Will Jio's "Datagiri" work?
Everyone knew that, when Reliance Industries launched its telecom service, it would be at competitive prices. But no one imagined that it would make voice calls free – for life. The announcement came as a shock to everyone, including the incumbent telecom players.
Investors panicked – more so, those with Bharti and Idea. But Reliance Industries’ share price did not surge either. While the share prices of Bharti and Idea crashed more than 7 per cent, Reliance’s was down marginally, as many investors wondered how Reliance would make money by offering services at such competitive rates.
But, after an initial bashing of the Bharti Airtel and Idea share prices, some sense seems to be prevailing now. Both have recovered some lost ground, but the share price of Reliance is still marginally down since the announcement. While there is no doubt that Reliance Jio will be among the top three players in the next 24 months, the question is: who would suffer the most in the process, when Jio comes out with disruptive prices?
According to the COAI Website, as on July 2016 Bharti has 256.80 million subscribers, followed by Vodafone, with 199.70 million and Idea, with 174.50 million. While Jio has set an immediate target of 100 million subscribers, its network can support 200 million subscribers. In that sense, it will take quite some time for Jio to be the market leader in an industry that boasts 1.03 billion wireless subscribers.
Also, the price Reliance Jio will have to pay to become a significant player in the industry is another issue worth looking into. It has already announced that it’s going to incur R1.50 lakh crore on the Jio project and, hence, a payback to that extent would be critical. Raamdeo Agrawal, Joint MD, Motilal Oswal, has put a disclaimer, saying that he has no exposure to telecom companies at the moment, and is watching the event from outside. “With this launch, Reliance has definitely got a first-round advantage over the competition,” he says. “But it has disrupted the market. Yet, it’s too early come to a conclusion, as the situation is quite fluid. We have to see how the competition responds, because they also have a sunk cost and can come back aggressively. Still, I am cautiously optimistic about Reliance Jio’s success. Reliance’s strategy appears to be: let us have 100 million customers, who can pay us R150 each per month. Let’s lose the least money, while achieving an honourable entry into the telecom business.”
Research reports from various broking houses reviewed by Business India suggest that Bharti will be impacted, though not severely. On the other hand, concerns continue for Idea, as the analyst community fears that it will have a tough time, going ahead. “Idea remains at a greater risk, given its smaller size, lesser spectrum and risk to its position as the Number 3 wireless operator in the country,” says Vaibhav Dhasmana of Jeffries, in his report published after Reliance Jio announced its tariff. The fear that Idea would be losing its competitive advantage is reflected in the almost halving of its market cap during the last one year. Somehow, the market perceives it as a weak player in the new competitive arena. Sometime back, there were rumours that Idea and Vodafone may merge their telecom businesses, which was denied by the Idea management. But rumours are still abuzz about how Idea will play its cards after the entry of Reliance Jio.
Can Jio sweep the market?
This is not the first time Reliance has ventured into the telecom business. The first time it made an entry, it was with great fanfare, but things did not pan out as the management envisaged then. Of course, the business got split then and the unit went to the ADAG group, controlled by Anil Ambani (which is now called Reliance Communications).
This time too, Reliance has made an entry with a bang, offering state-of-the-art technology at affordable prices. Even competitors admit that this packaging of tariffs by Jio is a game changer. Rajan Mathews, director, COAI, who has been waging a war against Jio’s entry, admits that the Jio packaging is an “excellent offering”. He equates the bundling of Reliance Jio services to Apple’s, when it launched its first iPhone. There, it had offered a simple operating phone with an app store. Apple changed the way phones are manufactured, with the touch screen becoming the norm. Similarly, going forward, free voice call will become the norm. Agrawal considers Jio’s strategy similar to the mode of entry Reliance adopted when it started in the polyester business.
Thinking big is in the DNA of Reliance. All its projects, be they in refinery or petrochemicals, have a world class stamp. So, when Mukesh Ambani announced the Jio operation at Reliance Industries’ AGM, he described the Reliance Jio network as “the largest only 4g LTE network in the world”. Instead of looking at only the telecom business, Ambani has ambitiously set out to offer a bouquet of services, ranging from 300 live channels to 6,000 HD movies to 60,000 music videos, and so on. It would also have a JioMoney wallet, which will make wallet transactions cashless.
In a way, Reliance is looking at making money, not by selling pure data, but a complete eco-system bundled around a powerful data network. This strategy is quite different from what has been adopted by the other telecom operators. It is also quite radical, as normally a new player would target the revenue pie of the largest component of the industry – voice calls – which Jio is offering free. Instead, it is creating new revenue streams, where the existing incumbent has hardly any presence. Hence, Jio is moving into a different business model altogether. This is where Ambani deserves to be applauded.
Another smart strategy Reliance has adopted is the announcement of the ‘welcome offer’, which extends to four months. This would serve a couple of purposes for Jio. First, it will allow it to settle customers down. Its first telecom venture had faced huge teething troubles, which made customers unhappy about the services. By giving services free, the customers’ expectation of good quality services will be muted. Secondly, Reliance has realised that ‘interconnect’ is a problem it has to sort out. In his speech at the AGM, Ambani gave five reasons for extending the welcome offer, of which the main one was, “…to test and stabilise Jio’s interconnect with other operators and to ensure superior voice quality for calls to other networks”. This is critical for Jio’s success. Right now, the incumbent players are not willing to increase interconnect points, as asked by Reliance Jio, to complete a phone call. They argue that the free calls offered by Reliance Jio will create an asymmetrical scenario of voice calls between Reliance Jio and incumbent players, which can cause huge financial losses to incumbent players.
The bone of contention now is the interconnect charges, which TRAI had fixed it at Rs 0.14 per minute on 1 March 2015. This charge has to be paid by the telecom company with which the call originates, to the company with which the call terminates, for using its infrastructure. Now, COAI, a body of telecom operators, in which Reliance Jio is also a member, claims that the Rs 0.14 per minute charge is not enough to cover the cost incurred. “TRAI has used the LRIC method to fix interconnect charges, where one excludes historical cost,” says Mathews of COAI, explaining the issue. “This method is good in developed economies, where the industry has matured, but not for a country like India, which is still a developing economy. Our cost of interconnect charges works out to be Rs 0.32 per minute.”
He goes on to add: “Phone calls made from the Reliance Jio network to the incumbent players will result in a loss; hence, in a way, we will be subsidising Reliance Jio. Due to the welcome offer, we expect the voice calls between Reliance Jio and others to be in the ratio of 10:1, resulting in huge financial loss. Also, this abnormal traffic will create network congestion and could also impact the incumbents’ own outgoing traffic, where one makes Rs 0.46 per minute.”
Mathews is firm in his stand that COAI is not going to increase the interconnect point until the initiative comes from TRAI or dot to resolve the same. Jio has gone on the record before its official launch saying that 65 per cent of its phone calls are dropping due to insufficient points of interconnect from the incumbent players. With hundreds of thousands of new subscribers joining the Reliance Jio network every day, the problem is only going to get further aggravated. While Jio believes that the licence agreements obliged the incumbent players to offer interconnect points, COAI believes they are satisfying the conditions in the licence agreement and, hence, are very much within the law. We will see more clarity only in the coming weeks – the resolution Jio and the incumbent players will finally agree to. But one thing is obvious: the existing players are in a mood to give Jio a tough fight to protect their customer base and, hence, it’s not going to be easy for Jio to reach its target of 100 million subscribers.
To counter the COAI theory that free calls in the welcome offer will surge in voice volume, the Reliance Jio spokesperson has given some numbers to drive home the point. “Jio’s average voice call was 355 minutes per subscriber during the trial period, as against 381 minutes on an average, for the incumbent GSM subscribers for August,” says the spokesperson. “This suggests that free phone calls did not result in more voice calls.”
Can Jio make money?
This is the question that is bothering everyone. When you are spending Rs 1.50 lakh crore to build a business, you have to make money to justify such a huge investment. With the source for 70 per cent of the industry’s revenue – voice calls – offered free and the data price also aggressive, how will Jio make money? “We are not looking for killer returns,” said Mukesh Ambani in an interview. “We are looking at high teen returns on our capital.” But one is not sure when Reliance can reach these high teen returns. In an industry where high capex is the norm and technological changes happen so fast that what is considered an advantage can become obsolete in no time; is where Jio has to be nimble. Jio does not want to find itself in a position where today’s innovator becomes tomorrow’s dinosaur.
At present, it does not look as if Jio will make substantial money in the short term, despite the fact its welcome offer has generated tremendous response from the subscribers. “We are happy to see good response from consumers across the country for Jio’s welcome offer,” says the Jio spokesperson. But how much of this will convert into paid subscriptions would be interesting to observe. Sanjay Mookim from BOA-ML, who has maintained a buy on Reliance after its AGM, has given various scenarios in his research report dated 1 September. He expects Jio to be EBIT positive, but not before 2020-21. This is the best case scenario.
Jyotivardhan Jaipuria, founder and MD, Veda Investment Managers, who has been negative on the telecom sector for quite some time, due to competitive pressure, did not give a view on the company specifically, but commented on the industry. “Telecom is typically a high fixed cost industry with a huge operating leverage. The nature of the industry is such that break-even takes at least two years, typically.” He goes on to add: “This is just the start of a long fight for market share, where not only price, but quality as well, will play a role in winning customers. The incumbents have already launched a non-tariff campaign, highlighting the better connectivity of their network to retain at least their high-paying customers.”
Right now, the first round has gone in favour of Reliance Jio with its out-of-the-box thinking of bundling services with an exciting welcome offer for four months. But what is key is for Jio to have satisfied paid subscribers for its game changing services. Jio has raised expectations so high that it would not be easy to match the same. Where Jio is headed in terms of business would be clear only by June 2017. By that time, a lot of dust would have settled on the competition and Jio operations would have settled too. If we are to go by stock market indications, then investors are in wait-and-watch mode. They have not gone ballistic over Jio’s offer. It is too early to open champagne bottles for Jio. After all, what will separate Jio from the other players is the quality of its services and its app-based products. If it clicks, Jio could soon be in the league of the high-tech companies of the world. The countdown begins.
(The article published in latest issue of Business India. After the article published there has been some agreement between incumbent players and Jio to have more Interconnect points)