Reliance Industries’ Jio reshapes India’s telecoms market
We’ll send you a myFT Daily Digest email rounding up the latest Indian business & finance news every morning.
Mukesh Ambani’s love affair with telecoms began more than 15 years ago, when he spearheaded a move into the sector by his family’s Reliance Industries conglomerate.
Ambani lost control of that business in 2005 to his younger brother Anil, in an acrimonious group break-up that followed the death of their father. Over the past 18 months, however, the elder Ambani brother — firmly established as India’s wealthiest man thanks to his company’s oil-refining operations — has made a barnstorming return to telecoms, through one of the biggest gambles of its kind in global corporate history.
His Reliance Industries has invested $32bn in Jio — an entrant to India’s mobile market that has attracted more than 150m subscribers in less than 18 months. The company has fundamentally transformed the Indian telecoms market, turbocharging mobile data consumption with its cut-rate tariffs and triggering a wave of industry consolidation involving powerful rivals, from Vodafone to Tata, while forcing Anil Ambani’s struggling Reliance Communications to quit the mobile sector.
To Ambani his venture is a push to “democratise the digital culture”, helping vast numbers of Indians to make full use of the internet for the first time. According to rivals, Jio’s success has been driven largely by unfair tactics and favourable regulatory treatment.
The debate may be bitter, but no one disputes that Ambani’s unprecedentedly aggressive move has reshaped India’s telecoms market, the world’s second largest (after China) with 1.2bn mobile subscribers.
“It was a huge risk and they really had to prove themselves,” says Neil Shah, an analyst at Counterpoint Research. “But the vision was right, the timing was right, and the scale was massive.”
When Ambani took to a Mumbai stage in September 2016 to announce the commercial launch of Jio, it came after a six-year gestation period beset with delays. These had prompted sceptics to ask whether the venture could prove to be the most expensive failed investment on record.
Even before the formal launch, the first public skirmishes had begun between Jio and the chief incumbents: Bharti Airtel, the market leader led by rival billionaire Sunil Bharti Mittal; the Indian business of UK-listed Vodafone; and Idea Cellular, backed by the Aditya Birla family-run conglomerate.
In the months leading up to its grand opening, Jio accused rivals of seeking to sabotage its initial “test phase”, when its network was used first by its own employees, then by a growing number of users that reached several million. Jio claimed the other companies had refused to make a sufficient number of interconnection points with their own networks available, meaning its users faced a high number of call drops.
Jio’s rivals denied this, saying that the call drops resulted from problems with Jio’s systems. That claim resonated with some analysts who noted that this was the first mobile network in the world to run entirely on 4G data technology, without any back-up systems to handle voice calls.
The acrimony increased after the launch, when Ambani exposed the sheer aggression of his strategy to wrest business from incumbents. For the next three months, he said, Jio would offer voice and mobile data services for free. Even after the promotional period ended, he added, Jio customers would enjoy free, unlimited voice calls and data charges far below those previously seen.
Reliance’s marketing went into overdrive, plastering billboards with its logo featuring Bollywood star Shah Rukh Khan and the slogan “Come on India”. This echoed Ambani’s message that Jio would pull millions of Indians into the digital age. Reliance officials drew parallels with the buzz around iPhone launches, as queues mounted for Jio Sim cards.
As Jio’s number of subscribers swelled, the outlook for its rivals darkened. It had signed up 51m users by the start of December 2016, when it announced that the giveaway would continue for another four months. “In Europe or the US, this would have been stopped,” Airtel’s Mittal said last year. “It would have been seen as predatory.”
Jio’s rivals had little choice but to slash their tariffs, prompting a stark decline in industry margins that shows no sign of abating. The first indication of the disruption’s scale came in November 2016, when Vodafone wrote down the value of its Indian business, the country’s second-most popular operator, by €5bn. Four months later, the UK company — which before Jio’s arrival had been hoping to list its Indian operation — agreed to merge it with third-placed Idea Cellular.
This was just one part of telecoms consolidation last year, with many smaller operators seeing little prospect of survival as Jio pushed prices ever lower. Bharti Airtel seized the chance to snap up assets, buying the struggling mobile businesses of the Tata conglomerate and of Norway’s Telenor.
Anil Ambani’s Reliance Communications, meanwhile, was making a last-ditch attempt to stay in the race through a merger with Aircel, owned by Malaysia’s Maxis Berhad. When that deal fell through, Mukesh Ambani grabbed the chance to win back the core assets of the business he ceded to his brother in 2005. In a deal announced on December 29, Jio bought RCom assets, including telecom towers, a national fibre optic network and about half its mobile spectrum.
This purchase strengthened what Jio claims to be the world’s biggest mobile data network, a vast investment based on logic that defied conventional industry wisdom, says Chris Lane, an analyst at Bernstein Research. “When I spoke to the other operators three years ago, they were dismissive of 4G,” he says, referring to the high-speed data technology on which Jio’s network is built. “Data adoption was pretty low at that point, and their view was that no one was willing to pay for it. “Jio changed the model, showed them that Indians actually do like fast data and want to use more if it’s affordable. It’s put pressure on the others to roll out their own 4G networks; Jio has accelerated the investment.”
Ericsson’s global mobility report in November highlighted the huge shift in behaviour created by Jio’s free offer, which it said had “pushed up global [mobile data] traffic noticeably”.
Monthly smartphone data usage in India, as well as the tiny markets of Nepal and Bhutan, reached nearly five times the level two years previously, the Swedish group estimated. Jio’s development of India’s 4G era had ushered in a new period of sustained, dramatic growth, Ericsson said, predicting data consumption would rise tenfold over the following six years.
To sustain its rapid growth, analysts warn, Jio will need to reach lower-income Indians who have been put off by the cost of 4G-compatible phones. This was the target of another glitzy announcement from Ambani last July: the JioPhone, a basic 4G-compatible handset that Jio offered for a refundable deposit of Rs1,500 ($23).
The growing access to mobile data has generated a mood of optimism among India’s digital entrepreneurs, who have been struggling to attract customers beyond the wealthy urban elite.
“Seventy per cent of our business is on mobile, and the low cost of data, together with smartphones being so much more affordable, is a significant boost,” says Hari Menon, chief executive of online grocer BigBasket. “All this is going to make sure that ecommerce comes and really settles here.”
There are questions about how long it will take for Reliance’s huge investment to pay off. In January, Jio reported a maiden net profit for the final quarter of 2017. Analysts treated the claim with caution, noting that the company has been capitalising an unusual proportion of its costs, flattering its bottom line.
Had Jio applied “normal” depreciation standards, it would have reported a net loss of $376m for the period, rather than the claimed $78m profit, says Bernstein’s Lane. He added that Jio’s accounting methods appeared to be permitted under Indian rules.
Jio’s rivals have not hidden the impact on them from its assault on the industry. Profits at Airtel’s India mobile business fell 93 per cent year-on-year to Rs1.7bn in 2017’s final quarter. Idea slumped to a net loss of $172m.
Rivals have complained bitterly about a succession of regulatory decisions that they say have benefited Jio at their expense. One was a move to slash the interconnection charge that networks pay each other to handle incoming calls. This boosted Jio, whose customers have been making far more calls than they receive.
“It is undesirable for a critical core industry like telecom to be regulated based on the ambition of a new operator,” Vodafone chief executive Vittorio Colao wrote to India’s telecoms minister.
But Jio has had an irreversible impact on India’s digital landscape, says Counterpoint’s Shah, predicting that rapid growth in its users will persist to hit 250m by the end of 2018.
“It’s changed the entire consumer habit,” he adds. “Everyone is now hooked on the internet. Fortune favours the brave.”