Two days ago, India witnessed an epoch-defining launch by a formidable business empire hoping to capture, by storm, India's $50 billion telecom industry.
Reliance Jio, led by oil-to-retail billionaire Mukesh Ambani, elder son of legendary business tycoon and promoter of the Reliance Group Dhirubhai Ambani, opened the shutters to his newly minted business after around eight months of testing. The deluge of subscribers was heavy with customers queuing up at dawn for new SIM cards and retailers often running out of them by midday.
The deals offered were audacious and unparalleled: In a country that is still voice-heavy and yet to fully jump onto the data bandwagon, prospective customers have been offered the mouthwatering bait of free nationwide voice calls as well as roaming. From an astronomical 37 rupees in 1997 (around $1) to completely free today, Ambani has, in one deft move, completely upended the industry as we know it. If there ever was a killer blow in telecom, this would be it.
Everyone expected the Jio assault to happen in the data category -- and it certainly saw some revolutionary new rates attached to it as well. On Monday, India went from one of the most expensive places to buy data plans in the world to one of the cheapest, outdoing North America in the process.
Jio's offerings have included seven data plans from 149 rupees ($2) a month that includes 0.3GB of data, to 4,999 rupees a month ($75) coming with 75GB of data which converts to free late at night. The non-night rate translates to 22 rupees (33 cents) per GB which is astronomically low from any perspective. Airtel and Vodafone has responded to Jio's moves by also slashing its data rates by as much as 80 percent.
However, the real death strike has come in the least expected category -- voice -- which Reliance has made completely free. This is a masterstroke by Jio and may prove debilitating for existing incumbents such as Airtel and Vodafone, India's largest two players pre Jio's entrance. The problem for them is that today over 70 percent of the industry's revenues come from voice and Reliance has effectively attacked them in their most vulnerable spot.
On the one hand, Airtel and Vodafone may run into trouble holding on to their more numerous lower-value customers who spend most of their money on voice. The average revenue per user (ARPU) for Airtel is 196 rupees and the lowest Jio plan is 149 rupees which comes with 300 MB of data. Anyone below that threshold would be very tempted to go with Jio since it gives them a data package they would not have originally availed of. This is of course not counting the free access to movies, music, and live TV that a Jio customer can get until the year's end on the company's suite of apps.
On the other hand, what will really prove to be debilitating for the incumbents is losing their fewer, higher-end customers, since 70 percent of industry revenues come from 30 percent of the customer base. If the collective value proposition -- which includes the enormous content collection that Jio is amassing -- proves to be a winning one to the higher-spending, urban crowd, Airtel and Vodafone will have their work cut out for them.
Vodafone and Airtel have retaliated with free voice plans of their own but the fact is that their CFOs had not planned on losing half of their respective revenue growth, from 10 percent in fiscal 2016 to below 5 percent in 2018 and 2019 for Airtel. This will no doubt dampen the ability to pare debt and offer other more competitive services if data does not increase at a rate at which it can cover the shortfall.
If all of this isn't bad enough news for India's telecom incumbents, there's more. Not only are all services free until December 31, 2016 (data, voice and messages -- voice being free for life) which includes all of its content and other offerings (Jio Wallet, Jio Chat, Jio Pay), Jio says it is offering blazing peak download speeds of 70Mbps, fluctuating between 15 and 30Mbps while travelling.
If these are the cannon balls with which Jio is firing broadsides against its competitors, its canons are the fantastically low-priced 4G-enabled Jio Lyf phones that cost upwards of 2,999 rupees ($45) as well as mobile routers at 1,999 rupees ($30).
These are all terrific accomplishments but the big question is if Reliance's game plan is both realistic and ultimately good for the industry. As previously covered, according to its own goals, Reliance wants to become profitable within a year of launch and attract a subscriber base of 100 million -- or 10 percent market share -- with an average revenue per user (ARPU) of 300 rupees ($4.47), essentially a pipe dream considering the current industry ARPU is at 165 rupees ($2.46).
Investment firm CLSA thinks that Reliance will need to attract between 140 million and 180 million subscribers who fork out double the existing ARPU to hit that 10 percent pre-tax return on capital employed on its $22 billion capital expenditure, which is even more unreachable than the previously articulated goal.
It is like being caught in a vicious spin cycle -- the more you slash your rates, the more customers you need to attract to meet your revenue and profit targets.
Goldman Sachs estimates suggest that all of these previous numbers are pure fantasy. It expects Jio to gather just 35 million subscribers over the next two years, with data volume growth for incumbents slowing to 50 percent in the 2017 fiscal year from 70 percent in 2016.
Of course, what these estimates don't count on is the Ambani thirst for wining at all costs, not entirely implausible considering Jio's parent Reliance Industries is perched atop around 91,000 crore rupees ($12.8 billion) of cash. Bleeding to gain market share is not a problem as long as Reliance shareholders see nothing wrong with it.
Meanwhile, Bharti Airtel with its 250 million customers, Vodafone with 198 million, and Idea with 174 million will all be looking at hundreds of millions in network upgradations and spectrum acquisitions in the future while seeing revenue growth drop thanks to lower tariffs and possibly fewer customers.
It is not an enviable position to be in. Reliance may just prefer bleeding itself long enough to see its rivals capitulate by relinquishing customers. In other words, the Indian market is going to see a prolonged game of Russian Roulette between the biggies until some kind of equilibrium is reached.
Meanwhile, the unquestioned winners are the country's 1.3 billion people, most of whom have never experienced the internet until now but will do so by feasting on an unparalleled bouquet of cheap data and services like never before.