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Will Reliance Jio disrupt the market with 4G?

If there’s one thing Mukesh Ambani, chairman of Reliance Industries (RIL) imbibed from his father, the late Dhirubhai Ambani, it was to always be a step ahead of the crowd. The founder of the Reliance Empire would often say: “Think big, think fast, think ahead. An idea is no one’s monopoly”.

In the field of telecommunications, Dhirubhai dreamt of connecting people through mobile phones at the cost of a postcard (50 paise). Those were the initial days of mobile telephony, when most telecom operators would charge Rs. 16 per minute for outgoing calls and Rs. 8 for incoming calls.

This is the big idea Mukesh Ambani would ride on.

On December 28, 2002, the 70th birth anniversary of his father, he unveiled Reliance Infocomm. Its USP: call rates at barely 10 paise per 15-second pulse, with incoming calls and value-added services free. In addition, through its Monsoon Hungama scheme, the company offered Samsung and LG multimedia phones costing Rs. 10,000 with a down payment of just Rs. 501.

Suddenly, everyone from the neighbourhood vegetable vendor to rickshaw-pullers in small towns owned a mobile phone. Within just 10 days, Reliance had a million subscribers rolling in.

Dhirubhai’s legacy was carried forward, and Reliance Infocomm was able to make a big impact on the Indian mobile telephony market. By March 2004, the company’s subscriber base had soared to almost 7.3 million subscribers making it India’s largest mobile player at the time.

More than a decade later, Ambani wants to not just replicate the Reliance Infocomm success of 2003, but also better it.
Will Reliance Jio disrupt the market the way it did back then? To some extent, say analysts, though the going may be a lot tougher.

The difference now is that the battlefield has shifted from voice to data. And it’s a battle being fought by multiple players flexing their financial muscle.

Not only does Ambani need to contend with an explosion in mobile telephony and competitors thinking equally fast, his company will also battle to sustain profitability. “Going by the Reliance Jio model, breaking even in the next five years looks difficult,” said the promoter of a leading telecommunications firm that has entered into an agreement with Jio to share infrastructure. The promoter did not wish to be named.

Ambani’s dream has weathered multiple challenges. In the early part of the millennium, Reliance Infocomm became the ground for a public spat between the Ambani siblings, and in June 2005, their mother Kokilaben announced a settlement with the division of the Reliance Empire. The toughest part for Mukesh: he had to part with Reliance Infocomm. Worse, the demerger came with a ‘no compete clause’, meaning he could not get into the telecommunications business for the next 10 years.

In May 2010, the brothers agreed to bury the hatchet and do away with the ‘no compete pact’. Mukesh entered the telecommunications business again with Reliance Jio Infocomm.

The brothers eventually announced deals beneficial to both — Anil’s debt-laden Reliance Communications (RCom) got instant cash and Mukesh got to use RCom’s solid broadband network to roll out a fourth-generation (4G) network faster.

In 2010, Mukesh acquired Infotel Broadband Services, the only company to bag pan-India spectrum, for Rs. 4,800 crore.

This gave Jio access to spectrum in all 22 circles. In comparison, only Bharti Airtel is a pan-India player, while Vodafone India and Idea Cellular each have operations only across half the circles in the country.

Besides having its own spectrum, Jio entered into agreements with RCom for spectrum-sharing and trading. This made Jio one of the largest holders of spectrum resources in the country, on a par with Bharti.

In 2013, the firm signed an agreement with Bharti, under which the latter would provide Jio data capacity on its i2i submarine cable. Jio also became part of a global consortium, which included firms like Telekom Malaysia (Malaysia), Vodafone Group (U.K.), Omantel (Oman), Etisalat (UAE) and Dialog Axiata (Sri Lanka) for establishment of the Bay of Bengal Gateway submarine cable system connecting India to the rest of the world.

The company has so far spent about Rs. 1.5 lakh crore on the venture. Jio claims to offer high-speed 4G data connections that are 10 times faster than those of current service providers at one-tenth the cost.

This, combined with aggressive pricing, is Ambani’s recipe to lure consumers in a fast-growing mobile telephony market — the world’s second-largest after China.

Mobile tariffs in India are among the lowest in the world. Jio could bring these down further, by offering 4G handsets at Rs. 4,000 and voice and data services at Rs. 300.

The foundation is there, but Jio will need to wean away a considerable chunk of customers from its rivals.

India’s mobile consumer base has grown manifold since 2002, when it was less than a million, to more than a billion connections as of April 2016. Here’s how the numbers stack up: Bharti alone has more than 250 million customers, followed by Vodafone at almost 198 million, Idea at more than 174 million and RCom at 102 million.

India’s 4G market is set for exponential growth. Smartphone market volumes are projected to be at 326 million by the end of 2016, according to a Gartner and KPMG report.

According to CLSA, 210 million subscribers will be using 4G by March 2018. While Jio will have to acquire new customers, Bharti needs to migrate most of its 3G users to 4G.
The competitors are not taking it lying down either. Ever since Jio got its spectrum, Vodafone, Bharti and Idea have unveiled 4G services in key circles.

Bharti already has investments of Rs. 1,60,000 crore in 4G infrastructure, and plans to pump in another Rs. 60,000 crore in next three years. Vodafone is planning an investment line-up of Rs. 13,000 crore in the next three years.

“R-Jio is gearing up to offer a complete communication services bouquet on an all-IP network which could disrupt the marketplace,” Abhishek Gupta, an analyst at IDFC Securities, wrote in a note to clients. “Incumbents would look to protect their turf through wider coverage, increasing tie-ups for content and higher dealer commissions to be the primary data SIM.”

Telecom companies have stepped up data promotions recently, including 30-50 per cent discounts for night usage/data packs.

In addition to stiff competition, Jio has to cross a mountain of debt to break even, said investment advisor S.P. Tulsian. The company has to pay Rs.12,000 crore of interest on Rs.1 lakh crore of borrowings and has to set aside another Rs.12,000 crore for depreciation, he said.

In order to be profitable, Ambani is banking on Rs.300 average revenue per user (ARPU) and a subscriber base of 10 crore within a year of start.

“We will generate revenues of Rs.36,000 crore and be profitable within the first year of operation,” said a member of the senior management at RIL, who did not wish to be named.

However, the target, which is 10 per cent of mobile users and an ARPU of Rs.300 will be next to impossible, given the average industry ARPU currently is only about Rs.165, said the Managing Director of another leading telecom company, who did not wish to be named.

Bernstein analysts believe Jio can achieve 10 per cent market share by FY25 and post net profits only after FY23.

Returns from this investment are uncertain. “While Reliance is expecting a four-year payback on their investment, the greatest risk is a price war with incumbents as they compete for market share,” senior analysts Neil Beveridge and Chris Lane wrote in a research note.

The price war will no doubt help consumers. Shipra Praveen, a banker, can’t wait to try out her new Jio connection.

“I bought a Reliance Infocomm phone in 2003 under Monsoon Hungama. In 2005, they offered to waive off the bill if I converted from post-paid to pre-paid plan and I did that,” she said.

There’s no saying where this will take the company in the long run. According to Bernstein’s analysts, Jio will hold out on the strength of the group’s muscle.

“Given the financial resources of Reliance, we expect it will emerge as a winner along with Bharti and Vodafone,” Beveridge and Lane wrote.

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