Will Mukesh Ambani’s $14 billion telecom bet pay off?

India’s richest man is counting on R-Jio to snare users on the strength of a network that promises to deliver a full suite of high-quality digital services at speeds competitors can’t match

Mumbai: The last Sunday of 2015 was momentous for employees and business partners of billionaire Mukesh Ambani’s Reliance Industries Ltd (RIL).

About 35,000 RIL employees gathered at Reliance Corporate Park in the satellite town of Navi Mumbai that day (27 December) to hear Ambani on the eve of his late father Dhirubhai Ambani’s 83rd birthday. Some 150,000 more employees and business partners at RIL’s 1,100 locations across India were connected through conferencing facilities to watch the proceedings live.

Ambani began his speech by stressing how they all were “…truly connected with each other, on the power of the Jio network”. Jio is the brand of the fourth-generation (4G) mobile-phone services being launched by RIL’s telecom unit Reliance Jio Infocomm Ltd (R-Jio).

While the media was not invited to the RIL event at which Mukesh Ambani’s wife Nita, sons Akash and Anant and daughter Isha, film star Shah Rukh Khan and music maestro A.R. Rahman livened up the party, RIL shared Ambani’s speech with the press that very day.

Among other things, Ambani urged all present to “…welcome our newest and youngest member in our family—Jio” while inviting all employees of his group, which has interests in oil and gas to retail and now telecom, to be “the first to experience Jio’s services, starting tomorrow and the coming weeks”.

“…I am also counting on you, as a part of my family, to be a part of co-creating the best experience for all our customers,” Ambani concluded at the soft launch, which will pave the way to the much-delayed commercial rollout of R-Jio’s ambitious pan-India 4G service that will offer high-speed data transfers and video streaming.

Heavy investment

Ambani’s impassioned plea to his employees is understandable, given that the hefty investment in R-Jio has made RIL a net debt company—from a net cash one.

After unveiling its annual results in April 2015, Reliance Industries said it was investing $14 billion, or around Rs.85,000 crore, in the telecom venture.

The fact, however, remains that R-Jio—which has consistently belied analyst and media expectations of the commercial launch date—is primarily banking on convincing existing and potential users that its voice-over-LTE (VoLTE) network will deliver a much better voice and data service than what its competitors offer.

LTE is short for long-term evolution, a mobile telephony technology standard.

VoLTE allows users to make voice calls over the LTE (typically marketed as 4G LTE) network that has a higher speed than 2G or 3G ones that were designed primarily for voice calls. It does so by enabling Internet Protocol (IP)-based or data-based calls.

Globally, VoLTE seems to be catching the fancy of telecom services providers (telcos). According to a 2 November note by the Global Mobile Suppliers Association (GSA), 111 operators are investing in VoLTE-related services in 52 countries. Of these, 30 operators have commercially launched VoLTE-HD voice service in 21 countries.

As opposed to standard digital telephony, HD (high definition) voice, or wideband audio, provides better quality speech by extending the frequency range of audio signals transmitted over telephone lines.

In September, for instance, Hutchison 3G UK Ltd became the first network (called Three) in the UK to enable VoLTE, especially to capitalize on the lower frequency 800MHz band that allows signals to penetrate walls much better than the higher frequency 900MHz, 1800MHz, 2100MHz and 2300MHz bands.

Similarly, operators are investing in VoLTE networks in countries such as South Korea, Singapore, Japan and China.

But while the 4G data services of India’s big three telecom services providers—Bharti Airtel Ltd, Idea Cellular Ltd and Vodafone India Ltd—can be used on any 4G-enabled handset to make voice calls, too, potential R-Jio subscribers will not only have to buy a handset that is 4G-enabled but one that necessarily features VoLTE, too, if they also want to make voice calls.

Competitive market

India has over one billion wireless phones, of which smartphones account for a little over 10%. According to a 23 November note by research firm International Data Corporation (IDC), the growth in the smartphone market was aided by the rising demand for affordable 4G-enabled devices that “witnessed almost a three-fold increase in unit shipments over the preceding quarter”.

Not all 4G-enabled smartphones in India feature VoLTE. This, caution analysts, could prove a dampener for smartphone users to migrate to R-Jio services in a market that is very competitive, especially in urban areas.

Kunal Bajaj, a former consultant to the Telecom Regulatory Authority of India (Trai), pointed out that “most phones will not support VoLTE by default as the technology is not available in all 4G smartphones”.

“An R-Jio SIM card will run on your phone but will only give you data service and not voice…. In that, they will be completely similar to any other company offering 4G. But, currently, mostly high-end phones provide that feature,” he said.

With R-Jio having already launched its service for employees and business partners, he said the initial feedback in terms of data and voice service has been very good.

Now, the challenge is to continue offering the same quality of service, especially in terms of voice, when the company goes for a commercial launch and has a million customers on its network. “This is a challenge which does not exist with its competitors as they have a fallback option on 2G and 3G network,” Bajaj pointed out.

Testing upgrades

R-Jio executives insist that handset makers can offer a software update on 4G-enabled handsets to feature VoLTE, too.

An R-Jio executive familiar with the networks and technology claimed that “several brands in India are working on testing software upgrades for their current 4G LTE handsets that are already in the market…since the industry expects more and more devices in future to be launched with the VoLTE and VoWiFi features.” The executive didn’t want to be named.

VoWiFi is short for voice over Wi-Fi, which allows users to make voice calls using Wi-Fi on their mobile devices.

Insisting that “R-Jio is not just a telecom network but a digital services company”, a second R-Jio executive, who also declined to be named, insisted that “we have built this venture de novo—from scratch. We want consumers to have a taste of true 4G services”.

According to the second executive, R-Jio is banking on the fact that most 4G phones currently available “offer only data on 4G and fall back on 2G/3G for voice delivery”, which is why “consumers need to invest in a true 4G phone that will not only have better data speeds, but also have the advanced VoLTE technology and VoWiFi…they will be better equipped to explore the full 4G advantage if they buy future-ready handsets that deliver these advantages”.

Analysts from Credit Suisse, who tested R-Jio’s network “in and around Mumbai”, said in a 14 December note that the VoLTE calls were as good as voice calls made from any phone that uses a circuit switched network (standard phones). They added that the “network coverage was on par with incumbents—we visited shopping malls, office buildings, market places, train stations. Even while travelling at high speed on a highway, the call quality was good without any drops”.

The analysts acknowledged, though, that handset availability is limited in the beta phase, with only 20 models recommended for full VoLTE functionality (starting at $130). “We suspect the list will expand soon”.

They concluded that R-Jio’s “network is turning out to be as strong a threat to incumbents as we had feared. Next focus would be on pricing and marketing execution. We see the market being surprised negatively on telco stocks. Stay cautious”.

Sales and distribution

In an email response, an R-Jio spokesperson said that besides an exclusive tie-up with handset maker Micromax Informatics Ltd, “several smartphone brands have announced exclusive sales and distribution partnerships with Reliance Retail Ltd to enhance the availability and sales of their upcoming VoLTE and VoWiFi devices across India”.

The brand names include “LG Spirit LTE, the LG G4 Stylus, Yuphoria, Yureka plus, Micromax Canvas Amaze, Yu Yunique, Intex Aqua and Lenovo Vibe shot”.

Reliance Retail, according to the spokesperson, has “strengthened its sales and distribution arm to establish a retail network of 1,200 distributors and 150,000 retail outlets that will support the evolving VoLTE and VoWiFi device ecosystem in the country”.

R-Jio is planning to competitively price its 4G services, offering a bouquet of services for Rs.300-500 per month, if one goes by Ambani’s speech at RIL’s annual shareholders meeting in June.

While analysts and media are waiting and watching, hundreds of R-Jio employees and executives have begun populating the newly-constructed building at Reliance Corporate Park.

The campus also has a learning development centre, an experience centre, two data centres (in total, seven data centres across India), a Jio hub that is one of the 1,072 hubs (that provide sales, marketing and customer care support to a given area, depending on the size and population) across the country, and a network operating centre, or NOC, that keeps an eye on R-Jio’s entire services network.

TC-22, the new building for R-Jio employees, has three wings with seven, eleven and nine floors each.

It is an open office with no cabins. “You will see unit heads sitting at tables along with their team members. Even Mr Ambani, our chairman, who visits the building at least once a week, has no cabin,” said a third company executive on condition of anonymity.

The Ambani role

The idea of an “open office” is aimed at imbibing the new millennial culture of a mobile generation and increasing collaboration among teams and executives. It is the brainchild of Akash (who handles strategy) and Isha Ambani (involved in branding and marketing), who come to work almost daily.

Mukesh Ambani visits TC-22 every Wednesday, accompanied by his close aide Manoj Modi, the executive said. The idea is to take stock of the progress that R-Jio is making as it nears the commercial launch.

“He (Mukesh Ambani) is a task master and is personally looking into all aspects of the project. Mr Ambani and Mr Modi like to keep an eye on the blueprint even as the other heads of the devices, network and apps are under pressure to meet the deadlines of their respective units. Akash and Isha are undoubtedly fast learners, but this is a very huge and complex project that needs Mr Ambani’s personal attention at this juncture,” said the third executive.

To be sure, R-Jio has also been testing its Wi-Fi services since last April when it launched Jionet—R-Jio’s exclusive website to connect to the company’s Wi-Fi network. The company also tested the Wi-Fi service for customers during a Mumbai Indians’ Indian Premier League match at Wankhede stadium in Mumbai and a few select neighbourhood pandals (tents where devotees gather) during the 10-day Ganpati festival in September in Mumbai.

R-Jio has also been testing its apps. While the firm has already launched Jio Chat, which borrows extensively from the existing free mobile text messaging application WhatsApp, it has lined up an array of more such apps to be launched in the coming months, on the lines of Google Drive, Newshunt, iTunes and Apple Wallet.

Its Jio Chat application, launched last April, has been downloaded by over 2 million people in nine countries, including the US, UK, China, the United Arab Emirates, Australia, Canada, South Africa and Singapore, according to a company statement released on 4 December.

And, at RIL’s annual general meeting on 12 June, Mukesh Ambani informed shareholders that over the next one year, the company will be launching a host of applications such as Jio Switch-and-Walk (to ensure that users who buy their phones from R-Jio can migrate data seamlessly from their old device to the new one), Jio Drive (similar to the cloud storage services from firms such as Apple Inc., Microsoft Corp. and Google Inc.), Jio Beats (music), Jio Play (games), Jio Mags (newspapers and magazines) and Jio On-Demand (video).

Payment services

The company is also preparing to launch its mobile wallet service Jio Money and Jio Money Merchant (payment bank services) for customers and shopkeepers, respectively. Many R-Jio employees, said the third executive, have already begun using their phones to pay for their food at the canteen with R-Jio’s own mobile wallet service, Jio Money.

There are also a little over 3,000 consultants that R-Jio is working with currently. These include both consultants that R-Jio has a direct contract with and sub-contracted parties.

Consultants MintAsia spoke to attested to the fact that R-Jio is currently in the pre-launch testing and stabilization phase of this large and complex network. None of them was willing to be named because of non-disclosure agreements (NDAs). All of them indicated the commercial launch will mostly likely be done in phases, with a full suite of services available by end 2016.

“First, the handsets are being rolled out. Other services will follow. You can’t launch everything at one go, else you’re asking for trouble—you do an initial launch, get feedback, loop it, solve minor problems. You start by targeting the over 85% prepaid market and expect churn to take place with a well-priced data plan that tells the customer what to expect. Aggressive pricing and packaging is the company’s strength,” said a consultant who is familiar with R-Jio’s rollout strategy.

Pricing and packaging is something Mukesh Ambani does understand well.

He did attempt to disrupt the telecom sector earlier, too, when he and his brother Anil Ambani launched Reliance India Mobile (RIM) services under the Reliance Infocomm Ltd umbrella to mark the 70th birthday of Dhirubhai Ambani (who passed away in July 2002) in December that year. The brothers parted company in 2005, with Anil Ambani taking over the telecom business.

The vision statement, then, was to make phone calls accessible to all Indians at a price lower than the cost of sending a postcard anywhere in India.

This was clubbed with value-added services and Internet access to everyone—a strategy being replicated for the launch of RJio’s 4G services.

Within two years, Reliance Infocomm, later renamed Reliance Communications Ltd, managed to garner 11 million subscribers and 21% of India’s mobile market share, according to news reports published in 2005.

R-Jio plans to launch its high-speed data services across the country using a blend of several technologies, including two rival 4G high-speed wireless technologies, as well as other network options such as FTTx (fibre to the location) and Wi-Fi hotspots.

The challenges

R-Jio does face its share of challenges in terms of return on investment and capturing market share.

“With Jio’s launch expected to be in Mar-16 or later (as per media), we believe the big 3 (Bharti, Vodafone, Idea) will have a head-start in 4G and also have incumbency advantage,” analysts from Bank of America Merrill Lynch Global Research said in a 30 October note.

The analysts cautioned the “continued delay from Jio will make it difficult for Jio to poach more high-end subs (subscribers) as the company would need to focus on offering a differentiated service as aggressive pricing alone would not be able to help Jio have a sustainable advantage”.

Jayanth Kolla, co-founder and partner of research and advisory firm Convergence Catalyst, has a similar view.

Pointing out that “VoLTE as a technology option for voice is yet to be commercially proven at scale”, he explained that consumers who would appreciate and value 4G LTE services are those who are early adopters and upwardly mobile but are already being serviced by existing players. “So, scaling exponentially would be a daunting task for the company,” he said.

Kolla added that as R-Jio delays its launch of services to end-consumers, “existing telcos Airtel, Vodafone and Idea get more time to stabilize their 3G networks, build on their learnings and experiences servicing data consumers to launch targeted and relevant 4G services. This essentially erodes any potential advantage that Reliance Jio would have garnered had they launched early”.

Disruption

Whether the much-delayed launch of R-Jio’s services will be disruptive or not is yet to be seen. The big three—Bharti Airtel Ltd, Idea Cellular and Vodafone—have already pulled up their socks, fearing an impending disruption.

Airtel, which is by far the biggest telecom firm in India, launched its high-speed 4G services way ahead of R-Jio to take the first-mover advantage. It launched 4G services across 296 towns in August.

Airtel not only took the lead in 4G, but also offered an added incentive to pull customers from other networks and from its existing 3G customer base by offering 4G at the cost of 3G service and over-the-top services much on the lines of what R-Jio had planned.

On 29 November, Airtel announced an investment of Rs.60,000 crore over the next three years to overhaul its entire telecom network across India.

“A significant step-up in capex clearly reflects fear of disruption by R-Jio and it would keep the balance sheet stretched. Moreover, as competition is going to accelerate post R-Jio, we believe RoE’s (return on equity) on incremental capex would remain under pressure, hence, delaying pay-back on investments,” said a 30 November report by Emkay Global Financial Services Ltd.

Analysts feel Bharti’s substantial jump in capex will have a ripple effect across the sector with other firms following suit.

“Even as Idea (Idea Cellular) management has maintained it does not expect FY17/18E wireless network capex levels to be materially higher than FY16E guided levels of Rs.60-65 bn (Rs.6,000-6,500 crore), increase in Bharti’s capex spends may force a recalibration of Idea’s capex plans, in our view,” said a 1 December report by Kotak Research.

While the Idea management has maintained there would be no change in capital expenditure for the fiscal, it has already jumped on to the bandwagon of spectrum sharing to consolidate its presence pan-India in 4G airwaves before the launch of R-Jio.

On 24 November, Idea became the first firm in India to enter into a spectrum sharing agreement since the Department of Telecommunications (DoT) issued Guidelines for Trading of Access Spectrum by Access Service Providers (Guidelines) on 12 October.

The company signed a Rs.3,310 crore deal with Videocon Telecommunications Ltd to share the latter’s 5MHz spectrum in the 1800MHz band in 2 key circles—Gujarat and Uttar Pradesh west—which contribute 14% of its revenue.

With this, Idea’s “4G spectrum coverage expands to 12 circles with the ability to offer 2G/3G/4G services in eight leadership circles (~67% of revenue),” said Axis Capital Ltd in a report on 25 November.

R-Jio is in advanced talks with Anil Ambani’s Reliance Communications to share the latter’s spectrum in the 800MHz band across seven circles.

If the deal is finalized, R-Jio will essentially become the telco with the strongest spectrum footprint in India.

“We think spectrum trading will allow Jio to fill gaps in its 800/1800MHz spectrum portfolio and also help acquire enough spectrum in 800/1800 to potentially offer voice services using circuit-switched fallback technology,” said a 9 September report by Goldman Sachs Group, Inc.

Anshuman Thakur, head of strategy, R-Jio, at a press conference in October, said the firm plans to integrate the use of all three frequency bands to provide seamless coverage across all the 22 telecom zones in India. For this, its 800MHz and 1800MHz bands will be used in tandem with the 2300MHz band to offer 4G speeds.

“The three-pronged combination of broadband networks, affordable smartphones and the availability of rich content and applications has created a global information tsunami. We had foreseen this development even when Jio was first conceptualized. We followed an integrated business strategy from the very beginning and, today, Jio is capable of offering a unique combination of telecom, high-speed data, digital commerce, media and payment services,” Ambani said during the annual shareholders’ meeting in June.

Bajaj, the former Trai consultant, acknowledged that since R-Jio has an LTE network, “once it is loaded, it gives them a lot more capacity to handle a huge amount of data, including voice, which is the differentiator for the company”.

He concluded that for R-Jio, “the game changer will be two things—quality of service and/or tariffs for their VoLTE feature. If they decide to get very aggressive with voice or data service, then they might offer voice completely free with data”.

Second, he added, R-Jio will taste success if it provides a “significantly superior voice quality”.

“Since they are setting up a brand new LTE network and with VoLTE working on it, maybe they are able to offer no dropped calls and constant HD calling. Like, today, you have HD calling on 3G network, it sounds like you and the listener are in the same room; it is an amazing experience, extreme quality. For that, both users have to be on the 4G network and there is a discernible difference. So that can really work well for the company.”

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