it pumped $1.1 billion into pharmaceutical firm Roivant, which Wired called perhaps the biggest single biotech investment ever. And reports in recent days have indicated SoftBank is nearing a $1 billion investment in Fanatics, an online retailer of licensed sports apparel whose investors and partners include MLB and the NFL.

Many of the investments have been made via the $93 billion SoftBank Vision Fund — the world's largest tech fund — which has raised money this year from such investors as Apple, Sharp, Qualcomm, Oracle founder Larry Ellison, Abu Dhabi, the Public Investment Fund of the Kingdom of Saudi Arabia, and the company's own money.

The size and pace of investments has shocked both analysts and competitors.

But it doesn't surprise those who know SoftBank's mercurial founder and CEO Masayoshi Son, who has defied expectations his entire life. Founding SoftBank as a software distributor in 1981, Son, 61, invested heavily in the nascent internet, growing the company's valuation to $200 billion in the days before the dotcom bubble, only to see it lose 95 percent of its value when it burst. As markets crashed between 2000 and 2002, Son was reported to have lost north of $70 billion, the biggest financial loss ever suffered by any individual. However, during that same period he also invested $20 million in a then-unknown Chinese e-commerce startup called Alibaba. The stake was valued at more than $50 billion by the time of its IPO in 2014, making it one of the most successful investments in history.

Son has not shied away from ruffling feathers, either. Determined to break into Japan's then-largely closed telecom market, in 2001 he infamously stormed into Japan's communications ministry and threatened to set himself on fire if bureaucrats didn't cooperate with him. He later convinced Steve Jobs to give him exclusive Japanese rights to the iPhone, despite the fact that he didn't yet own a mobile carrier. But in 2006, he took over the struggling Japanese mobile operations of Vodafone for $15 billion, turning the company around in no small part thanks to the iPhone deal.

Amid the recent wave of investments and deals, SoftBank has also set its eyes on a major expansion in the U.S. pay TV and wireless space where it already owns more than 80 percent of Sprint, the fourth-largest U.S. wireless company. This represents a pivot away from direct investment in content and toward a strategic focus on distribution.

For years, Son targeted content via a number of Hollywood pacts, but results were mixed. In late 2014, the company invested $250 million in Legendary Pictures for a roughly 10 percent stake after talks to acquire DreamWorks Animation ended without a deal. It followed that up with the acquisition of streaming video service DramaFever, best known for offering Korean dramas. But by 2016 SoftBank had unloaded its Legendary stake to Dalian Wanda Group and sold DramaFever to Warner Bros. Although SoftBank did make a $250 million investment in WME-IMG shortly thereafter, the company's aim has changed.

"A few years ago there was more focus on content, but now there is a definite shift to IoT," says Gerhard Fasol, CEO of Tokyo-based tech consultancy Eurotechnology Japan and a longtime observer of SoftBank.

Tech analysts say IoT, or "internet of things," will transform technology, consisting of billions of interconnected devices communicating with both humans and each other. Think self-driving vehicles, smart cities, networked homes and a host of everyday objects with enhanced capabilities.

SoftBank has already bet big on IoT with the $32 billion purchase of U.K. chipmaker ARM Holdings in July 2016. Son has boldly predicted that ARM will produce a trillion chips for IoT over the next two decades.

But the ever-ambitious Son is planning to produce not only the chips to power the multitude of IoT devices, but also own the faster networks needed to connect them. That goal underpins SoftBank's drive to boost the reach of Sprint via a major deal that would give it scale beyond its current wireless network infrastructure in the U.S.

"IoT is a major focus as we view it as the next technology paradigm shift," said a SoftBank representative. "We expect to launch 5G [high-speed wireless] services around 2020. … Suffice it to say 5G will be extremely important in both the U.S. and Japan."

If SoftBank is going to achieve its goals it is going to need a partner — a big one — and there are three likely candidates: Charter Communications, the second-largest U.S. cable operator behind Comcast, which has a market value of about $120 billion before applying any takeover premium; wireless provider T-Mobile U.S., which has a market value of more than $52 billion; and the satellite TV operator Dish Network, currently worth more than $27 billion.

Although Sprint recently logged its first profitable quarter — just over $200 million — in three years, the carrier lost subscribers and remains the smallest of the "big four" American players behind Verizon, AT&T and T-Mobile. Son wants to replicate the telecom success he achieved in his home market by making Sprint a major player. But, as Fasol notes, it won't be easy.

"The turnaround of Vodafone in Japan gave Son the confidence that he knew how to turn around a mobile company," he says. "But the U.S. is more complex than Japan: it's like 25 local markets because of all the regional telecom companies."

Each of those acquisitions or mergers would be a mega-deal. And it would continue the trend of consolidation of distribution companies that started a few years ago and has, among others, seen Charter acquire Time Warner Cable and Bright House and make recent efforts to add wireless services to their arsenal. For example, Comcast this year will launch a wireless service, and Charter plans to do so next year.

The reasons for that convergence is that with cord-cutting and the explosive growth in broadband, and increasingly wireless, usage for video consumption has led pay TV giants to focus more on their telecom than pay TV businesses. And they have been looking to ensure they have the tech infrastructure needed to handle further growth in broadband and wireless usage.

That is why, despite the old adage that "content is king," a lot of recent deal talk, including that from SoftBank, has focused on cable, satellite and wireless distribution rather than content companies. "I think there will always be interest in content, but there has now been a definite shift of interest toward distribution systems/platforms," says Hal Vogel, CEO of Vogel Capital Management and former entertainment industry analyst.

If Sprint combined with Charter or Dish, it would allow it to move into new services as the merged entity could offer a quadruple play of pay TV, broadband, telephony and wireless services at a time of increasing convergence, which has been a key focus of cable titan John Malone's Liberty Global in Europe and Latin America to make its services a must-have that offers a focus on broadband and mobile video.

Such a deal for SoftBank would allow Sprint to position itself to enable consumers to access the content they want — whether on traditional pay TV, streaming services like Netflix and Amazon, or new direct-to-consumer offerings from Hollywood giants, such as the one Disney announced on Aug. 8 that it would launch in 2019.

"We think as pay TV subs continue to decline, we'll see wireless products bundled with content in an effort to drive gross adds and reduce churn," notes RBC Capital Markets analyst Steven Cahall. "We think this may result in TV subs gravitating toward distributors with wireless plans."

A Sprint takeover of T-Mobile U.S., meanwhile, would keep the company's focus on the wireless space, but give it more cost-cutting opportunities and bigger scale, which analysts say would allow it to take on giants AT&T and Verizon. A combined entity would be positioned for growth in mobile video usage and IoT.

Sprint CEO Marcelo Claure in June said a combination with T-Mobile U.S. would create a real competitor to AT&T and Verizon. "We'll be a formidable competitor and we'll continue to disrupt the industry," he told CNBC.

But an expansion into the U.S. cable and wireless arenas also comes with plenty of risk. A deal for Charter would leave SoftBank one of the most leveraged companies in the world, and whatever moves it makes to secure its holy grail of a network capable of powering IoT will add to its $130 billion-plus debt pile. But none of this is likely to deter Son, a natural risk-taker who plans to invest in 5,000 companies by 2040 and has a 300-year strategy to make SoftBank the world's most valuable company.

As Son told Japanese business daily Nikkei in September last year: "I don't care about the sort of things that will bring in chump change over the next two or three years. I think I'm better than others at sniffing out things that will bear fruit in 10 or 20 years while they're still at the seed stage, and I'm more willing to take the risks that entails."