Reliance Jio: The shakeup goes beyond tariffs


After a prolonged wait, Jio has decided that the network, device, internet and consumer ecosystem is ready for its plans and launched commercial service. Tariff plans announced are disruptive, though not totally unexpected. Incumbent players have had ample time to plan and will fight back, but this clearly is Jio’s moment, one that has been 6 years in waiting.

I think this is just the opening gambit as it is all free till December 2016, which will be the next opportunity for players and customers to evaluate the situation and take a fresh guard. Product, pricing and regulatory changes by their nature will continue to evolve as response to competition and technology.

Lot of analysis is being done on Jio’s tariff plans and how they compare to other operators, the more interesting aspect is the direction Jio has set for the industry and how it can structurally transform India’s telecom and internet markets.

Data consumption

As the dust settles, we will see a more consolidated industry and lower pricing, which is good news for customers in a poor country like India. With limited consumer spending power, the average revenue per user (ARPU) has, and probably will, remain at around Rs. 200 per month. However, what will change drastically, is what a consumer can get with that money.

Currently, apart from the top 20 million, consumers use approximately 300-400 minutes per month for voice calls. On average these cost about Rs. 180 per month, leaving subscribers Rs. 20 to spend on data, which is priced at ~Rs. 200 per GB. No wonder, subscribers beyond the top 100 million have been consuming under 50 MB of data per month. This is also evident from the fact that only 10% of subscribers have opted for 3G and data growth has been slowing down.

With Jio making voice calls free, it has essentially given an average subscriber ~Rs. 200 to use for data. As effective data price drops to ~Rs.100 /GB, these subscribers will be able to consume over 1 GB of data per month in addition to voice. That is 10X more data usage for customer number 100 million to 500 million.

If public Wi-Fi also ramps up substantially, and Jio alone is claiming a million access points by mid-2017; that can further support low-priced data consumption for the masses.

Broader impact

Broad based surge in data usage will have transformative effect on lives of customers and businesses that deal with them. Most of these new data customers will not have desktops and make choices regarding their smartphone applications for ecommerce, messaging, media content, payment bank, etc. Internet companies that are struggling to get scale, targeting just top 20 million customers, could get a much larger addressable market. Jio also has a large suite of content and services and intent to be an integrated digital life player. To what extent its walled garden works versus existing internet and ecommerce companies should be the other interesting battle; expect net neutrality debate to continue in new avatars.

While tariffs are compelling (actually free for now!), getting a 4G Volte (Voice over LTE) enabled handset in enough customers’ hands is a big challenge. Cheapest 4G Volte handset at Rs. 3000/- is still unaffordable for many customers. Free voice offers should incentivize many to stretch their budgets; further helped by 4 months of free service, which is like a Rs. 1000+ cashback on buying a 4G device!

Smartphones already account for ~25% penetration and 45% shipments of mobile phones. With lower device price, free voice and cheaper data, smartphone value proposition should improve dramatically over feature phones. Expect Jio and other operators to come with pricing disruptions/ discounting through content and applications to enhance attractiveness of the offer. Together, this should lead to a surge in smartphone penetration, most of them 4G, as 3G loses mindshare and relevance. It is pertinent to note that almost 80% of smartphones in India are dual SIM and Jio with its fundamentally different offering, could be well placed to occupy one of those two slots.

A key reason Jio can offer free voice is that its 4G VoLTE network allows it to carry voice as data and it has no legacy 2G/3G networks. Assuming ~200 MB of data will suffice for most customers’ monthly voice need, Jio needs to dedicate less than 10% of its network capacity to voice. Incumbent operators carry circuit switched voice and assign over 80% of their 2G and 50% of 3G network capacity to voice traffic; which so far has been providing ~80% of revenues.

By targeting zero (or low) revenues from this 10% voice capacity, Jio is shifting value (pricing) from voice to data, putting pressure on existing players’ to repurpose their network and align costs with revenues, Such an exercise takes time and investments and needs to be done even as voice revenues decline. Incumbents also need to cater to a large feature phone base and a potential surge in voice and data traffic (along with demand to improve 2G network quality!). How well the existing operators can pace the decline in voice revenues while transforming their networks will determine the financial impact on their business.

Future trends

Now that the script is unravelling, let me be bold enough to make some prediction on how Indian market will play out over next 4 years.

By 2020, of ~800 million phones, over 500 million will be smartphones
All Smartphones will be 4G (or 5G) and consume 2GB+ of data per month; 3G handset shipments will stop in 2017
3G networks could start shutting down in 3 years – expensive 2100 MHz spectrum will be re-farmed for a more efficient LTE network architecture
2G networks will be scaled down in terms of capacity – we could see more 2G network sharing across operators to optimize cost of serving the dwindling feature phone user base
Evolution of India could also provide a template for other developing countries that have been stuck with stagnant data revenues, as consumers have limited budget leftover for data after paying for voice. It will depend on when an operator will make (or regulator will push) the switch from legacy to a 4G only network and reprice voice as data.

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