On 1 July 2003, Reliance Infocomm lobbed a grenade into India’s telecom sector, offering handsets for just Rs 501. The ‘Monsoon Hungama’ offer allowed it to rack up over a million subscribers in just 10 days.
By the time, it realised that giving away stuff for free would only attract those who wanted free stuff, it was too late. The adverse selection would saddle Reliance with a low-paying, marginal user base that it would find impossible to outgrow later on.
13 years later, on 1 September 2016, Reliance would again lob a grenade into the same sector, this time as Jio. Having spent over Rs 1,50,000 crore (over $20 billion) to buy spectrum and build a pan-India 4G network, it decided to give away its product free of cost to customers. In just over four months, it had signed up over 72 million subscribers.
Unfortunately for Reliance, the same adverse selection that plagued its original gambit, seems to be in store for it this time round too. Unless it can pull off something that no telecom operator in the world has ever done.
The giant sucking sound
“Jio has hurt revenue and realisation from services for other players, all of which have come down very drastically. I see no sign of that picking up in the short term. That’s a big concern. And it’s very clear Jio will continue to do this till it acquires its desired market share, even though right now that’s traffic market share, not revenue market share (since Jio is not yet billing). But even that is hurting the revenue of other players,” says Mahesh Uppal, a director with ComFirst, a consultancy that specialises in telecom.
In case you weren’t keeping track, Reliance Jio’s share of wireless data traffic is 94%, compared to approximately 2% each for Airtel, Vodafone and Idea. This is according to a recent research report by Credit Suisse.
Doesn’t matter that its revenue share is 0% because by offering its services free of cost (since September, and as of this article being published, with no firm date on when it would start charging), Jio has forced existing companies to drop prices and increase data caps.
Airtel for one seems to have prepared itself for exactly this. It improved its profit margins (EBITDA) from less than 30% in 2013 to nearly 40% by the time Reliance Jio launched, thus giving it the cushion to cut prices.
But Idea had no such cushion, and reported its first quarterly loss in January, blaming largely Reliance Jio’s disruptive entry. To survive, it is seeking to merge with Vodafone, thus becoming the largest player in the market.
As for everyone else, there isn’t a snowball’s chance in hell.
From elimination to consolidation
In 2008, the Congress-led government allowed 13-14 operators per license circle, betting that India would buck global trends by being able to sustain more than 4-5 serious operators.