In 2015 Rakuten Took a $70 Million Write Down on Kobo, and Paid Five Times More Than OverDrive Was Worth

3668167688_860ef44e06_oRakuten released its annual financial report on Friday. While the news was generally good, the report also revealed embarrassing details about Rakuten's ebook ventures.

Overall company revenues rose by 19% to 713 billion JPY for the year. Quarterly revenues were also up 14%, to 198 billion JPY, while net profit for the year slipped 38% to 44.3 billion JPY.

eBooks were hardly mentioned at all. There were a couple mentions of OverDrive, which Rakuten acquired in March 2015 for $410 million, yes. It's library loans were up 23.5% YoY in the fourth quarter, and Rakuten indicated in its "Vision 2020" brief is that the combined EBITA for Kobo+OverDrive will be positive in 2016. That is a first for Kobo, which has stayed a money pit even two years after Rakuten put a fixer in charge of the ebook company.

The single most important mention of Kobo was in a related document where Rakuten explained the write offs it is taking this year on several of its subsidiaries.

The Japanese retail conglomerate announced a 7.8 billion JPY goodwill impairment on Kobo.

According to Wikipedia, in this situation goodwill is an accounting term for a certain type of intangible asset:

Goodwill represents assets that are not separately identifiable. ... Examples of identifiable assets that are not goodwill include a company’s brand name, customer relationships, artistic intangible assets, and any patents or proprietary technology. The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase the asset or business) over the total value of the assets and liabilities.

Shane Leonard, CFA and CEO  of Stockflare.com, has a simpler explanation. Over on Quora this certified accountant explains that "goodwill" is used to describe the difference between the amount paid to buy a company and what its assets are really worth. (Several other accountants chimed in with similar explanations.)

Basically, if company A pays $200 million to buy company B, and company B has assets which are worth $100 million, then company A lists the difference between the actual value of company B and the purchase price as goodwill.

It is, as a reader pointed out, a concept that was invented by the Ministry of Accounting in Orwell's 1984.

And when a company decided to take that goodwill as a loss, it is called a goodwill impairment.

In this case, the Kobo write off is worth about $69 million, or about a fifth of the $315 million Rakuten paid for Kobo in 2011. You could frame this as Rakuten conceding that they overpaid for Kobo way back when, but that's not quite true.

At the end of 2014, Rakuten showed 20 billion JPY in goodwill on Kobo, but that was cut down to 10 billion JPY in goodwill at the end of 2015 (after which Rakuten took the goodwill impairment).

And at the end of 2012, Rakuten was listing 16.8 billion JPY in goodwill on Kobo, meaning that Rakuten overpaid by about $149 million when it bought Kobo in 2011 for $315 million.

That's pretty bad, but the situation with OverDrive is actually worse.

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According to Rakuten's own documents, they're currently carrying 37.6 billion JPY in goodwill on OverDrive. That comes to about $333 million, on a company that was acquired for $410 million.

Yes, Rakuten paid about five times what OverDrive's assets were worth when they bought the company last year.

There's no way for outsiders to tell why that happened, but do you suppose they had to outbid Amazon?

P.S. TechCrunch reported on this story on Friday, but they accidentally swapped two of the figures and misreported the Kobo write off as 17.2 billion JPY. That is not correct. (They also neglected to explain the meaning and context of goodwill, and missed the detail about OverDrive.)

images by cogdogbloggalactic.supermarket,

About Nate Hoffelder (11594 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader:"I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

10 Comments on In 2015 Rakuten Took a $70 Million Write Down on Kobo, and Paid Five Times More Than OverDrive Was Worth

  1. So what you are saying is that ‘goodwill’ is one of those termed invented by the Ministry of Accounting in George Orwell’s 1984…

  2. I hope this doesn’t mean that Kobo’s e-readers have a limited future.

  3. Goodwill writedowns in the tech world are generally a function of reduced prospects for growth. To me, the Kobo writedown is Rakuten saying Kobo is not going to be much bigger anytime soon.
    Overdrive they aren’t writing down because they think it still has the potential to grow into its purchase price.

    Note, for example, that the positive outlook they cite for 2016 is for the combined Overdrive + Kobo. If they expected positive growth for both they would’ve reported them separately,no?
    Sounds like one is generating a strong enough cash flow to covers the losses of the other unit. Which is the loser is unclear but looking at their market positions I’d pick the one that got the goodwill writedown as the weak sibling. 🙂

  4. | There’s no way for outsiders to tell why happened, but do you suppose they had to outbid Amazon?

    That’d be my guess. I’m sure Amazon doesn’t want Rakuten gaining ground outside Japan any more than Rakuten wants Amazon making strides within it. I doubt Overdrive had much that’d interest the Amazon of 2015, but it surely would’ve been worth a strong bid to interfere with Rakuten’s expansion.

    Same with Kobo. Amazon probably would’ve tried to keep it out of Rakuten’s hands or make them overpay. It may be telling that Amazon ignored for years the impassioned pleas of Kindle owners in Canada and Australia for their own stores, only bothering to finally put them together in the year or two after Rakuten’s Kobo acquisition. The only English-speaking markets where Kobo has (had?) a strong presence.

    • I was thinking that Rakuten overpaid for Kobo because they bought it before the ebook bubble burst in 2012.

      Remember, the antitrust suit was announced against the price fix six a few months later, and the Nook platform didn’t implode until the end of 2012. Also, Kobo still had an upwards trajectory and positive buzz when it was sold. And the purchase even made sense at the time under the assumption that Rakuten was going to get behind Kobo and push.

      And as for OverDrive, I always thought Amazon was going to buy them. I even predicted it years back. It’s an ebook market Amazon does not control, and OD dominates.

  5. I have to honestly say that this is a confusing article. The goodwill owed due to Kobo is presented in reverse chronological order for no good reason. It takes a careful look to see that conversions between yen and usd are being made. You think that would be clear but not when two different numbers are reported after the figure in yen. Why do we need to know the original values in yen anyway? You could just say “I converted all figures from yen to usd and now present to you the disparity between what Rakuten paid and what Kobo and Overdrive are valued at.”

    And why are all of these numbers needed anyway? Write offs are year to year. I don’t need to know what happened in years past to understand that the ebook market was stagnating this past fiscal year.

    What I want to know and what this article does not address is what is happening with ebook commerce in France? That is what Rakuten is blaming these figures on.

  6. I think you are misunderstanding the meaning of “goodwill” in this context. It’s a weird term from accounting, and while I agree that it sounds like some kind of doublespeak, it’s not actually a nefarious way of whitewashing overpayment for an acquisition. In the example of OverDrive, the company’s dominance as a library ebook platform gives it significant value that can’t be captured as book assets under accounting rules. It’s not correct to say that Rakuten “paid five times what OverDrive was worth” because some of the value of the company is accounted as “goodwill.” You should talk to an accountant or finance professional before writing an article like this – and be more careful with your clickbait headline.

    • I have tweaked the post so that it is more explicit about the difference between a company’s assets and its purchase price, rather than the difference between its worth and purchase price.

      Is that better?

  7. I have a problem with my Kobo Touch and the response from Kobo was basically, “try using the app on your laptop to read Kobo books”. After insisting that was not a good enough answer they wrote to me but they prevent me from writing to them by using “No Response” email addresses.

    My response is to warn people not to buy their products as they have no support and are technically suspect.

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