Reliance Jio — A look at the world’s most intriguing mobile network in India
Jio is a fascinating bet on going mobile-first in the world’s second largest mobile market in terms of number of connections.
Some context — Reliance Jio is a brand new all-4G network built out in India for a country of 1B users. This in a country where the mobile market is already fiercely competitive and generates INR 1.8 trillion of revenue at an average ARPU of INR 133 (USD 2) for its 1.2B connections. A significant subset of users carry multiple SIMs and the actual number of unique users is expected to be closer to 800M. In such a market, Reliance Jio has already invested INR 1.8 trillion in capex building out this network from scratch.
Yes, the competition has historically under-invested in their data networks, but to invest capex equivalent to the revenue generated by the entire market is as high-stakes a bet as it gets. To make this even more interesting, Jio came up with a unique launch strategy of providing its services free of cost to users for the first 4 months, and then another 3 months — so seven months in total.
And yet, by starting with a “clean slate”, Jio has taken a fresh approach to building a new mobile business untethered from the legacy of existing mobile network businesses. To be fair to them, they’ve made the most of this fresh start.
Advantage 1: Building telco processes from scratch have allowed Jio to deliver an experience far better than their competition
A typical new customer acquisition for a telco involves a lot of documentation (customer onboarding form, ID proof, address proof, passport size photos and photocopies of all of these) and is analog to the hilt. This documentation typically gets sent to a back-office somewhere and someone painstakingly enters them into a system within 3–5 days. It is not uncommon for errors in documentation/typos to cause further issues and create a painful customer experience. Jio has set all of this aside and created an enviably simplistic and yet sophisticated system. A customer walks in with their Aadhar card and a QR code. The staff scans both from their mobile point of sale app, acquires customer details through APIs into the government’s identity database — Aadhar, authenticates the customer through a little biometric reader that connects to their mobile PoS. As a result, the customer can walk out with a connection within 10 mins from a shop and often get activated before reaching home!
Why does this matter — clearly the on-boarding experience blows the competition out of the water but also, for the business, they remove all barriers from acquiring a new customer as quickly as possible.
Advantage 2: Simplicity of their mobile network provides lower operating costs
All mobile networks around the world today run a combination of 2G/3G/4G networks. This is largely due to their legacy and that 2G/3G has been kept around to support voice not only for customers without 4G capable phones but also to a large extent to support voice for users on 4G phones. By building a 4G only network, Jio has massively simplified their network. Thus, they are managing just one network with no distribution of spectrum across multiple networks, no painful process to upgrade their network from 2G/3G to 4G. Of course, it creates a barrier in terms of requiring the customer to have a 4G capable handset but by betting on 4G phones to become mainstream, it’s probably the right trade-off for them.
Why does this matter — Jio is running a different mobile network to its competitors and has operating costs that are fundamentally lower than its competition (operating cost/GB).
Advantage 3: Simplicity of tariffs/Bent towards Data:
By simplifying tariffs (no in-country roaming, flat rate voice), not only do they have a strong marketing proposition to attack incumbents, they are also playing to their strength in delivery of data (by virtue of running a 4G network). Also, by not having hundreds of voice tariffs, they are probably well placed for lower customer service costs by cutting out all the calls from customers confused about their voice charges, having issues with their rates etc. And as they’ve called out in the investor presentation, by moving the market towards data, it removes the need/option for arbitrage for customers buying multiple SIMs. The player with the best cost/quality data network wins the SIM and thus has 100% share of wallet of mobile spend.
Why does this matter — With its tariffs, Jio is cutting through the marketing clutter from the incumbents, playing to their strength in data throughput and also lowering future customer service costs.
Despite all these advantages, Jio has a couple of major issues — one is natural for a late entrant to a saturated market and the other, an own goal for which they have themselves to blame.
Issue 1: Industry pricing pressure will make Jio’s revenue targets difficult to achieve
From their own investor pack, Jio highlight how ARPU isn’t necessarily a good measure of Average spend per customer because a lot of people in India carry multiple SIMS to arbitrage between voice tariffs of different networks. But even so, the current spend on mobile connectivity in India is ~INR 1.8 Trillion. Even if one follows two of Jio’s assumptions,
a) Market spend will move from voice to data
b) Overall SIMs in the market will reduce because of flat rate voice (people won’t carry multiple SIMs) — so 800M SIMs instead of 1.2B
that still gives us an overall spend of INR 187 per month instead of the official ARPU figure of INR 133. If we assume voice is “free” and there is an ever increasing amount of data consumed for the balance money, that INR 187 is still the average size of wallet for the Indian consumer today.
While Jio has launched it’s free welcome offer, Jio’s competitors haven’t sat still and over the past year, they’ve rebalanced tariffs aggressively to retain their base. One can only assume they will continue to vigorously defend their customer base with price cuts and thus the INR 187 average will be under severe pressure for the next few years and probably lower than Jio’s forecasted INR 313 by 2020–21.
To break out of that dynamic, the mobile industry will need to convince customers to pay more for their subscription (possibly for much more data) than they have this year or in the past and thus mobile spend will be fighting for a larger share of discretionary spend competing with eating out, cinemas, TV etc. For all the value the telecom industry has delivered around the world, it has struggled to capture a higher share of wallet and it isn’t clear why this time will be different.
One way of doing it would be to get some spend from the consumer earmarked for “entertainment” and this is where the wider Reliance’s business interests in content might help differentiate Jio in the long run. The Jio TV and Jio Music apps are out there but again after giving them away for free for the first two years, creating a perception of value against them isn’t going to be easy.
Issue 2: By flooding their network with “free” users, Jio has neutralized their technology advantage and harmed their longer term pricing power
By not charging customers for a year, Jio has gotten a tremendous amount of free publicity and has hit their “100M” subscriber target within six months of launch. In theory, paying zero lowers customer expectations and thus initial teething issues may have hampered customer perception of Jio less than what it might have even at a modest price.
So far so good then and can we file the give-away of the first six/seven months of revenues as a simple “subscriber acquisition cost” like VC funded startups do in their early years of “investing in price”? Not quite and that’s where an understanding of how mobile networks work would have helped. By giving away their mobile services for free and heavily marketing it, Jio has created a flood of data hungry subscribers on its network who are causing congestion and deteriorating the experience for everyone. And remember given Jio runs voice on 4G, the end user experience of congestion isn’t just their Facebook running slow but being unable to make/receive calls reliably. (The withholding of interconnect capacity by competitors leading to failed calls haven’t helped either.)
Jio themselves seem to have walked back from that position and have lowered the data cap to 1GB per day four months into the free offer. This has given the impression of “rationing” which is very damaging for a new service. Mukesh Ambani himself was on record saying “While 80% customers are happy, 20% users are creating a bad experience for others”. That surely doesn’t create an image of abundance you want to give people when marketing a new futuristic service. In contrast, Uber supposedly works very hard to create an image of “abundance” for new users that encourages them to rely on it, consume the service more often.
The business plan for Jio surely involved capturing the top end of the user segment with high data needs and giving them a 4G quality data experience. These users would have been the higher than average spenders (so INR 400 and above) and would have moved to Jio in droves. Jio had an opportunity to let their new users brag about the high speeds, futuristic technology to others and help brand perception and pricing power. With this approach, they’d have been able to monitor the network for any signs of congestion and made remedial arrangements before the user base got affected to maintain a quality of service.
But thanks to their free offer, they’ve ended up with a congested network and denied their early adopters a superlative experience. In fact from the regulator TRAI data, in Jan 2017, Jio had speeds as low as 8.3 Mbps and allowed itself to be beaten by market leader Airtel at 11.8 Mbps. Speed stats are always debatable because they don’t capture how often 4G is available, latency/reliability but it suffices to say if Jio had 10M paying subscribers instead of the ~75M free users they had on the network then, those 10M subscribers would have received speeds in several multiples of anything Airtel/Vodafone/Idea might have been able to deliver.
So to sum this up, seven months into the commercial launch, Jio has reached a 100M connections but isn’t the primary provider for their most desirable customer segment; the network service it has offered in the introductory period isn’t perceptibly better than the incumbents’; and thanks to months of hammering the “free” message, its brand isn’t perceived as the premium one. Why then should a high end subscriber (paying INR 400 or above) bother moving to them or giving them a second chance once the free offer expires?
Jio isn’t doomed but they’ve made their job far harder than it already was. But then again, who wants to bet against a businessman with a personal net-worth of US $27.5B?
Disclaimer: Views expressed are my own and do not reflect opinions of my employer.