It has been over six years since Reliance industries acquired pan-India 2300 MHz spectrum, which is conducive for 4G LTE services. But, the company is yet to launch services commercially. Reliance Jio, the telecom arm of Reliance Industries Limited has been busy planning and strategizing the commercial rollout and in the project phase, building the network including nationwide optic fiber network, passive infrastructure equipment, strategically partnering with other industry players for utilizing their resources, acquiring spectrum in complimentary bands, working on technology developments such as VoLTE and device harmonization over the past few years. The company has so far spent over USD 22 billion in Capex for spectrum acquisition and network rollouts.
The company is well positioned to launch its LTE-based mobile services soon, and has made public announcements to garner 100 million subscribers in its first year of launch. Although daunting and extremely ambitious, a combination of attractive product and service bundles, extremely low tariff and high decibel marketing campaigns have been successfully used by companies to garner significant market share in short time in India. And, many industry experts believe that if any company can reach such a goal, it could be Reliance Jio. However, we at Convergence Catalyst believe that it is extremely difficult to achieve this target, and even if achieved, this ambitious goal could be highly detrimental to the company in the long term. And, there are five key reasons for this:
1. Unique and Inadequate Spectrum Mix: The spectrum available for Reliance Jio to provide 4G LTE services are in the bands of 2300 MHz (TDD, Band 40), 1800 MHz (FDD, Band 5) and 850 MHz (FDD, Band 5 – through spectrum sharing partnership with Reliance Communications). This mix is unique (globally) for Reliance Jio, and as a result harmonization of active infrastructure and devices is difficult and time-consuming task. The propagation characteristics (in terms of cell radius, indoor coverage, capacity limitations, signal attenuation, etc.) of each of these spectrum bands are different. Also, the company has to offer voice services using VoLTE (Voice over LTE) technology on the same spectrum, or partner with an existing player to offer voice services on CSFB (Circuit Switched Fall Back) option. Also, the spectrum (held by the company), especially in the 850 MHz band is non-contiguous in many circles, which could be a hindrance to offer high quality mobile data services. And, to garner large subscriber base, the company needs to focus on servicing semi-urban and rural subscribers as well. And, the current spectrum holding is not sufficient to carry combined traffic from VoLTE calls and mobile data usage for these markets.
2. Mobile Devices Market Has Moved On: Currently, there hardly exist any mobile device models of various open market brands (Indian, Chinese & Global) that support all the 3 spectrum bands of Reliance Jio. And, to cater to the unique spectrum combination of its network, and most importantly VoLTE technology, Reliance Jio has launched over 24 smartphones ranging from USD 50 to USD 300, under its own “LYF” brand. The company’s other objective could also be to trigger the demand, create a market for such devices and motivate the open market brands to launch their devices operating in Reliance Jio’s spectrum bands, while the company gradually recedes from the mobile devices business.
The risk with this strategy is that, to trigger the demand and create the market, the company needs to invest in technology development, sourcing, distribution and marketing of smartphones, which have completely different dynamics as compared to launching and growing mobile services. The company needs to invest significant amount of Capex and bear the burden of liquidating the inventory, while dealing with stiff competition from open market brands and rapidly slowing customer device upgrade cycles. Also, unlike a few years ago, when the top 3 device OEMs in India (most of them US & European brands) commanded over 90% share of the market, today the Indian mobile devices market is highly fragmented, with a number of domestic and Chinese brands leading the market. And, all of these companies, under various competitive and changing market dynamics are already operating with extremely low margins and do not focus on investing on R&D. To motivate such players to make changes to their product portfolios and roadmaps will be a tough and time-consuming task, and Reliance Jio could potentially stay put in its non-core mobile devices business for much longer than anticipated
3. Consumer Demand Not Ready: In India, unlike for voice, there doesn’t yet exist pent-up demand for broadband services at the mass-market level, and it needs to be created. We believe that the adoption and usage of mobile broadband services will happen in three key stages and the number of active users and the per-capita data consumption will vary across the three stages and service types. First, the existing mobile consumers will onboard data networks using communication based services. Later, a portion of them will evolve into broadband multimedia consumption, thus increasing the per-capita data consumption. Finally, once the consumers are comfortable with communication and consumption based services, a subset of them will start generating their own content and share it with their peers and social groups. This is the most evolved stage of mobile broadband consumer and his/her average data consumption will be at its peak.
Currently, most of the mass-market users in India are using data services for communication-based services, which do not require high bandwidth and can be serviced by existing networks and technologies. Data services in India, at the mass-market level are still in the “Nice to Have” category and have not yet evolved into the “Must Have” category. They are also a function of price and tariff bundles. The Indian mass-market consumer is not yet motivated adequately to allocate a dedicated share of wallet for data services.
4. Incumbent Players Will Not Concede Easily: Almost the entire user base that Reliance Jio needs to garner is currently the customer of incumbent carriers. And, it will not be easy for the company to churn out from the existing players. The competitors are expected to fight hard to retain their subscriber base. Reliance Jio could potentially start a price war and offer attractive products and services bundles to lure the subscribers, but such offerings will be easily matched and replicated by the incumbents overnight. Leveraging their existing investments, networks, service offerings and operations, the incumbents are better positioned to test the price elasticity and value offerings combinations as compared to Reliance Jio. We have witnessed this in 2008-09 when the new entrants tried the “Pay Per Second Billing” strategy and “VAS (Value Added Services) Bundle” strategy. The players who started these price wars and differentiated offerings could not sustain, and lost out in the long term. Also, the incumbent players could pose a number of operational challenges to restrict their subscriber base churn through long winding and bureaucratic processes, as witnessed in 2010 during the launch of MNP (Mobile Number Portability) by various new carriers, and the current PoIs (Points of Interconnect) issues that are being faced by Reliance Jio.
5. History Could Be Repeated: CDMA, a relatively superior technology in terms of both voice and data based offerings and quality of service, has never really managed to reach its full potential in India, primarily due to closed ecosystem (dedicated devices), lack of global scale of economies, royalties and license fee payouts, and most importantly, competing with the open market GSM ecosystem. And the leading CDMA carriers (Reliance Communications and Tata Teleservices), in order to compete with the GSM players in terms of market share started offering subsidized (low-end) devices and services bundles targeting bottom-of-the-pyramid, mass market, low quality subscribers. As a result, their CDMA business was never really profitable and the companies are now shutting down and/or significantly slowing their operations.
Aircel, a carrier which has positioned itself as a “VAS provider” for the masses, offering a bouquet of non-voice VAS services, including ‘all-you-can-eat’ data plan for USD 1.5 had eventually gotten its networks congested, and the company has not been able sustain its offerings or operations. Uninor, a relatively late entrant into the Indian mobile services space, aiming to be the secondary SIM/connection provider for the masses has launched a number of low tariff offerings, and is currently unable to sustain its operations profitably.
The two common factors among all these players were that they tried to garner significant market shares rapidly, but could not sustain long-term profitability. For all practical purposes, Reliance Jio’s entry currently with its rapid growth ambitions and potential Go-To-Market options is a lot closer to the above-mentioned three scenarios. And, there is a significant risk of history repeating itself in the long term.
Reliance Jio, over the last six years, in the project phase, has invested significantly in building its network – garnering the entire available spectrum, laying the optic fiber network around the country. And, its network is well positioned to offer high quality, high-speed broadband offerings. The company should look to target high-end, top-of-the-pyramid subscribers and early adopters as customers, who are currently highly dissatisfied with the incumbent players’ quality of offerings. However, such customers being long-term subscribers of the existing players will be harder to churn out. But, once converted, these customers can in turn act as advocates for the larger mass-market subscriber base. In India, for digital technologies adoption, demand is extremely difficult to be created overnight and is best cascaded top-down, with network effects playing a significant role in their rapid growth. This is a long-term play, but eventually will be sustainable and profitable for the company.
On the other hand, if Reliance Jio aims to garner significant number of subscribers in the short term, it has to fight multiple battles on many fronts, stretching its strategic and operational bandwidth extremely thin. In order to ramp up higher subscriber numbers in the shortest possible time, Reliance Jio stands the risk of repeating the same mistakes committed by various players in this market. There don’t exist any proven models or successful case studies of extremely fast, short term ramp up and scale, sustaining over long periods of time, profitably in India.
The choice for the company is either a structured, sustainable and profitable growth with good quality subscribers in the long term or low quality, non-profitable, unsustainable high market share in the short term. Not both!
Key excerpts from this Analyst Note have been published by Business Standard on 30th August, 2016 and in Wall Street Journal, Financial Times and Hindu Business Line on 1st September, 2016.
