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Reliance Jio: Combative strategy to take on incumbents

October 10, 2016

By - Devangshu Datta

The launch of full-scale commercial services by Reliance Jio Infocomm Limited (RJIL) has been a long time coming. Reliance Industries had announced its intentions to enter this space way back in June 2010, when it purchased Infotel Broadband Services, an unlisted firm, for Rs 48 billion. Infotel was remarkable in that it possessed broadband spectrum in all 22 Indian circles.

The company was rebranded soon after the acquisition and RJIL has bought more spectrum since then. The company spent over Rs 1.3 trillion prior to distributing the first set of SIM cards earlier this year, when telecom services were soft-launched. The LYF brand of 4G handsets was also made available at group outlets. The initial users were Reliance group employees and their family members and select invitees, who started using RJIL’s voice and data services a few months ago.

During this time, there were acrimonious back-and-forth exchanges between the sector regulator, the Telecom Regulatory Authority of India (TRAI), RJIL and the other mobile service operators. The other operators alleged that TRAI was unfairly favouring RJIL over them. A price war was clearly expected. And the incumbent operators, such as Airtel, Idea and Vodafone, slashed their data charges prior to the launch, anticipating lower data prices from RJIL.

Despite the long lead time, the launch on September 1, 2016 at the annual general meeting of the flagship company set the proverbial cat among the pigeons. Promoter Mukesh Ambani made a sensational commitment that RJIL would offer free voice calls permanently, a generous number of free SMSs and free national roaming on its network, which uses the voice over long term evolution (VoLTE) technology.

In addition, RJIL is offering all its services free of cost till December 31, 2016. The company has released 10 indicative tariff plans at different price points, ranging from the minimalist Rs 19 per day to the top end Rs 4,999 per month. Compared to the terms of the existing plans offered by other operators, RJIL’s plans seem generous for they promise more data at every price point. Moreover, free additional data will be offered between 2 a.m. and 5 a.m., along with features such as free data downloads from RJIL Wi-Fi hotspots.

The RJIL network also offers access to large libraries of video content and multiple TV channels via a bouquet of Jio-specific apps. For example, the JioTV app has over 300 live channels, JioMusic has over 10 million songs, while JioCinema offers 6,000 movies and over 60,000 music videos along with TV serials.

The operator has claimed that on average 4G data would cost Rs 50 per GB, which is substantially cheaper than the most discounted offerings of rival incumbents. However, this would be the case only for those who avail of data downloads from hotspots. For others, RJIL data would cost an average of Rs 66 per GB, which is still very cheap.

RJIL is also offering cheap handsets and has clarified that data used for making VoLTE calls would be exempt from the paid-for data accounted for in the tariff plans. However, data used during video calls would be accounted for as paid-for data (everything is free until December 31, 2016, but the plans or variations thereof, will kick in after that date).

Tariff plans will be reviewed in January 2017, by which time RJIL hopes to acquire a substantial chunk of the 100 million subscribers that it is targeting. Presuming that many of these subscribers will be migrating from other networks, Ambani has asked other operators to quickly process mobile number portability requests.

The launch offer has led to long queues outside RJIL outlets as many people would like to avail of the free services during the trial period. In fact, as per reports the number of sign-ups has been so large that RJIL is facing logistical challenges in supplying that many SIMs. This is despite putting in place a 500,000-strong distribution network.

The RJIL IP-based network covers 18,000 cities and over 200,000 villages. RJIL says that the transaction for the transfer of spectrum in the 800 MHz band from Reliance Communications (RCOM) to RJIL has taken place across 13 circles and it is sharing spectrum in the 800 MHz band with RCOM across 21 circles. It also holds spectrum in the 1800 MHz and 2300 MHz bands.

The network would really be put to test once it has large number of users. RJIL plans to invest more in infrastructure and intends to cover 90 per cent of the Indian population by March 2017.

On the voice front, RJIL users have already witnessed a fair number of dropped calls. In fact, Ambani claims that so far there have been over 50 million dropped calls to numbers on other networks (including the test-run period of the soft launch). This is supposedly due to the fact that telecom networks of other operators are clogged. Further, there may also be technical problems relating to interconnectivity between RJIL’s VoLTE technology and the circuit switching technology used by other networks.

The interconnectivity issue is a major area of contention between RJIL and other operators. When calls are initiated from numbers on network A to numbers on network B, the operator of A pays the operator of B Re 0.14 per call for the interconnectivity. RJIL will have to pay this interconnectivity charge and, of course, it will receive the same for calls originating from other networks and terminating on RJIL.

However, as a new operator with a low subscriber base, RJIL will be paying substantially more than will receive, at least in the initial stages. It is subsidising every voice call made to another network, since calls are free. Under these circumstances, RJIL will gain substantially if interconnectivity charges are reduced or eliminated. TRAI is reportedly considering doing away with these charges. However, the move will be strongly opposed by incumbent operators, who believe that it would give RJIL an unfair advantage and cut down incumbent revenues.

Earlier, accusations of TRAI favouring RJIL had arisen from changes in the norms for using 4G spectrum. In the earlier TRAI guidelines, LTW spectrum was auctioned under terms that precluded it from being used for providing voice over internet protocol (VoIP) services, which is precisely what VoLTE does. However, this restriction was later removed with VoIP being allowed, along with mobile virtual network operator (MVNO) and virtual private network (VPN) services.

Interconnectivity negotiations have led to a bitter public feud. The Cellular Operators Association of India, which represents incumbent operators such as Vodafone, Idea and Airtel, says that “traffic imbalance” on account of traffic from RJIL’s network is choking the networks of other operators, who are refusing to offer extra points of interconnect (PoIs) to RJIL.

In fact, incumbent operators claim that they are not legally obliged to offer interconnectivity to RJIL. On its part, RJIL is accusing the other operators of attempting to cripple its quality of service (QoS) by refusing to allow points of interconnect.

As per the Department of Telecommunications (DoT), the interconnect issue comes under TRAI’s domain. It has thus refused to intervene and asked operators to negotiate with TRAI as the moderator. Subsequently, Idea, Bharti and Vodafone have all increased PoIs for RJIL.

RJIL’s free voice offer, described as “predatory pricing” by the other operators, could lead to a new paradigm for the sector. The Indian telecom market derives about 23-25 per cent of its revenue from data traffic, while the rest comes from voice. RJIL’s offer turns this trend on its head and, in fact, this is a new strategy even in the global context, since in other markets VoLTE data usage is usually charged.

RJIL is, therefore, betting big on its ability to drive data usage and deliver high quality service. The whole range of Jio apps will help users access multiple TV channels, digital libraries of movies, songs and books, magazines and newspapers, newsfeeds, etc.

Some of RJIL’s confidence that it can drive data usage by offering content is backed by the Reliance Group’s extant plays in multiple news, media and entertainment spaces. In 2014, Reliance took over Network 18, which has key properties such as CNBC-TV18, CNBC Awaaz, CNN-IBN, online portal Firstpost, entertainment channel Colors and the ETV portfolio. Reliance Industries invested roughly Rs 23 billion for this media takeover and it can now leverage the content to attract more users.

Indians love watching videos despite slow mobile internet connections, which leads to lags. As of now, about 45 per cent of mobile internet usage is driven by video and this is slated to rise to about 70 per cent, even as net usage expands. In absolute terms, video data consumption is expected to rise 14-fold in the next five years.

Given its media presence, the Reliance Group has reason to believe that it has a good sense of data consumption patterns and can hope to push data uptake in a way that a standalone telecom operator cannot. In addition, the group may be looking at RJIL as an initial loss leader (higher data consumption will benefit other group companies). In the long term, if the game plan works, it could be a win-win situation as RJIL would become profitable and Reliance’s exposure to media and entertainment would bring higher revenues.

However, it should be noted that the bundled media content apps offered by RJIL may also be challenged on the grounds of a possible violation of net neutrality. The logic is that Jio apps offer some media content for free whereas other similar media content may be chargeable. It remains to be seen if this also blows up into a major issue.

Whatever happens, a price war has already started and is bound to escalate. Incumbents must match the RJIL offer with counter offers to try and stem large-scale migration. As of now, it’s not clear how effective RJIL’s strategy will be. Many people will pick up a free SIM, perhaps even a cheap handset, to avail of the services until these remain free. Such users are likely to later switch to paid services only if they have a good experience. The numbers will only become apparent in January 2017 when the services become chargeable.

Apart from the price angle, the bar is set low right now in terms of QoS, with users of other operators expressing dissatisfaction about the number of dropped calls and network fadeout. If RJIL’s QoS is good enough, anybody who is paying more than Rs 500 for voice plus SMS at the moment will clearly be tempted to convert to RJIL’s Rs 499 plan or higher, depending on their data needs. At the top end of the market, the competition will be as much about QoS as about price.

There are also question marks about Reliance’s ability to service retail customers. The launch of RCOM in 2002 from what was then the unified Reliance Group saw similar generous offers of bundled handsets, deep tariff cuts, etc. While value for money was certainly on offer, RCOM did not make expected inroads into market share. This was due to its inability to smoothly service customers, who complained of billing issues, tardy responses to complaints, etc. Thus, the incumbents gained time to bounce back.

Ever since, questions have remained regarding the Reliance Group’s ability to manage retail services. This time around, issues such as SIM cards being out of stock, slow activation, etc. have reinforced such doubts.

A majority of users are likely to “comparison shop” for tariffs at the lower end of the scale. There is a consensus that the largest number of users will sign up at the lower price points of Rs 149 and Rs 299, where incumbent operators will have to compete with the new service in terms of effective pricing. The low-end market is highly voice oriented and RJIL seems to be acknowledging that fact. For instance, the Rs 149 plan offers 300 MB data at what works out to be a price of Rs 496 per GB (ignoring hotspot downloads).

RJIL is probably hoping that users at the low end get hooked on to data usage during the free trial period, and, therefore, start paying for more expensive data later. Media analysts point out that this could involve a mindset change. Families that typically possess one cable TV subscription would need to start thinking of mobile phones as second and third “TV sets”.

India has extremely low data consumption, despite having about 250 million smartphone users (including about 70 million with VoLTE-capable handsets). Data consumption is about 137 MB per month and the RJIL Rs 149 plan offers 300 MB. RJIL also claims that during the soft-launch period (when about 1.5 million users were accessing the network), data usage jumped to 26 GB per month and voice usage to 355 minutes per month. While this sample consisted of persons with higher incomes, the potential for a rapid rise in data consumption volumes is obviously there.

ARPU (blended voice plus data) for the biggest incumbent operator, Airtel, is around Rs 192. Asia’s leading brokerage and investment group CLSA estimates that even if RJIL manages to achieve an ARPU of Rs 250, given investments of Rs 1.5 trillion, it will be a long haul of about five years before it breaks even, assuming a pre-tax 10 per cent return on capital employed. However, RJIL, despite the huge investments, is only one of the Reliance Group’s ventures. As long as the established businesses such as refining and petrochemicals continue to generate high cash flows, RJIL can afford to grab a share of the telecom market and wait for profitability to follow.

It’s indisputable that RJIL has changed the operating parameters. Listed incumbents such as Airtel and Idea saw sharp drops in their share prices after the launch of Jio. Securities analysts have cut their price targets for other listed operators 15-20 per cent. Reliance Industries has also seen a markdown in valuations and projections as the market adjusted to the possibility of a long period of losses of the telecom arm.

Prashant Singhal, Global Telecommunication Leader, EY, says, “For a price sensitive market like India, the launch of affordable data services and free voice calls is indeed a welcome step. This is expected to drive greater data adoption. But the sector is currently reeling under financial stress, high debt burden and a slowdown in revenue growth. Further decline in data tariffs may impact operators’ profitability and sustainability. Telcos need to make higher investments in data networks. Any market erosion at this stage may impact the outcome of the upcoming spectrum auction, which is critical for the Digital India vision.”

Indeed, there is fear that operators will be reluctant to bid at all at the upcoming spectrum auctions, starting October 1, 2016, due to the need to preserve cash and fend off RJIL. The government is making 2,354.55 MHz of spectrum available at a base price of Rs 5.56 trillion. Incumbent mobile operators carry over $61 billion equivalent in debt, and ARPUs will decline after RJIL’s launch. Total debt for operators has increased by 41 per cent between March 2014 and March 2016, according to credit rating agency ICRA.

The next three or four months will see RJIL trying to iron out any issues that arise as full-scale services get under way. The other operators must use that time to develop counter-strategies and craft counter-offers. The real battle will start in January 2017.

 
 

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