On March 19, internet services company Rakuten, Inc. announced its acquisition of Cleveland-based OverDrive Holdings, Inc., operator of the OverDrive platform, “for a total consideration of $410 million in cash.” According to OverDrive’s press release, the company will continue to operate under current CEO Steve Potash as a subsidiary of Rakuten’s U.S. unit.
Although the purchase appeared to surprise many, it follows a string of recent changes in the worldwide book distribution sector. From Rakuten’s perspective, the decision was a clear effort to move into global ebook distribution.
Why OverDrive? Why Now?
OverDrive will strengthen Rakuten’s ebook business by adding a distribution platform, more than 2.5 million titles, and relationships with 5,000 publishers and 30,000 libraries, according to its press release. The San Francisco-based independent investment bank Qatalyst Partners advised OverDrive on the deal.
“Rakuten’s vision of empowerment is perfectly aligned with OverDrive,” says Potash. “Since 1986, our vision has been to advance digital publishing and content to connect readers with books and information. We’re passionate about working with publishers, libraries, schools and retailers to make that happen, and we are very excited to join an innovative company that shares and supports our vision.”
Rakuten’s purchase is a step in its efforts to dominate the global consumer marketplace—and particularly to move into the North American marketplace. “OverDrive is a widely-respected pioneer in digital content and the sharing economy. Long before even Kobo emerged onto the global stage, OverDrive had already seen the future and was working with publishers to digitize their content to share with the world, building one of the most comprehensive online digital marketplaces in the process,” says Takahito Aiki, head of Rakuten’s global ebook business and CEO of Rakuten-owned ebook company Kobo. “OverDrive’s deep content library and relationships with publishers, libraries, schools, and retailers will allow Rakuten to extend our mission of empowerment to new market segments and accelerate the growth of our digital contents businesses.” The deal, which is set to close in April, will help Rakuten’s ebook business EBITDA (earnings before interest, tax, depreciation, and amortization) get close to breaking even in 2015.
Just What Is Rakuten?
Hiroshi Mikitani founded the company as MDM, Inc., in February 1997. Later that year, it launched an internet shopping mall, Rakuten Ichiba. In 1999, the company changed its name to Rakuten, Inc. (Rakuten is the Japanese word for “optimism.”) Today, the multinational corporation has nearly 50 subsidiaries—largely created through acquisition—and operates across the globe, focusing on such areas as online retail, sports, banking, media, travel, entertainment, and securities. In keeping with its goal of international commerce, in 2012, the company formally adopted English as its official language. “Our goal is to become the No. 1 Internet service company in the world,” Mikitani said at a 2010 press conference. The company’s mission is to “empower merchants to deliver Omotenashi, a hospitality mindset, which helps sellers create lasting relationships with customers. Rakuten ranks among the top three e-commerce companies in the world with over 90,000 products from 38,500 shop owners. Among its numerous online properties, its flagship B2B2C (business-to-business-to-consumer) model e-commerce site Rakuten Ichiba is the largest e-commerce site in Japan and among the world’s largest by sales.” The goal of its global ecommerce site is to be “wherever the consumer is and constantly connected through social networking sites such as Facebook, Twitter, Pinterest and Google+. Our new focus on video guides and tailored recommendations will make it easier than ever to ensure you’re ahead of the curve when it comes to the next big thing!”
Mikitani, Rakuten’s chairman, president, and CEO, is Japan’s third-richest man. He has a net worth of about $9.8 billion, according to the Bloomberg Billionaires Index. As of Dec. 31, 2014, Rakuten had nearly $10 billion in net cash. Rakuten.com Shopping is No. 46 in the 2014 Internet Retailer Top 500 Guide, and Rakuten, Inc. is No. 20 in the 2015 Asia 500 Guide. (Amazon is No. 1 in the Top 500.) Rakuten has spent about $3.2 billion during the past 3 years to buy companies as it expands into online services and selling ebooks, video, and other content.
OverDrive’s EBITDA for 2014 was $25 million. “Acquiring the company,” notes an article in The Australian Financial Review, “makes Rakuten one of the big three players in the ebook market, ‘ahead of Google Books and Barnes & Noble’, said Andrew Rhomberg, founder of publishing start-up Jellybooks. ‘It massively deepens Rakuten’s relationship with publishers.’”
Rakuten has been busy buying up companies that are strategically important to its future growth. It spent $900 million to acquire the free messaging app Viber in February 2014, and it invested in the bitcoin commerce platform startup Bitnet in October 2014. In a move toward rental-based businesses, Rakuten also recently invested $300 million in the mobile ride-sharing service Lyft. The company paid $1 billion in cash for Ebates.com in September 2014, giving it a strong base in the North American consumer market. By acting as a single portal for consumers, stores pay Ebates a commission on any sales coming through the Ebates website, and Ebates shares the commission with consumers in the form of cash back. Rakuten’s buying spree has been interpreted by analysts as an effort to reduce reliance on its home market in Japan as it positions itself among the leaders in global ecommerce.
According to Bloomberg Business, Mikitani “introduced tablets in Japan to help sell ebooks, tracking rival Amazon.com Inc.’s strategy of delivering digital content through its Kindle platform.” To build on this effort, in 2011, Rakuten acquired Kobo for $315 million. Kobo offered the company a ready market and an open platform for future development. As the company notes in a press release, Kobo is “one of the world’s fastest-growing eReading services offering more than 2.5 million eBooks, magazines and newspapers—and counting. Believing that consumers should have the freedom to read any book on any device, Kobo has built an open-standards platform to provide consumers with a choice when reading. Inspired by a ‘Read Freely’ philosophy and a passion for innovation, Kobo has expanded to nearly 200 countries, where millions of consumers have access to localized eBook catalogues and award-winning eReaders, like the Kobo Touch. With top-ranked eReading applications for Apple, BlackBerry, Android, and Windows products, Kobo allows consumers to make eReading social through Facebook Timeline and Reading Life, an industry-first social experience that lets users earn awards for time spent reading and encouraging others to join in.”