Snapshot
- The Jio strategy has worked wonderfully well, and the huge bet in terms of capital investment in networks and customer acquisition by Mukesh Ambani are beginning to pay off.As things stand, Jio is winning. Mukesh Ambani is not home yet, but he is half-way there.
With 252 million subscribers at the end of September 2018 (239 million according to official Telecom Regulatory Authority of India (TRAI) data in August), there is little doubt that Reliance Jio is winning the telecom war with Bharti and Vodafone-Idea. The scale of the monthly leaps in user base tells a story. Between July and August, Jio grew its subscriber base by 12 million; in the month after that, it grew another 13 million, while its main competitors saw measly rates of just over one million. Idea, which merged with Vodafone, even lost 3.43 million subscribers in August.
There is good reason to believe that Jio has already crossed Bharti Airtel in terms of revenue market share, but if a Kotak Institutional Equities report is to be believed, it could become No 1 and overtake Vodafone Idea in terms of net revenues in the current quarter (October-December 2018) itself. From zero to one is a phenomenal achievement unheard of in telecom history.
Clearly, the Jio strategy has worked wonderfully well, and the huge bet of over Rs 2 lakh crore in terms of capital investment in networks and customer acquisition by Mukesh Ambani are beginning to pay off. In the second quarter to September 2018, Jio reported a standalone net profit of Rs 681 crore. This profit may have been massaged with generous dollops of creative accounting and capital infusions, but it is nothing to sniff at.
How did Jio do it in such short a time, and why is this phenomenal in the history of telecom?
There are 10 elements to the Ambani strategy, some of which date back to the Dhirubhai era, which have delivered in spades.
First, bring in massive volumes and at super-low prices. This is how Dhirubhai Ambani became king in petrochemicals and oil refining; his son has done this in telecom. He has built a massive subscriber base on low tariffs, which has not only forced his competitors to follow suit, but also ensured huge adoptions.
Second, execution. The Ambanis have always believed in executing their projects at the lowest costs, and in record time. This is what has been done with Jio too, where the entire network rollout and customer scale-up happened over just five or six years, despite the fact that his opponents were well entrenched, with large customer bases. Mukesh Ambani lost his first telecom company to his brother Anil in the 2005 carve-up of the Ambani empire, but it was only in 2012 that he did a deal with his brother whereby he could re-enter the business. Jio has come from zilch to milch in just six years.
Third, take the path less taken. In the last attempt, when Mukesh Ambani launched Reliance Infocomm in 2002, he went in for a new technology – CDMA instead of the well-accepted GSM – to generate huge volumes at low costs through more efficient use of spectrum. That gambit did not work, but there is no doubt that he tried changing the rules of the game despite being a late entrant; this time his gambit has been about betting on data, with voice becoming largely a freebie. Is there any doubt that this has worked? The future is data, and Mukesh Ambani is sitting on piles of it even as he garners millions of new subscribers eager to part with their data.
Fourth, timing. Ambani launched 4G services just soon after it became possible for telecom companies to do KYC (know your customer) verifications electronically, through the use of Aadhaar. He used the two-year window provided by this opportunity, before the Supreme Court shut the door last September, to ramp up the subscriber base to over 250 million. Imagine where he would have been if he had had to get his subscribers through the old paper route of customers bringing in physical ID and address proofs. Smart.
Fifth, cheap capital. The senior Ambani always knew that the cost of capital was key to making large projects profitable. He got his capital cheap by raising large amounts through convertible debentures, and then converting them to shares at huge premia. Since he also played the markets, the company (RIL) gained net worth, and his shareholders capital gains. Mukesh is using large capital investments from Reliance Industries to fund Jio, and this investment will – at some point – result in huge capital gains for Reliance shareholders as Jio gets listed, and more capital is raised at high valuations if Jio becomes No 1 in telecom revenues. This could happen as early as in the next financial year, if things go right. Jio benefited from the huge profits and cash flows generated from the refining and petrochemicals businesses. It is winning because it is not overburdened with debt, unlike its competitors.
Sixth, Ambani is playing for the long-term. Jio plans to target a revenue market share of 50 per cent, and is conscious that as the voice market shrinks in terms of revenues, data will grow exponentially. When this happens, the trend of customers holding two SIMs will reduce, as Jio offers both data and voice on the same SIM. This means operators offering only voice will be reduced to occupying the second SIM plot in phones, and will see revenues dropping steadily. This is what may already be happening.
Seventh, Jio knows that winning means pushing others towards losing. Market share is ultimately a zero-sum game. Jio’s entry has already reduced the playing field to three private players and one public sector player, and if Jio becomes No 1 in terms of revenue share, the No 3 or No 4 players will have to pack up or sell out to players with more capital (ie, largely international players). BSNL is particularly vulnerable, and so is Airtel. This is one reason why Jio continues to retain low tariffs, since it damages its competitors while it can hold on with higher cash flows from the non-telecom businesses.
Eighth, there’s accounting tricks. RIL, Jio’s parent, knows a thing or two about how to show profits and keep interest costs down. Jio’s equity is a massive Rs 91,000 crore, and its debts less than half of that. Jio’s equity is largely the result of borrowings by RIL, which means the interest is paid by the latter, while Jio sits on relatively free equity capital. This is what gives Jio a profitable look, given the scale of investments in it.
Another trick is to keep depreciation costs low. Accounting norms allow pre-operative expenses to be capitalised, and not shown as operating costs. Thus, investments in network rollouts can be shown as pre-operative costs and shown as assets to be depreciated later. This boosts current earnings before interest, depreciation and taxes, while shifting the burden of depreciation to a later time.
Ninth, buy out the smaller competitors. Since Jio’s strategy is to dominate the data space, it is slowly buying out the last-mile data and cable players who get fibre into the home or to offices. In October, RIL bought controlling stakes in two cable operators (Den and Hathway), since this means direct access to homes. It may continue to buy other such cable operators, since the same access can be used to pump content into homes, ensuring higher revenues from entertainment and internet surfing.
Tenth, take no prisoners. From day one, Jio has been betting the farm in order to win. It has given no quarter to its rivals, whether it is in terms of tariffs or its relentless focus on expansion or taking advantage of the policy environment.
As things stand, Jio is winning. Mukesh Ambani is not home yet, but he is half-way there. The only thing that can spoil his party is a deep-pocketed foreign takeover of Airtel or Vodafone Idea, but he is unlikely to be the resultant loser. He is too big now to fail.