Full Spectrum Dominance: The Politics and Economics of Reliance Jio

If Jio's cutthroat disruption eventually leads to the dominance of just one or two players, it may not be good for consumers in the longer run.

If Jio’s cut-throat disruption eventually leads to the dominance of just one or two players, it may not be good for consumers in the longer run.


Customers rush to sign up for a Reliance Jio SIM. Credit: PTI

Prime Minister Narendra Modi lending his name and image for the launch of Reliance Jio, the ambitious $20 billion digital start-up has serious implications on several counts. For starters, the PM has committed a serious blunder by implicitly endorsing Reliance Jio as a significant driver of the government’s Digital India vision. Public policy cannot and should not get conflated with corporate objectives, however big such projects may be. Company ventures are essentially aimed at making profits and creating shareholder value.

Mukesh Ambani in an interview to the Times of India has said his first aim is to create societal value followed by value for customers, employees and shareholders, in that order. Knowing the DNA and history of the Ambani Group, one could just reverse that order of priority. Not just Mukesh Ambani, any businessman claiming to create societal value ahead of shareholder value (profits) will invite the charge of hypocrisy. It is a bit like the promoters of Flipkart or Amazon suggesting their primary aim is to create societal value when they offer such huge discounts! Jio is also offering massive discounts to current market price on data services while making voice calls free. Former TRAI Chairman Rahul Khullar, who had an impeccable reputation as a telecom regulator, told The Wire, “I have no doubt in my mind that Jio and the rest of the industry will raise prices after a year or so when the Reliance acquires a critical mass of customers by offering much cheaper data and free voice services. There is no way the industry as a whole will be able to sustain such low tariffs. We have seen in the past how the telecom players gradually raised tariffs after 2012 when they were bleeding”.

Khullar also raises another important question — one of quality of services. Reliance Jio has claimed it will provide the best quality at the lowest price. However, he says, the claim of “best quality” will be tested once Jio acquires over 50 million customers. “Quality becomes difficult to maintain after a critical mass of customers are acquired”, Khullar adds.

If Rahul Khullar is to be believed, things are not looking very good for the telecom industry in the medium term. This clearly reflected in the way the stock prices of telecom companies crashed immediately after Jio announced its new tariffs. Once analysts concluded that the tariff war will not be good for the industry, the share price of RIL crashed by about 4% in two subsequent trading sessions of the Bombay Stock Exchange. No wonder, some of the  big FII investors say they will stay away from India’s telecom sector for sometime. While there will be huge uncertainty about the profitability and viability of the telecom sector in the years ahead, one must also expect a prolonged regulatory and policy warfare between Jio and the incumbent players like Vodafone and Bharti Airtel. The incumbents have already fired the first salvo by writing to the PMO, accusing the regulator of showing a pronounced bias towards the new entrant. Reliance Jio has hit back arguing that the incumbents merely want to protect their turf.

There is already a raging controversy over the manner of Jio’s entry, which includes scathing remarks by the Comptroller and Auditor General (CAG) on the way Reliance had acquired the spectrum and license to run its much touted 4G services.  Given this backdrop, it was indeed surprising that PM Narendra Modi agreed to lend his name and image for the Jio launch. Besides, only a few days before the Jio launch, a committee headed by Justice A.P.Shah, accepted an independent consultant’s report that Reliance Industries  had unjustly taken away gas from the neighbouring ONGC’s block in the Krishna Godavari basin. RIL may have to compensate the government to the tune of close to $ 1.7 billion. The short point is controversy has never left RIL in its four-decade history. Therefore, it was all the more puzzling that Modi should have agreed to act as Jio’s implicit brand ambassador. It may not have occurred to the PM that among  the worst  hit by Jio’s price war will be the government-owned BSNL which has steadily lost market share to the private sector. In a sense the prime minister is the CEO of BSNL and therefore it is all the more galling that he should have so openly promoted Reliance Jio.

Disruption by itself may not be bad. Consumers will gain and so will the Internet start-up ecosystem. However, if the disruption is of such an order that it wipes out large sections of the industry and eventually leads to the dominance of just one or two players, it may not be good for the consumers in the longer run either.

From all accounts, Reliance Jio will be burning a lot of cash to conduct a sustained price war. Most experts aver that it will be a few years before Reliance Jio generates cash profits. Having invested Rs.1.5 lakh crore, theoretically  Jio’s interest burden itself should be close to Rs. 15,000 crore. It will have to generate profits after servicing its debt. Currently, the healthy RIL balance sheet , with cash generated from oil, gas and petrochemical business, is funding the price war launched by Jio. The question is how long will the RIL shareholder subsidise Jio’s “loss leadership” in the telecom business. Some analysts say Reliance Jio can pull off a coup and sustain itself if it grabs 100 million customers by end of 2017.  But that is easier said than done because the total smartphone market is no more than 220 million. Jio will have to grab nearly 50% of this market within a year. This seems like a tall order as the competitors won’t let existing customers leave so easily. They too have a plan to put up a fight.

Success through association

The history of cut throat competition and sharp practices among businesses tells us that sooner or later such corporations get embroiled in huge legal disputes and end up being scrutinised by either the courts or regulators. The recent history of the Indian telecom sector is testimony to this. Why then is the Prime a Minister taking such a big risk of being seen as a patron of  Jio’s digital project. Can you ever imagine George Bush, Bill Clinton or Barrack Obama acting as brand ambassadors for US companies like Microsoft, Google or Facebook?  They stay away fully realising the pitfalls of getting caught in dirty corporate wars.

Modi seems to have taken a calculated risk by associating very closely with the Jio project. Perhaps the PM is convinced that his vision of “a billion plus connected Indians innovating” will be realised by Reliance Jio’s aggressive launch. He could then take some credit for that.  One even detects a certain desperation to show some success on the ground with regard to “Digital India”. Is he putting excessive faith in Mukesh Ambani to make this happen?

While Modi may have taken a calculated gamble, there is another sobering thought from Khullar. The telecom industry had already borrowed Rs.3.5 lakh crore from banks as they pay for spectrum year after year in their quest to expand. With Jio’s entry more money will be borrowed from banks in the future and in the absence of adequate profitability the sector could generate fresh NPAs in  the banking system which is already burdened by over Rs.10 lakh crore of bad loans in sectors such as the steel, roads, power etc. Telecom could join the ranks in the future, warns the former TRAI chairman.

Finally, there is an even bigger existential question arising from Jio’s aggressive plans.  With the rapid convergence of carriage and conten , Jio is pitching its business model as everything conceivable delivered on the same platform. In internal presentations, they have talked about emerging as India’s homegrown Facebook or Google and not merely a telecom services company. That raises the larger question of where is India’s media diversity headed. If Jio envisages a subscriber base of over 400 million in a few years, it will surely put many existing media companies out of business. If you control media, you also potentially control politics, democracy and so on. This should make any leading politician salivate at the mouth. It may not, after all, be such an innocent gesture on Modi’s part to support and encourage Jio.

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