Why Reliance Jio did what they did?

There are various theories that are floating around about Reliance Jio’s strategy. They are wide ranging from,  

1. Jio wants to make money out of their users’ data
2. Jio will sell add on services and make money out of those instead of conventional revenue streams
3. Jio will bring down competition by offering cheap rates and then increase prices when competition fades away.
4. There is a catch that users don’t know yet.

To really understand what is cooking underneath Jio’s cash splash, one needs to look at how telecoms where playing this game before Jio and what responses they have come up with after Jio. Every service provider before Jio’s entry was marketing 4G as a value add, aspirational service and hence something that people should pay more for. In reality though, 4G service is really a commodity that can be differentiated only by network coverage. Assuming comparable network coverage by all service providers, the only factor that will impact revenue is price.

Could this industry then go into a Price war? Or has Jio started a price war by offering free services for introductory period? would we see price cuts from all other players to match Jio’s pricing?

Answers to the above questions are in negative. Jio’s strategy to offer free services in introductory period is nothing but a strategy to clear a perception that 4G is a value added, aspirational service and attract non-aspiration driven customer base to this service. Jio has successfully eradicated premium perception of 4G services with its free introductory offer. To respond to Jio’s move, Airtel had come up with a technology to pool different bands of spectrums to offer a better 4G speed. What are they trying to do? They are trying to justify their premium prices. Other service providers are not very different. They have reduced their pricing but no way close to where Jio is. So are they challenging Jio on value?

Not really, this is what will unfold in future in my opinion

 1.       Jio has acquired a significant customer base as part of their introductory offer and they will continue to hold on to part of it after introductory period (Especially the non-aspirational section)

2.       Jio will offer internet at a price that is slightly below other players, however not too low to squeeze themselves out of business

3.       Other providers will still compete for the higher end of the pie with value add gimmicks

4.       In the end, market will settle into an equilibrium where Jio would have acquired a considerable customer base and they would offer their services at rates marginally below other service providers. Most of these customers would be fringe customers who were pulled into the game owing to Jio’s free offer.

5.       Other service providers as a result will not see significant reduction in their customer base and continue to charge prices that are higher than Jio.

Jio in the end would have wiggled some space for themselves in this game without significantly putting stress on Industry margins.