Reliance Jio – More Smoke Than Fire?

Almost a decade back I heard Professor Deepak Jain, the marketing guru and the erstwhile dean of Kellogg School of Management, saying “...in marketing price wars, the winner loses and the loser dies!”
The statement is so apt for the Indian telecom market.

The Disruption, Destruction & the Frankenstein

The entry of Jio with its unlimited voice and data offerings sent tremors across the industry. In the bloodbath that followed, Idea and Vodafone announced a merger to face the Jio onslaught.

Telenor, MTS, Videocon, Tata Tele conceded humiliating defeats and exited the battleground through cheap sale-offs or other means. RCOM went for debt restructuring and asset sale (ongoing) to Jio and, has recently landed up in bankruptcy proceedings. Airtel, facing the Jio assault quite bravely till date, finally succumbed to pressure and announced loss in Q4 (2017-18), first time in the last 15 years.

In this ‘Avengers: Infinity War’ with such casualties, how is Jio faring? Is it triumphant, is it singing the song of victory all the way to the bank? Hmmm.. if the Q4 result is any indication of the not-so-transparent stand-alone financials of Jio, which accounts for nearly 5 percent of Reliance conglomerate’s business, things are far from being right!

While subscriber acquisitions go unabated, the average revenue per user (ARPU), Revenue, and earnings before interest, taxes, depreciation, and amortisation (EBITDA) are far from being satisfactory. Mukesh Ambani (MDA) claims that Jio is the world’s largest start-up – for a startup, a Quarter-on-Quarter revenue growth of 3.5 percent is a timid number (specifically, on a not so large base).

Jio ARPU of Rs 137 is miles away from the expected ARPU of Rs 500 that Jio presented to the analysts a year back. Jio’s ARPU is nearly at-par with Airtel (116) and somewhat ahead of IDEA (105), who also declared their Q4 results recently.

Jio’s Q4 EBITDA margin of 37 percent is also at par with Bharti’s EBITDA (35 percent) and Jio’s declining EBITDA margin trend is worrying. Again, EBITDA margin is far off from the showcased 50 percent figure that Jio ‘promised’ to analysts justifying the heavy capex spends. It is believed that Jio’s capex for building the ‘next-gen 4G/5G’ network is 20-40 percent more than other telcos. Given the higher capex, but, with near-similar EBITDA margin vis-à-vis completion gives Jio a far lower capital utilisation.

However, Capex seems to be not a challenge for Jio. Having already spent over Rs 2 lakh crore, thanks to RIL parentage and cash taps from petrochem and refining business (all good news of oil prices going up) and low cost debt with RIL guarantee, Jio continues to spend more on fibre-to-the-home network and other assets.

With ARPU and EBITDA margins, the two key indicators of telecom business, being more or less in line with Airtel’s and IDEA’s figures, it clearly shows that Jio is not insulated from the ecosystem that it is disrupting.

I tried some back of the envelope calculation on the investment, return and payback period and the numbers are really worrying if not scary! With the current as-is trend and with basic assumptions, the pay-back seems to be not less than 10+ years. I can understand the growing concerns of the RIL investors – the Jio investments may not give them a nightmare but, surely, some investors may be losing their nights’ sleep.

However, investors have massive faith and trust on Ambani and the investments are made largely on his or RIL’s name rather than on any business feasibility analysis.

However, times are changing. Although Ambani has also transformed the group and Jio is of a different category altogether, just building scale as entry barrier will not ensure success.

Apart from petrochem, Ambani has successfully built the organised retail business. Though Reliance Retail is a $10 billion plus business, with the Flipkart-Walmart deal, questions are being raised if Reliance has missed the e-commerce bus or got the calculations wrong.

It seems questions are being raised on the Reliance chairman’s wisdom. It is also a well-known fact that Mukesh Ambani has an emotional connect with the telecom business, and that the company has been meticulously re-building the business for nearly a decade, after RCOM had to be renounced in the family settlement. Are the investors paying the price in RIL chairman’s emotional investments?

All Advocates, Few Real Users

Generally, when I speak to senior execs in our office, people talk very highly about Jio and they are all in praise about its strategy with all content in-house, coverage etc. “Just see what Jio will do” is a common statement by many pundits who are completely buying into the Jio fantasy.

However, whenever I’ve asked them, "do you use Jio (as the primary SIM)?" the count of people who’ve said ‘yes’ till date is zero.

No senior executive in my office uses Jio. The same trend stands for the millennials in my circle. However, most of the folks who did get Jio, got it as their second or third SIM. Some millennials use Jio entirely for their data purposes. Personally, I don’t find Jio ‘dependable’ yet (interconnect/node issues with other operators), though I have been exploring their offers for quite some time now.

Also, I don’t think that I am badly missing any content that Jio is offering though I must say that the myJio app is designed very well with excellent user experience.

Is the Customer Really the King?

In the middle of the telecom warfare, while, the general belief is that the customer is the winner (my monthly bill came down from Rs 1500 to Rs 550, thanks Jio!), given the entire gamut of things, this may not be the case.

The telecom trouble has put pressure on banks’ NPAs; currently, the government is the biggest creditor in the telecom sector with significant amount of outstanding spectrum payment liabilities.

With bankruptcies, like in Aircel, such payment dreams go up in smoke. As the spectrum/license fee is an important component of government budget, such deficit will now be met through other means that has to be borne by people (say, higher petrol/diesel rates?)

On Jio’s content strategy, I still have some serious doubts – while, having home cooked food is good, it’s no that bad visiting restaurants once in a while. With Jio’s walled-garden strategy, Jio offers all in-house home-cooked content.

So, while Jio having all their content in-house is not bad, do you want me to only watch JioMovies while, I like Hotstar or Netflix or use just JioMags while I am hooked on to Magzter!

Jio’s acquisition of Saavn gives an indication that all in-house content is unlikely to be great strategy and that JioMusic was not good enough. You can create your own version of Whatsapp or PayTm or Netflix, but it is simply reverse engineering. It is imperative to be a serial innovator in this digital business, which unfortunately has not happened for Jio. So my personal bet is for a low-margin business model (what Airtel/Vodafone have) with a lot of alliances with content kings and OTTs, rather than the high-margin model of Jio: creating content on its own and trying to limit the customer to a walled-garden model.

Water Stirred Up to Shallow Levels – More Fishing Unlikely

In the prepaid tariff drops, Jio has taken the rates to a rock-bottom level where there is no further elasticity of adding revenue. For example, if someone is given truly unlimited voice or data services, there is a logical and physical constraint beyond which an average human being cannot talk or watch movies and content.

Jio seems to have hit the danger mark, beyond which there is no additional customer acquisition. Fortunately or unfortunately, competition has also matched up the price drops (maybe at significant cost) to thwart subscriber poaching. It seems that Jio’s subscriber addition will slow down and that the company hitting the bumper at a sub-level of 15 crore subscribers is a bad news.

However, desperation is growing as it seems investors are getting impatient – the Rs 199 monthly postpaid plan is a show of such desperation. Unless the service quality (interconnects, network availability) improves, high ARPU postpaid customers will not migrate to Jio.

I think the rock-bottom Rs 199 postpaid ‘stunt’ is also another plan to entice subscribers, by effectively paying them a ‘discount’ for the poor quality of service (QoS) and a ‘joining bonus’ to buy their trust.

Had there been a level playing field in the QoS, Jio would have enticed subscribers showing more value in its content bouquet rather than dropping tariffs.

The Phoenix & the Reliance Magic

In this telecom warfare, where the entire industry is severely shaken up, Jio is also seriously wounded and its business is bleeding too. Things seem to have not progressed as planned, and it seems that the strong advocacy around Jio has not translated to usage, and revenue remains a matter of concern for the company.

By now, Jio has understood that there is no way to get ‘absolute leadership’ in the market today. Airtel and Vodafone have shown strong business resilience and, Airtel has smartly picked up dirt-cheap acquisitions that give them the spectrum and subscribers advantage.

As per newspaper reports, Ambani has grand plans of an entry into home broadband and IoT, Jio-enabled laptops and the DTH market. The digital business also gives seamless entry opportunities to adjacent industries like payment, music and video, which has significant revenue multiplier impacts.

But, in all likelihood, in a consolidated market, Airtel, Voda+Idea, MTNL and BSNL (if the government wants) will strike back with all their might. OTT players have strong customer mindshare and there is no sign of OTTs perceiving any completion from Jio’s content. It is unlikely that Jio (or, any other existing player) would have more than fair market share of 20-25 percent.

However, Jio is in the hands of best corporate doctor in India: Mukesh Ambani, and the investors are eagerly waiting to see his magic, one more time.

(The writer is a Senior Managing Consultant with IBM This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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