Reliance Jio Injects Another Round of Free Data as It Struggles With Severe Growth Pangs

The three month extension of free data is Jio’s way of dealing with abundant quality of service issues, a failing hardware strategy and second SIM syndrome.

Mukesh Ambani, chairman of Reliance Industries Limited. Credit: Reuters/Shailesh Andrade

Mukesh Ambani, chairman of Reliance Industries Limited. Credit: Reuters/Shailesh Andrade

New Delhi: Reliance Jio is the fastest growing technology company in the world, Mukesh Ambani declared proudly on Thursday. “In the first three months, Reliance Jio has grown faster than global tech giants, Facebook WhatsApp or Skype,” Ambani, the chairman of Reliance Industries, said.

The ambitious 4G telecom venture is also, however, in danger of running out of its first wave of steam, according to industry observers and analysts.

Which is why Ambani, on Thursday, injected another round of steroids into his company by tacking on another three months to the company’s existing free data, voice and video offer.

Reliance, however, framed it slightly differently. “Starting December 4, 2016, every new Jio user will get Jio’s data, voice, video and the full bouquet of Jio applications absolutely free till 31 March 2017,” Ambani said.  The free data and voice services offer for existing Reliance Jio users, launched in September and which was due to end December 31st, was also quietly extended until the end of March, 2017.

Most telecom and stock market analysts predicted this decision last month and view the three-month extension as Jio’s way of dealing with a rapidly-increasing number of growth pangs: the company is currently struggling with abundant quality of service issues, a failing hardware strategy and the dreaded “second SIM syndrome”.

“These growth pangs are both dangerous and solvable. Some of them are because Reliance Jio is rushing too quick… others are structural in nature and will easily take another two to three years to iron out completely. Add to this outside factors such as demonetisation and the picture doesn’t look pretty,” a senior executive of a rival company told The Wire.

Why is Reliance Jio in need of a second wind? The Wire spoke to Jio officials, industry executives and analysts to put together a picture of the telecom industry’s shifting winds.

Quality of service cycle

The first is the vicious quality-of-service structural cycle that Reliance Jio needs to overcome. The company’s internal subscriber target was to hit 100 million subscribers by the end of December 2016 – which in retrospect was overly ambitious, with the company announcing it had the 50 million subscriber mark this week.

Nevertheless, in its rush to sign up customers, it attracted large sections of India’s primarily urban, primarily data-hungry customer base. The average Jio user uses 10-20 times more data than an Airtel or Vodafone user (which of course is driven by the company’s free data offer).

This quick subscriber addition, and high data usage per subscriber, translated to Reliance Jio having a higher-traffic share than market leader and rival Bharti Airtel.

“Let that sink in. Reliance Jio despite having no revenue market share was able to gain, by the beginning of November, higher traffic share in terms of data than Bharti. This led to massive clogging capacity and overall weaker network quality,” a senior telecom analyst, who declined to be identified on the grounds that he worked with Reliance Jio in setting up their initial rollout.

This clogging and weak network quality started resulting in a vast number of customer complaints: A Motilal Oswal report in November noted that “Rjio outlets started receiving complaints that data speeds are down by ~70-80% over three months”.

What didn’t help also was Reliance Jio’s point of interconnect (PoI) issue with incumbents Airtel, Vodafone and Idea – which resulted in huge number of call drops and voice call issues. However, as multiple analysts pointed out, Reliance Jio’s slow 4G data speeds (nearly half of Airtel’s 4G speeds according to one report) have more to do with over-promising and under-delivering and nothing to do with its PoI battle with the telecom lobby.

Slow data speeds and less-than-adequate customer care are serious problems. As the Oswal report last month emphasises, “service expectations of data consumers are very different from those of voice consumers”.

“We note that consumers have experienced some instances of call drops in the past, but still were largely loyal to their service providers. However, with many day-to-day activities of consumers happening online on mobile phones, slow data speed may not be accepted and cause subscribers to change service providers,” the report notes.

Second SIM syndrome

The second piece to the puzzle is that while Reliance Jio has been able to add 50 million subscribers in three months, it still hasn’t taken away subscribers from Airtel and other rivals.

“Looking at the incumbents sub data, Jio’s free period offer doesn’t appear to have impacted their net adds even in the second month since its launch. Airtel/Vodafone/Idea’s October sub adds have been higher than their last six-month average, cumulatively adding 4.9m subs. This is actually higher than September when the cumulative net adds were at 4.8m,” Citi Research said in a report issued on 21 November.

This offers two broad implications. The first is that Reliance Jio hasn’t cannibalised the existing Indian telecom base. The second is that while Jio may have increased the overall pie by onboarding new users (which is unlikely), it is more likely that a great deal of Reliance Jio users use the service as a ‘second SIM’ to take advantage of the company’s free data offer.

Jio certainly stands a chance at  converting these second SIM users – but it is unlikely to do so without ironing out its quality-of-service issues first. Turning off the free data tap before it fixes those issues could potentially be disastrous, which is why extending the free data offer was a logical step.

“Working its way out of the second SIM syndrome will be difficult. Many of these are probably not high-quality users, but people looking to take advantage of free data,” said Anand Batra, a telecom lawyer who works with CLSA Research.

Struggling Lyf strategy

Reliance Jio’s handset (Lyf smartphones) ecosystem is also crucial to its strategy and still hasn’t taken off. The Jio user experience works best on 4G compatible phones (It works on other phones, but a user has to download specific Jio applications to get around it). Which is why the company launched a range of sub- Rs 10,000, 4G-enabled smartphones known as ‘Lyf’. Before it launched commercial operations, Reliance started importing shipments of Lyf smartphones by the millions.

The logic here is simple. By selling cheap 4G smartphones, it could expand the overall telecom subscriber and 4G data market. Unfortunately, this still hasn’t worked. While a great deal of Lyf smartphone shipments may have reached India (and indeed been sold), Motilal Oswal estimates that 80-85% of Jio users use non-Lyf devices.

This further ties into the theory that most Reliance Jio users aren’t semi-urban or rural people using 4G smartphones for the first time, but are second SIM users taking advantage of the company’s free data offer. Another point in this theory’s favour is that Jio’s subscriber run-rate apparently “dropped to less than 50% after the first 15 days of launch, given issues in the handset ecosystem”, according to one telecom market report.

The Reliance Jio-Lyf hardware strategy, therefore, clearly still needs work.

Semi-glowing picture

None of these growth-pangs and obstacles, analysts stressed to The Wire, are automatically fatal or insurmountable. The more optimistic estimates of how long it would take Reliance to overcome back-end IT issues, poor consumer service and its weak distribution network were in the range of another  8-to-14 months – which gives incumbent operators another a year to capitalise on their own strengths.

What didn’t help Reliance Jio’s initial wave of growth was the Modi government’s demonetisation move. According to analysts, despite Reliance giving away free SIM cards, the company has seen significant impact on footfalls, with retail outlets suffering a nearly 50% drop in footfalls in November versus the last month.

It’s next few goals are also simple: targeted price plans to get into the sub-Rs 400 ARPU (average revenue per user) bracket, increasing its distribution network (currently only 70% of that of Airtel) and starting to sell its digital services strategy (digital wallets, music, movies, e-healthcare etc).

Can it solve these issues before its second round of free data ends? That remains to be seen.

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