In 2010, one of India's most dominant companies returned to the telecommunications space.
In ten years, they flipped the table on all of India's telecom incumbents and came out on top.
Reliance Jio (renamed to Jio Platforms later on, but I will stick to Reliance Jio)
leveraged a $30 billion network to remake the Indian telecom industry
and bring cheap data to the whole country.
Jio's entry has literally remade the Indian digital economy. In this video, I want to look
back at how Reliance Jio entered one of India's most competitive industries, won leading share
in that market against established incumbents, and won of the love of America's tech titans.
Over the years, Reliance Industries has gone from textiles to petrochemicals to retail and more.
Its journey made founder Dhirubhai Ambani one of India's richest men.
Reliance is single-handedly responsible for 9% of India's exports, with revenues 2.6% of total GDP.
Not quite Samsung in South Korea, but close.
Jio was not Reliance's first entry into the telecom market. In 2002, the group launched
Reliance Communications (RCOM) with the goal of bringing cheap voice services to the market.
The effort would be spearheaded by Dhirubhai's first son, Mukesh.
The elder Ambani noticed that in India it was cheaper to send a postcard than to make
a phone call. Phone calls were so expensive that an entire industry grew up around
missed calls - which are free. Some 30% of all mobile calls in the early 2000s
were missed, deliberately made to convey some pre-agreed message.
Dhirubhai saw an opportunity to remake India's telecommunications market
and make it accessible for everyone. But he never had a chance to make good on his vision.
That year in 2002, he suffered a stroke and died at the age of 69.
Reliance Communications did well without its founder, at first.
They would eventually acquire over 115 million customers and was considered a
leading player. But it would eventually lose that place and fall back into the telecom pack.
After Dhirubhai's death, a dispute arose between his older son Mukesh and younger son Anil.
Their mother resolved the dispute in 2005 by carving out Reliance's finance,
power infrastructure, and telecoms arms to create Reliance ADA Group. Anil would run that company.
The two companies had a non-compete agreement that kept Mukesh and Reliance Industries
from entering the telecoms space. This period lasted until 2010,
when the brothers ended it in an attempt to make peace with one another.
India's mobile telecom industry is the second largest in the world
after China with over a billion telephone subscribers.
The market is also one of the world's most competitive.
On the eve of Jio's launch in 2016, eight players held at least 5% market share.
The leader was Airtel with 24% market share. The company is a low-cost provider
famous for being the first telecom to outsource all of its business operations
except for marketing, sales and finance.
Vodafone and Idea had market shares in the mid-teens back then.
Vodafone India was a joint venture purchased by British multinational Vodafone Group in 2011. Idea
had been a subsidiary of Indian agribusiness and chemicals company Aditya Birla Group.
The rest of the market was held by telecoms Aircel, Reliance Communications, state-owned BNSL,
Tata Dococomo and Telenor. None of them had more than 10% share, with the smallest having 5%.
The scattered state of the Indian telecom market led people to believe
that there were no profits to be had here. Consumers are extremely
price sensitive and the cost to switch from one provider to another is extremely low.
Each competitor would just grind each other into dust. Jio sought to prove them wrong.
Soon after the Ambani brothers ended their non-compete agreement in 2010,
Reliance Industries paid $670 million for 95% of an unlisted internet service company
called Infotel Broadband Services Limited (IBSL).
India's telecom space is split into 22 circles. IBSL had successfully bid for
4G wireless broadband spectrum across all of those 22 circles. Such spectrum had not been interesting
to the rest of the telecom industry, who focused on 3G spectrum being sold in the same auction.
After its "acquisition", IBSL was renamed Reliance Jio Infocomm Limited.
Jio is a Hindi language word that means "to live".
Mukesh Ambani would later say that "Jio means to live and to be alive to every opportunity."
The company began to build a countrywide network of optic fiber cables and infrastructure.
At this point, Jio seemed to be heading towards becoming an independent internet service provider.
But here's the twist. They wanted be more than just that. Reliance has long
relied on a cozy relationship with the Indian Government. Jio's mission aligned with incoming
Indian Prime Minister Narendra Modi's goals for infrastructure development and service quality.
In 2013, the Indian government changed the game. They allowed Jio to provide voice telephone
services with its internet service license. This is a big deal. Voice makes up 70-85% of India's
telecom sector revenues. Previously this would have required a separate license. Now, no longer.
Jio now had backdoor entry into the telecom industry with its data carrier network,
using a 4G wireless communication standard called Voice over LTE.
From 2010 to 2017, Jio built the world's largest 4G and LTE-only network. It involved 250,000
kilometers of fiber optic cables and 90,000 4G towers. Built in partnership with foreign
network providers like British Telecom and Deutsche Telecom, the network was green field.
Green field means to be built from scratch. This offered vast advantages
over its competitors - whose networks were upgraded from the 2G and 3G days.
As they built up their massive $30 billion network,
Jio's management did extensive research on the Indian telecom industry.
The research found that people were paying too much for data services. Only 24.3% of the Indian
population accessed the mobile web in 2016. The average Indian consumer used 400 MB of data per
month. This falls far short of what is needed in a world with YouTube, Facebook and the mobile web.
As I mentioned earlier, the Indian telecoms made their money from voice services so they saw no
reason to invest in data. Jio saw an opportunity to win at their competitors' expense. They would
leverage their greenfield 4G network to strike at where the incumbents made their money.
On September 2016, Mukesh Ambani launched Jio with an address at
Reliance Industry's 42nd Annual General Meeting.
In it, he made four announcements that would forever change the Indian telecom industry.
First, Jio would never charge for voice calls within India.
The first 100 SMS each day would be free. Customers are paying only for the data.
Second, Jio would have the cheapest data rates in the world.
One GB of data would cost about 50 Indian rupees, or 70 American cents.
Third, they launched ten plans that drastically undercut the competition,
including those of industry leader Airtel.
Fourth, the company announced a shocking "Welcome Offer". Jio customers can easily register for
a free SIM card in just 15 minutes. And for the first 5 months, until December 31, 2016,
they got free unlimited calls, SMS, and data (4 GB daily usage).
This offer would later be extended to March 31, 2017 with the "Happy New
Year" offer. The 4GB daily usage limit would be dialed down to 1 GB though.
Later in February 2017, the company introduced Jio Prime, an exclusive membership program.
Those who subscribe for 99 rupees a year get even better data prices and additional
perks. The company followed that up with yet more sales and promotions.
To get the word out, the company hired some of India's most famous faces.
They signed up actor-producer Shahrukh Khan, known as the King of Bollywood, to pitch the service.
He would serve as their brand ambassador and appear in several commercials.
Jio also splashed who knows how much money to sponsor seven teams in the Indian Premier League,
the world's most attended cricket league. Idea Cellular in comparison only sponsored one. The
seven teams, normally rivals, would come out and dance as one to a Jio jingle, a powerful message.
The company's networks were state of the art, but are not compatible with older 3G phones.
So consumers needed to upgrade their hardware. To help with this,
Jio opened a subsidiary to provide 4G LTE phones for their customers.
The LYF brand as it is known would become the second largest LTE phone provider in India,
and the fifth largest overall. Their Jio Phone brand would also be quite popular,
briefly selling out during the pandemic.
Jio's launch offer shook the entire industry to the core. It took 12 years for Airtel to
gain 50 million subscribers. For Vodafone India and Idea both, it took 13 years.
Jio got there in just 83 days after launch. Jio was adding 600,000 subscribers a day.
Mukesh Ambani said that the company was adding 7 customers to its network
each second, every day for the first 170 days of its launch.
People waiting in long lines to get their Jio SIM card.
Free application forms were being sold for a hundred rupees or $1.40 on the black market.
Jio changed the entire Indian telecom market. Average Revenue per User or
ARPU for the entire industry fell from 122 rupees to 104 rupees in a single quarter.
The rest of the market had to retool their plans to match.
Airtel slashed the prices for their 4G/3G data plans by 80%. Idea Cellular, 60%.
This move hit them on both the revenue and cost sides.
Jio users consumed 30x the amount of data of the traditional subscriber,
over 11 GB a month. Incumbents had to shell out a lot of money to upgrade their networks.
The incumbents launched legal attacks against Jio's pricing strategies.
Airtel and others approached the Competition Commission of India or CCI
to accuse Jio of indulging in "predatory pricing" - selling its
services under its variable cost with the sole intention of eliminating competitors.
In June 2017, the CCI rejected Airtel's case
on the basis of Jio being a new entrant to the market.
In the end, Jio's entry forced a wave of bankruptcies and mergers.
Vodafone India, having lost 10% off their margins,
merged with Idea Cellular. Bharti acquired Telenor India. Reliance Communications,
the old one operated by Anil Ambani, filed for bankruptcy and its assets sold to Jio.
The eight or so telecom providers operating in the market as of 2016 consolidated down to four,
with Jio the leader.
Reliance Jio successfully grabbed a huge share of the market,
but at its heart Reliance Industries remains a petrochemical company. Its Digital Services arm
is growing very well, but that arm's revenue makes up a few percentage points of the overall entity.
But the ten year investment spree and four year telecom battle left Reliance with over $20 billion
of net debt. Stockholders began feeling some concern - with the net debt to equity ratio
rising 10x since 2013. Credit Suisse and other analysts cut the company's stock to underperform.
Mukesh got up in front of them and pledged to pay all of that money back. And thus he did.
First, Jio spun off its optical fiber and tower networks into separate companies.
Canadian company Brookfield bought the towers.
Then Reliance attempted to sell a 20% share of its
Reliance oil-to-chemical division to state oil company Saudi Aramco. That
deal unfortunately fell through as the pandemic swept across the world and crashed oil prices.
(Those talks seem to have revived as of late.)
Going to their backup plan, Reliance turned to Western internet firms, very quickly striking
deals over Zoom. They led with their big investor: Facebook, who paid $5.7 billion for a 9.9% stake.
After that, a raft of private equity investors like KKR,
General Atlantic, Silver Lake, TPG, the Abu Dhabi Sovereign Wealth Fund and the Saudi
Arabian Sovereign Wealth Fund. Google closed off the round with a cool $4.5 billion of their own.
All in all, the company sold a 32.97% stake in Reliance Jio Platforms for a cool $21 billion.
Mukesh is selling investors on the idea that Jio would be the fabric
that unifies the various arms of Reliance Industries into a single coherent unit.
More than a few people have pointed out Reliance's tendency to vertically integrate
and advance up the value chain. Jio started on infrastructure with internet services.
And it has been selling phones in bulk for a while now.
The final step up would be create that single consumer service.
A SuperApp that weaves together all of Jio's various media,
retail and telecom services. I have my doubts about it but let's see what will happen.
Under the table, I think a lot of investors also recognize that the
Indian Government is quietly closing off Indian market access to Chinese vendors.
This leaves room for an Indian national champion. Reliance's politically savvy
position and close ties to the government make it a good bet to be that champion.
Meanwhile, the telecom unit is seeking to monetize and grow revenues without losing its
leading market share position. The company has started rolling out fiber to home connectivity
and offering customers a triple play bundle of cable TV, broadband internet and mobile service.
Then after that, selling adjacent value-added services. Standard telecom playbook.
I am particularly interested that the company gave an entire slide
in its investor presentation deck to its home IOT experiences offerings.
Those efforts are starting to pay off. In its Q3 2021 results,
Reliance reported that Retail and Digital drove 56% of incremental EBITDA. Though I think that
might have more to do with the terrible oil and petrochemical business environment than anything.
Digital EBTIDA rose 48% from the previous year.
One can argue that the company is a cash cow already.
Today, India is the second largest internet market in the world.
Jio has transformed the country's digital economy and brought millions of people online.
There is no doubt that the company's infrastructure investment will be profitable.
American companies like AT&T, Comcast and Charter
churn out billions in cash from their triple play internet service bundles.
Facebook and other investors valued the Jio business at about $60 billion.
The company is already on a $10 billion revenue run rate on an annualized basis.
The investor presentation also says that EBITDA margins are 44% in the
past quarter. That seems high to me, though, to be honest.
Assuming the company hits $10 billion annual revenues next year
while maintaining that EBITDA margin, the $60 billion valuation would be a bargain.
No wonder all those funds invested money, it is probably going to be a good deal.
But thus far, Jio seems to be following the standard broadband internet company playbook.
Nobody is going to complain, because it is a very successful playbook. But no one is writing long
tech newsletters about value added internet services and triple play broadband bundles.
My big question is if Jio can live up to the expectations and dreams
that those tech bloggers in Silicon Valley have dancing in their heads.