THE DISRUPTOR

MUKESH AMBANI'S DARING ₹1.5 LAKH CRORE JIO GAMBLE MAKES THE CONSUMER KING AS RIVALS SCRAMBLE TO MATCH UP

IT WAS 2010 AND MUKESH AMBANI, the Reliance Industries (RIL) chairman, had only just acquired Infotel Broadband from telecom pioneer Mahendra Nahata. The company owned broadband spectrum in 22 zones across India. The acquisition was to be the springboard from which Ambani would launch his next telecom offensive, even more disruptive than the launch in 2002 of mobile telephony at throwaway prices. Brainstorming with close confidant Manoj Modi to blueprint the offensive, Ambani spelt out his brief. Modi was to focus on two key areas: he was to procure cutting-edge technology, and band together the old warhorses from Reliance Infocomm, the men who, back then, had helped him

roll out mobile telephony that was “cheaper than sending postcards” (the challenging prescription Dhirubhai Ambani is said to have given his older son to make a successful go of the telecom business).

What followed over the next six years were the birth pangs of what Ambani calls “the world’s biggest start-up”, leading up to the birth of Reliance Jio, Ambani’s second coming in the telecom industry. This time, the disruption is all but certain: data packages are being sold at a fifth of the prevailing market prices, not to mention voice, video, music and content being given free to subscribers for the first four months, beginning September 5. As for voice services, i.e., phone calls, they will be forever free. Or so is Ambani’s seemingly unbelievable offer to consumers, and the crux of his threat to other telcos, whose businesses are currently heavily skewed towards paid voice services. Illustratively, 70 per cent of market leader Bharti Airtel’s revenues currently come from voice (see box: What You Pay for Voice).

India is one of the fastest growing smartphone markets in the Asia-Pacific region, with nearly 103.6 million smartphones sold in 2015, an increase of 28.8 per cent compared with 2014, says research firm IDC. India is also the second largest in terms of internet users, whose numbers stand at 277 million, behind China and ahead of the US. However, the quality of its telecom services leaves much to be desired. Most subscribers have struggled with—and complained bitterly about—‘call drops’. This is because Indian telcos, while making merry on the stupendous growth in the number of subscribers, have not made commensurate investments in beefing up critical infrastructure such as spectrum and towers. As a result, calls drop all the time inside high-rises, on highways, in trains and on metros, either because the limited spectrum available with carriers does not allow them to beam signals over long distances or tall buildings, or because the increase in data use by consumers shrinks the capacity of telecom towers, affecting voice services.

Ambani knew that for a generation used to 24x7 access to social media and information, a cheaper, more robust service would be impossible to resist. But, once chastened, he did not want to repeat the mistakes that led to the Infocomm debacle. So, he invested heavily in futuristic technology: LTE (or LongTerm Evolution) is flexible and compatible with most mobile devices of the day (see box: A Guide to the LTE Revolution). He also made sure that back-up infrastructure was well established, and collaborated with

contract manufacturers such as Taiwan’s Foxconn to develop devices that are cheap, light and easy to handle. And last, but certainly not the least, he dangled the irresistible bait of a tariff plan that makes voice free forever—and data affordable, though the jury is still out on this one. In a freebie-obsessed, price-sensitive market, the plan looked a winner (see boxes: Supply Shock: Jio Tariff Plans, Reliance Jio: What’s on Offer).

To be sure, incumbent mobile telecom operators—Airtel, Vodafone and Idea—have also launched 4G LTE services, but Reliance Jio is the only one whose entire network is LTE-enabled. Jio has also made huge investments in laying fibre optic cables to ensure high quality data transmission. Besides, only Jio and Airtel, so far, have a pan-India 4G presence. Jio is also the only firm to offer Voice over LTE (VoLTE), an internet-based technology for transmitting voice data over the LTE network, offering better call quality.

The ambition is to acquire 100 million customers in the first year of operations, and, thereafter, retain those customers and keep adding more, striving to replicate what China’s state-owned mobile telephony provider, China Mobile, did in recent years. (China Mobile migrated 400 million users to LTE in a matter of 18 months, beginning 2014, at times adding 22-23 million subscribers in a single month.) Or, like South Korea or Australia, which are fast moving toward 4G-only networks, replace 2G and 3G entirely.

The first to launch 4G services in India was Bharti Airtel, which began by offering it in 296 cities in August 2015. By December 2015, Bharti had invested Rs 40,000 crore in the segment. The Aditya Birla Group-controlled Idea followed with their launch in December 2015 and Vodafone in February this year. But users have been slow to switch to 4G, largely because of the same problems they experienced with 3G—poor data transmission. For Ambani, this looks like the opportunity he had been waiting for.

“Today, India is ranked 155th in the world for mobile broadband internet access, out of 230 countries,” said Ambani, 59, at the RIL Annual General Meeting (AGM) of shareholders in Mumbai on September 1. “Jio is conceived to change this. I have no doubt that with the launch of Jio, India’s rank will rise to among the top ten.” The audience cheered, but not the markets, as concerned investors gave a thumbs down to the move, driving RIL shares down 2.7 per cent to close at Rs 1,029 on the day, wiping out Rs 9,400 crore in market value. The fear was that with such an aggressive investment, without clarity on when the money could be recouped, RIL would bleed not only rival telecom operators but even hamper its own prospects in the near term.

With the launch of cheap, high quality access to data, the digitalisation of a whole gamut of services is expected to be quick, and the consequences, far-reaching. E-governance, e-learning and e-healthcare—all buzzword services that were lost in implementation, largely because of the slow adoption of digital technology—are now expected to blossom. Ambani did not miss the opportunity to align his plans with Prime Minister Narendra Modi’s vision of a ‘Digital India’; however, this was not without its costs. The day after the AGM, a Jio advertisement on the front pages of national newspapers, featuring a photograph of the PM, came in for severe criticism on social media as it appeared to show the PM publicly endorsing the product. While RIL sources said they did not think it was wrong to use the PM’s photograph in the advertisement, stating that there was ample precedent for such campaigns, many believe that the controversy was something RIL could have done without.

India has 900 million active mobile telephony subscribers (more accurately, 900 million active SIM cards), of which about 254 million are served by Airtel (see chart: Pie in the Sky). Other big players are Vodafone with 198 million, Idea with 175 million and RCom with 101 million. As in his other businesses, Ambani seems to be playing a lowprice, high-volume game with Jio, and in the process, is disrupting the market, stunning rivals and exciting prospective customers—at least for now. Jio is also expected to help the mobile broadband market achieve its target of around 650 million users by 2020. “From 132 million to 650 million mobile broadband users by 2020 needs a revolution. It’s begun with Reliance Jio,” tweeted Mahindra Group chairman Anand Mahindra immediately after Ambani’s muchpublicised speech.

“Make no mistake, this is war,” says Romal Shetty, a partner with consulting firm KPMG India. “In the immediate short term, that is, three to four months, everything is for free. Even if it is [only] for 10-20 million subscribers, it can disrupt the market.” This could lead to a significant dip in the revenues of rival firms, which have been getting three-quarters of their revenues out of voice services. “For the next 12-18 months, there will be pain for incumbents,” he adds. India has only 7 million 4G subscribers, say reports, and the segment is growing at 10-15

Make no mistake, this is war. Even if it is only for 10-20 million subscribers, it can disrupt the market ROMAL SHETTY, KPMG INDIA