Reliance Jio

Contents

Before Jio

Jio entry

Why this disruptive approach

What other options?

Who gets hurt? What about Jio

So what’s the learning

 Long before Jio
 Telecom grew from 6% teledensity in 2002 to 70% teledensity by
2012. That’s a 10 fold increase in 10 years ( CAGR of 33%
approx.)

 Telecom growth was fueled by ecosystem such as handset prices,

lower entry cost, falling usage cost, multiplier effect of
community of interest, internet and data, intense competition,
enabling policies

 Staggered entry of competition was one of the biggest disruptive

influence

 Lets trace the path of growth

 Disruptive change-1
 Calling party pays
 Incoming free
 Opened up dependent segment and bottom part of the market
 Disruptive change-2
 Long life validity
 No minimum monthly recharge
 Further Opened up dependent segment
 Everyone can be Mobile and stay connected all the time
 Disruptive change-3
 Full Talktime
 No Admin fee/ Rental
 Affordable
 Disruptive change-4
 Per second pulse
 Short duration calls
 Granularity advantage for dependent segment !!
 Disruptive change-5
 Per second pulse
 1p per second for all calls
 Granularity advantage for all calls
 STD rates crash
 Death of distance
 Impacted the top end of the market and slashed monthly bill
 Disruptive change-6
 Bundled plans ( High Usage of Voice+ data+SMS)
 Superior value proposition for heavy user
 Parallel changes
 Blackberry plan rates crash from Rs.900 per month to Rs.250 per
month
 WhatsApp knocks of SMS
 On-net plans with steep value proposition
 3G and large screen improve internet experience
 Push-mail and Android features make Blackberry obsolete
 Split Usage: Dual/multiple SIM usage gaining momentum.
 STD CUG and Pan-India one circle for Corporate
 Then comes Reliance Jio
 Acquired 4G broadband data license
 Expands scope to include Voice thru lobbying
 Build Voice over data network--- first and unique experiment by any
operator
 Acquires spectrum in different frequency band at every opportunity
 Competition busy building 3G ---- Slowly
 Competition waiting for 4 G ecosystem to develop
 Competition believes that 4G adoption will be a gradual and slow
process
 Competition making slow progress in 4G ; handicapped by spectrum
and funds
 Competition miscalculates
 Apart from tardy investment and roll out of 4 G network, competition
miscalculates what Reliance would DO
 Competition expects Reliance to stumble in IP network
interconnecting with non IP
 Expects Reliance to pursue handset bundled strategy as 4G handset
ecosystem was poor.
 expects HS variety to be an issue
 Pace at which VoLTE enabled handsets are rolled out in market takes
competition by surprise
 Reliance has minimum glitches in its roll out
 RIL dare promotion

 Initially announced as a 3 month promotion and extended for 3 more

months, RIL offers EVERYTHING free during promotion period with
assurance that VOICE will forever be free
 At that point Voice accounted for 60% to 65% of revenue
 Market was reset and Jio was calling the shots
 Competition had revenue to defend---- How can they take a 65%
revenue hit straight away??
 Grudgingly they had to…….
 EBIDTA was about 35% at that stage.
 Competition financials took a solid beating and they are making net
losses over the last few quarters
 RIL is grinning with profits--- using a different basis for depreciation
 What did RIL do different

 Before RIL many new entrants came and rocked the market
 But with inferior coverage, service, patchy footprint, lower speed and
without any POD except tariff
 RIL came with a FULL BLOWN NETWORK and a Superior data network
 RIL waited to build a faster network and the ecosystem to churn
 They had unmatched vision to not just rock the market but take full
leadership control
 The attempt was not only to churn customers and get critical mass
but also SO debilitate the incumbents that they will not be able to
invest in growing the network
 That’s the context.
What is the insight in this unique experiment
What is the cost structure in Telecom
High capex for spectrum
High capex for towers
Cost to Acquire and cost to serve is extremely low
High fixed cost--- direct or indirect
Low variable cost
High contribution margin
Opex on towers to create coverage
Capacity is created incidentally
What are the costs to serve– Or VC
 Marginal Cost to Serve- B2C

Marginal Variable Cost to serve Rs. per subscriber

  Postpaid Prepaid
Service Delivery Cost covering bill
printing/ delivery/ collection/
dunning/telecalling/ service @
retail 40.3 14.23
Bad Debts / recharge commission 9.00 11.32
Total 49.30 25.55
• The relevant cost for taking decisions such as acquisition is the marginal cost and not the total or average cost.
• The marginal cost to serve a customer is extremely
• The marginal revenue on either product is in multiples of the MC and hence no further detailed case needs to be
made out on recovery of marginal cost to serve
• That average costs are very high as compared to marginal costs makes a strong case for PUSHING acquisition as the
incremental base will help drive down average cost
 Marginal Cost to acquire- B2C

Marginal Variable Cost to acquire Rs. per Subscriber

  Postpaid Prepaid
Acquisition cost ( One time) 1000 160.00
Service Delivery Cost covering
AV/TV/PV, CAF operation, 95.6 18.1
Brand advertising - 60
Total 1095.60 258.10
ARPU 270 85
ARPU less CTS 220 71
Average Break-even tenure 5 2.1
Actual average tenure for recently
acquired customers 9 months+ 6 months+

• Telecom business model entails very high critical minimum Capex to meet coverage requirement.
 Cost behaviour
Cost to serve Subscriber per month
Subscriber Fixed Cost Total Cost Average
Base (Lakhs) ( Rs. Crores) Fixed cost Marginal Cost ( Rs. Crores) Cost
15 30 200 32 30 200.0
16 30 188 32 30.32 189.5
17 30 176 32 30.64 180.2
18 30 167 32 30.96 172.0
19 30 158 32 31.28 164.6
20 30 150 32 31.6 158.0
21 30 143 32 31.92 152.0
22 30 136 32 32.24 146.5
23 30 130 32 32.56 141.6

Cost Curves
250
Cost to serve Subscriber per month
200

Fixed cost
150 Marginal Cost
Average Cost
100

50

0
1 2 3 4 5 6 7 8 9
 RIL strategy

What did RIL lose

They could have gone about systematically penetrating
Targeted high ARPU customers ---superior product
Selling data and data speed at a premium.
 Did RIL overdo it

Now they have about 38% customer market share and

about 40% revenue market share
 Did RIL overdo it

Not giving away all voice free

Could have targeted a lower CMS and RMS (RMS > CMS)
BUT A HIGHER ABSOLUTE REVENUE
 Did RIL overdo it

Deliberately choked the market and lost opportunity for

higher absolute revenue
Trade off to demoralize competition .
Make a statement to customers as well
 Insight

Digital business model is about creating huge scale.

Getting customers on board is the key task
Monetization can be figured out later
 Insight

Reach a higher critical mass AHEAD of time by giving up

absolute revenue
 Insight

Reach a higher critical mass AHEAD of time without giving

competition time/opportunity to FIGHT on any flank
( Had to merge)
 Learning for emulation

Entering a market 20 years behind competition

Using scale and surprise were the only weapons that RIL
could wield
 Learning for emulation

If cost structure are such that VC is low/ very low---

explore opportunity to achieve penetration/ sampling
Learning for emulation

For which product is it applicable

Many
Software products for example
Many Services
Education
Have Fun
learning
 When competition missed a chance
Top 3 should have taken a collective call to
• Not open up and share network with Rjio
• Come together to share active network
• Roll out 4G ahead of Rjio
• Offered bundled Voice+ Data ahead of Rjio

Jio would have still found an angle to disrupt but could have been blocked better