New Stories Annual Report Fiscal Year Ended December 31, 2014 New Stories of One of the World’s Most Sophisticated Ecosystems Ever since its founding in 1997, Rakuten has been developing a unique, original business model with the goal of becoming the world’s leading Internet services company. By applying this business model, we have created the “Rakuten Ecosystem” for the provision of one-stop access to wide-ranging Internet Services, Internet Finance and Digital Content businesses. At the heart of the business is membership and brand. In fiscal 2014, the Rakuten global gross transaction volume reached ¥6.7 trillion, and the number of members is approximately 700 million. We also have business operations in Japan, Asia, North and South America and Europe. In these markets, we will seek to create a global Rakuten Ecosystem by sharing with overseas group companies expertise cultivated in Japan through implementation of our domestic business model, and by adhering to the corporate philosophy of empowering people and society through the Internet. Contents 2 The Evolution of Our Business Model 30 Board of Directors, Managing Executive Officers and Company Auditors 4 The Year’s Highlights 31 Outside Directors 5 To Our Shareholders 32 Corporate Governance 10 The Inside Stories 37 Financial Section 18 Financial Highlights (IFRS) 45 Major Consolidated Subsidiaries and Affiliated Companies 20 Financial Review 46 Corporate History 26 Value Creation for Sustainable Growth 47 Corporate Information 48 Consolidated Financial Statements (Appendix) Rakuten Ecosystem E-Commerce Open New Stories of Closed One of the World’s Viber + Rakuten Most Sophisticated Membership Global Gross Transaction Volume: Ecosystems Digital Financial Content Service ¥6.7 trillion Open Closed Global Gross Transaction Volume Domestic E-Commerce GMS, Travel, Credit Card, Edy, Overseas E-Commerce GMS, Ebates GMS in Q4/14 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 1 The Evolution of Our Business Model The Ongoing Story of Rakuten Ecosystem 1 Establishment of an Online Shopping 3 Launch of a Points Program for Members Mall, Rakuten Ichiba Rakuten operates a membership-based online shopping When Rakuten Ichiba was established in 1997, people said mall using its accumulated customer database. In 2002, no one would shop on the Internet. Rakuten Ichiba is a we launched the Rakuten Super Points service in which B2B2C (business to business to consumer marketplace), customers earn points for purchases or use of services with merchants all over the country. Users find it more within Rakuten Ichiba. Points can be exchanged for a attractive and exciting than other e-commerce sites variety of services provided by companies in the because of our “Shopping is Entertainment” concept. Rakuten Group. 2 Adding Group Services 4 Launch of Finance Business, Rakuten’s improved brand after its OTC listing in 2000 Synergies with E-Commerce helped support major M&A activities. Rakuten expanded DLJdirect SFG Securities, Inc. (now Rakuten Securities) into the new service areas that became the Rakuten became a consolidated subsidiary in 2003. In 2004, Ecosystem, starting with the acquisition of the Rakuten acquired shares in Aozora Card, Co., Ltd., which portal and search site operator Infoseek Co., Ltd. and also became a consolidated subsidiary (now Rakuten MyTrip.net (now Rakuten Travel) became a Rakuten Card). The launch of the Rakuten Card credit card payment consolidated subsidiaries. service, brought synergies between credit card payment services and e-commerce, improving both Group revenues and the frequency of use. 1997 >> 2000 >> 2002 >> 2003 >> 2005 >> 1. E-commerce and 2. New services with 3. Launch of a points 4. Addition of membership Travel, Infoseek program financial services 2 5 Membership Database Integration, Brand Taiwan Rakuten Ichiba service marked the overseas Standardization, Synergy Formation expansion of our e-commerce business. Acquisition of Buy. In 2002, we started to integrate the membership databases com, a leading U.S. e-commerce site, and PriceMinister, a of various services. In 2004, creation of the Rakuten Golden top French e-commerce site, in 2010 accelerated Rakuten’s Eagles Japanese professional baseball team built a global expansion from an innovative Japanese company national profile for Rakuten. Then, in 2005, we replaced our into an emerging global online service company. Since disparate service logos with a single Rakuten brand. then, we have successively globalized the Rakuten Creating unity across all Rakuten Group services and Ecosystem by transplanting the Rakuten marketplace implementing a one-stop service system gave users access model to other countries. to a variety of services with a single ID, enhancing In 2012, Rakuten established a major e-book presence Rakuten’s ability to attract customers, improving usability, by acquiring Kobo Inc. (now Rakuten Kobo Inc.) of Canada. and expanding traffic. In 2014, our finance business began to expand overseas through initiatives that included a partnership with the 6 Establishment of the Rakuten Ecosystem First National Bank of Omaha in the U.S. and issuing a In 2006, we unveiled the Rakuten Ecosystem concept, credit card in Taiwan. linking Rakuten-branded services, the Rakuten member database and the Rakuten Super Points system. Users who 8 Global Business Foundation sign up under one Rakuten service can also use other Expansion with Viber and services. This model is based on continuous circulation of the Enhancement of Content all economic activities, both on the Internet and in the real The 2014 single acquisition of Viber tripled the Rakuten world. Using its huge membership database, Rakuten Group’s global customer base to 600 million (as of February pioneered a cross-use strategy to increase member usage 2015). The recent acquisition of digital content services, through migration between new and existing services. such as Wuaki.TV, S.L. and Viki, Inc., in addition to existing e-commerce and Internet finance services, will allow us to 7 Overseas Expansion develop new markets that do not require physical —Globalizing the Rakuten Ecosystem distribution. These developments are the start of a new Rakuten began affiliate marketing in the U.S. in 2005 after phase of growth and success on a global scale. acquiring LinkShare Corporation. The 2008 launch of the 2006 >> 2008 >> 2010 >> 2012 >> 2014 >> 5. Brand and data- 7. Acceleration of 8. Overseas infrastruc- base unification Overseas expansion ture expansion 6. Establishment of Rakuten Ecosystem (Taiwan) 3 The Year’s Highlights Gross merchandise sales from domestic e-commerce in- 1 creased by 13.7% year on year to over ¥2 trillion. Rakuten Card shopping transaction volume was 35.1% 2 higher year on year at ¥3.5 trillion. 3 Global gross transaction volume grew to ¥6.7 trillion. Consolidated operating income exceeded 4 ¥100 billion for the first time in Rakuten’s history. Unique IDs registered with Viber raise Rakuten global 5 membership to approximately 700 million. ROE continued to rise steadily, 6 from 16.0% in fiscal 2013 to19.6 % in fiscal 2014. 7 Dividend was increased from ¥4.0 to ¥4.5 per share. 4 To Our Shareholders A New Story— See Around the Corner A New Growth Story Began for Rakuten in 2014 2014 marked the 25th anniversary of the World Wide Web, and 18 years since the founding of Rakuten. From our foundation at a time when “people will not buy goods on the Internet” we are aiming towards becoming the global number one Internet services company and we have constructed a sophisticated and unique business model. The expression “Internet of Things” is becoming widely used, and it has become possible to link all goods through the Internet. The number of global Internet users has expanded from 1.02 billion in 2005 to 2.92 billion in 2014. Particularly significant is the fact that the number of people accessing the Internet via smartphone-based mobile infrastructure has reached 1.75 billion. We are also seeing the continual emergence of disruptive technologies that redefine the world’s existing frameworks, as well as an accelerating shift of focus from goods to digital content. Rakuten was quick to respond to this changing environment by moving into the digital content business, starting with the acquisition of Rakuten Kobo in 2012. In fiscal 2014, we continued to concentrate on the development of this business area into a new core segment in the Rakuten Ecosystem. In the Internet Services segment, we further strengthened our services for smart devices, which already account for approximately one-half of gross merchandise sales in Rakuten Ichiba. Another focus was the utilization of big data. Furthermore, in the Japanese market, we launched the R-Point Card, a common point service Starting a New Chapter on Our Journey to No. 1 in Internet Services Worldwide Hiroshi Mikitani Chairman and CEO 5 To Our Shareholders that allows customers at real-world stores to use Rakuten’s Super Point system, which is one of our key strengths. We also launched “ROOM”, a curation-type social shopping service, in the Japanese market. Further Acceleration of Global Expansion Our domestic e-commerce business, especially Rakuten Ichiba, continued to show sustained growth in 2014, and gross merchandise sales from domestic e-commerce was in excess of ¥2 trillion. In Japan, we have been most successful with the B2B2C marketplace business model, and we continued to make steady progress with our efforts to extend this model into other countries. Cross-border integration under the Rakuten Merchant Server global (RMSg) platform was reflected in rapid growth in gross merchandise sales in overseas marketplaces. A new addition to the Rakuten Group in 2014 was Ebates, an online cash- back site based in the United States. We see this as an opportunity to provide new impetus to the global e-commerce market by building a unique and innovative e-commerce platform. In the Internet Finance segment, we maintained steady growth in the number of Rakuten cardholders, and shopping transaction volume increased by 35.1% year on year to approximately ¥3.5 trillion.