Reliance JIO - Cheapest Telecom Services in World

By: Sayam Verma

Reliance Industries launched its much-anticipated new 4G telecom network, Jio also known as Reliance Jio officially Reliance Jio Infocomm Limited, on Thursday, offering free voice calls and data services at very low tariffs. RIL chairman Mukesh Ambani, India’s richest man, announced the launch of Jio at the company’s 42nd annual general meeting in Mumbai. The move is a potential game changer that could fuel an all-out price war in a market of 950 odd million mobile subscribers in India.

Takeaways of the plan are:

•        Domestic voice calls free, no roaming charge.
•        Data will be cheap- 5 paise per MB. Higher the consumption, lower the rate.
•        Anyone with a valid student ID Card will get 25% more data.
•        No increase in rates on Diwali or New Year.
•        Jio is a 4G-LTE service, available in 2 lakh villages and 18,000 towns.
•        Will offer 1mn public Wi-Fi hotspots by mid-2017.
•        Open to all users with 4G- VoLTE (voice over LTE) phones from September 5. Services free      till Dec 31.
•        Aadhar card holders promised a connection in 15 minutes
•        Apps free till Dec 2017.
•        Jio TV will have more than 300 live channels.

The aggressive pricing sent shares of established telecom players into a nosedive and brought back memories of 2003. In 2003, Mukesh Ambani-controlled Reliance India Mobile stormed the market with a “Monsoon Hungama” scheme, which offered mobile connection and a handset at R501. As incumbent operators jostled to keep their customer base intact, the tariffs plunged, making mobile phones affordable for millions and breaking down class barriers. From about Rs.5 then, a call now costs as low as 45 paise per minute despite intervening years of inflation and growth that makes the rupee go less far. With voice calls no longer expected to remain the dominant money spinner, a similar tariff war looks imminent on data services as browsing battles move to palmtops.

Earlier this week, Airtel announced a significant cut of 80% in its prepaid data tariff in a move widely attributed to Jio’s anticipated entry.

On Thursday, the telecom companies took a beating in the stock market. Idea Cellular shares plunged 10.50% to `83.70, Anil Ambani’s Reliance Communications tumbled 8.8% to `49.15 and Bharti Airtel’s slipped 6.4% to `310.70. This could hurt voice tariffs and average revenue per user of existing operators as well as push them to match the pricing, in a bid to protect their market share.

Implications:

·        EBITDA (earnings before interest, taxes, depreciation and amortisation) margins in the telecom industry to drop 250-300 basis points in 2016-17 and remain under pressure in the next fiscal as well.

·       Reliance Jio’s price aggression is expected to exacerbate pressure on both revenue growth and profitability of existing operators.

Reliance’s Jio effect:

Reliance’s  Jio offer will push smaller mobile service providers such as Aircel, Telenor India, Tata Teleservices and Reliance Communications to the fringes, if not to exit altogether but in the medium term, Reliance Jio will ensure the likes of Aircel, Telenor India, Tata Teleservices and RCom will exit. These weaker operators are dependent on cheap voice and not invested in data networks. These (weaker operators) still account for 25% of industry revenue and a likely 35%­40% volume share, given their low pricing. Weaker players with constrained financials will not be able to replicate Jio's aggressive offers, and hence would eventually cede revenue share to the new 4G entrant. It is expected that the telecom arm of Reliance Industries will corner 10% revenue share of the mobile market in five years.

CHALLENGES IN CUSTOMER ACQUISITION:

·       Reliance Jio enters the telecom market when there are three established players- Bharti Airtel, Vodafone India and Idea Cellular. They collectively account for 75% of the revenue market share. Jio will have to poach customers from existing operators rather than expanding the market.

·       Unlike 2002, there are users with mobile devices. Hence, Jio will have to demonstrate the value of the internet sufficiently for consumption to upgrade their device at a minimum cost of Rs. 3000.

It is expected that all telecoms would be vulnerable to Jio's free voice offer. RCom is considered relatively more vulnerable in listed telecoms, as high-end dongle subs and low-end price sensitive subs are churning out faster to avail of Jio's services. According to analysts, the voice market is significantly fragmented due to the dual SIM phenomenon, especially since new GSM entrants like Aircel, RCom, Telenor and Tata Tele collectively command 31% of minutes' market share. It is expected that accelerated consolidation will happen in the voice market that will ring in a single SIM market in the coming days.