Here’s how Mukesh Ambani’s Reliance Jio may generate over Rs 20,000 crore in one year

When Ambani announced the arrival of Jio in the Indian market, it completely disrupted the telecom sector, and with several extensions of the trial period, the company continues to defy every logic of economics.

Here’s how Mukesh Ambani’s Reliance Jio may generate over Rs 20,000 crore in one year
Reliance Jio essentially used brute force of massive money in order to change the historical course of an industry which was in a way well established within its limitations. (Reuters)

Was RIL Chairman and MD Mukesh Ambani, the Indian businessman of the year? Inarguably, so. When Ambani announced the arrival of Jio in the Indian market, it completely disrupted the telecom sector, and with several extensions of the trial period, the company continues to defy every logic of economics. Interestingly, even after spending a humongous amount of resources on Jio, there was practically no negative effect on the man himself. As a matter of fact, according to Bloomberg Billionaires Index, Ambani’s personal wealth increased by $6 billion in a year. According to Bloomberg, the rise in wealth can be attributed to his huge stakes in Reliance Industries. It has been said that even though Jio was a free service, it aided RIL’s stocks to roar. This is just a highlight of the great business sense that the country’s richest person has.

Reliance Jio recently announced two extensions of its services. One of them is a 15-day extension for those who still have not signed up for Jio Prime Membership, and the other one is a 3-month continuation of freebies, named as ‘Summer Surprise’. Jio essentially used the brute force of massive money in order to change the historical course of an industry which was in a way well established within its limitations. Now, with the recent extension, Jio appears to have used a huge chunk of revenue collected from the 72 million customers who paid the Jio Prime membership fee. The interesting thing to note in 3 months Summer Surprise extension is that Jio is providing the complementary service to users who have signed up as a Prime member or will do so until April 15. The benefits to such users will accrue to them till July. Masterstroke!

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While many people, tied to normal business sense may not be able to comprehend the reason behind such an unconventional approach to losing millions of dollars by Jio, but, unconventional is what Jio is. While we can understand Jio’s motive behind the launch of its product (new product, may not work out), Welcome offer (less user feedback, unsure over loyal customer base) and Happy New Year offer (product is popular now, connectivity issues). But the recent extension is a little confusing. Jio said that it already has 72 million users as Prime members. This essentially gives Jio a connect to over half the 4G smartphones in India. Yet, Ambani decided to keep extending the offer.

Meanwhile, Moody’s Investor Service has reportedly projected that Jio could generate revenues of Rs 21,300 crore for the current fiscal ending March 2018. Yet it added that it will be a drag when it comes to other RIL firms for a couple of years. This is understandable because if most of the Jio Prime members go for the Rs 303 plan for 28 days, this revenue will not be difficult for Jio to achieve. But this also means that the customers should be given services good enough that people stay loyal once the 28-day commitment ends. Meanwhile, Kotak Institutional Equities had said that Jio’s Prime membership of 72 million customers right now is larger than the ‘most sanguine expectations’ its expectation is that Jio’s subscriber base to rise and reach to 211million by end of the fiscal year 2023 and its ARPU will be around Rs 245-250 per month. Meanwhile, a Goldman Sachs had recently, in a report said that only 50 million subscribers out of the 72 million will likely stay as paying subscribers for Jio by March 2018.

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If we look at the history of Reliance, following an ownership issue between the Ambani brothers, it was Anil who got Reliance communications. Back then there was a non-compete clause, which stopped Mukesh from starting his own telecom company. But this was scrapped in the year 2010. In the same year, Mukesh Ambani laid the foundation for Reliance Jio by buying a 96 percent stake in Infotel Broadband Services Limited (IBSL). In 2013, this company was named as Reliance Jio Infocomm Limited (RJIL). This decision may not have been a rivalry thing, but at least it made a lot of business sense. Jio had already started doing the groundwork and laid the fibre optics network all across India. Ambani, the businessman, knew that while the service during that time was not great in India, he can easily compete in the market. With the surge in information technology and schemes like Digital India defining India right now, the decision makes, even more, sense as telecom is one of the most lucrative businesses. Here are a few possible ways Jio is planning to make money in this sector:

Jio will probably make more money by giving its users free calls than other incumbents can by charging you for it. The monthly average revenue per user (ARPU) in India, for telcos, is generally around Rs 130 to Rs 150. ARPU is essentially the revenue a company generates per month per user. So, if a user spends relatively more money than this, he/she becomes a high-value customer. Meanwhile, if we look at the tariff plans of Jio, their minimum plan is of Rs149 which is applicable for 28 days. The Rs 149 plan basically gives the user free calls and a negligible amount of internet. This means that you as a Jio users are anyway paying the company around Rs 150, which is the ARPU. So, anything paid above it is a profit, and automatically raises the revenue of the company per user. So, Jio is basically giving the user more than other companies, yet is earning more.

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Technically, after Rs 149, there is the Rs 303 and the Rs 499 plan for moderate internet users, which is a huge gap. The rates in the middle (Rs 19, Rs 199 and Rs 299) have less validity, so you end up paying more anyway. Again, there is no plan between Rs 499 and Rs 999. This is a fine example of great pricing. Also, one needs to understand that every tariff plan is valid for 28 days. While as a user we may not care about it much, it makes a lot of sense from Jio’s perspective. If we divide a year by 28 days, We get 13 cycles, which practically gives the company the revenue for an extra month which the user has to pay for. Again, unconventional business mathematics.

Meanwhile, Morgan Stanley has reportedly said that it was positively surprised by the number of new subscribers and expected that telecom business will break even on EBIDTA (earnings before interest, depreciation, taxation and amortisation) but in the 2nd year of operations.

How does Jio provide free calls then, you ask? How big is the loss? Well, not as much as it appears to be. Airtel, Vodafone and the likes are incumbents because they already had a 2G/3G network laid out to launch its 4G plans, but Jio being a new player in the market had to find another way to do it. 4G, unlike 2G or 3G, is an IP network. This means from your voice to video to data to everything else goes over IP. Jio could manage that, much better instead of laying out wires all across the country. This was also helped by the fact that, while Airtel and Vodafone had to upgrade their 2G/3G network, Jio only had to concentrate on its 4G. Reliance Jio has a big advantage here as it started its technology with 4G. It knows what is the bandwidth requirement to lay its fibre backbone for at least a couple of generations. It reportedly has the largest fibre backbone anyway and has beaten Airtel along the way too. It is because of this network, Jio is the only company to introduce HD Voice and Video. The biggest profit here is that IP infrastructure costs a lot less than GSM/SS7 infrastructure which is used in 2G or 3G.

Any other source of revenue generation? Yes, Jio applications. While the Jio apps appear to be unassuming right now, the potential is vast. With Jio Play, Jio Beats, JioMags, JioOnDemand and JioMoney, the company has made the right choices where it, at some point in time, can aggressively compete with market leaders in the respective sector. JioMoney can be a threat to PayTm, JioPlay can easy counter NetFlix and Amazon and so on. Once Jio is able to lure in enough consumer of its services it won’t take the time to get them addicted to the service.

Deutsche Bank made a very interesting point when it said that Jio has been using, ‘fear of missing out’ dynamic in order to retain subscribers on its network.

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Will you be paying less? And are Reliance Jio’s decisions good? Yes, and Yes. If you are a heavy user of calling and data surfing, you will see reduced bills. But what Jio is making you do, is what all tech companies have been trying- to make you addicted to the internet. So eventually users will get more used to the internet and end up using a lot more of it, which means paying more money. So as of now, with free calls and many other free offers, everything is lucrative and great. The bold moves by Jio are good too.With more investments in India, it means reduced prices for the common man and more employment too. In conclusion, this is a win-win situation for all. Users get double the benefits, yet the company earns the same as other companies and some more.

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First published on: 06-04-2017 at 18:46 IST