Business

Four Reasons Why Facebook is Buying a Nearly 10% Stake in Mukesh Ambani’s Reliance Jio

There are a number of important takeaways for their rivals, for the Indian tech ecosystem and for Indian consumers.

Mukesh Ambani appears prescient and ahead of the curve once again.

The same week that the economics of global oil was flipped on its head, Reliance snapped up a cool $5.7 billion (Rs 43,574 crore) investment from Facebook in return for a 9.99% stake in Jio Platforms, the subsidiary that will house a majority of the empire’s digital assets.

Ambani also has more than a few reasons to be happy. Facebook’s investment and corresponding valuation is higher than the average Rs 4.2 trillion enterprise value given to the company by top brokers such as Citi Investment Research, Kotak Institutional Equities, JP Morgan India and Goldman Sachs India.

As analysts at Jefferies India also pointed out: “Valuations suggest that Facebook expects Jio’s EBIDTA to double from current levels.”

RIL’s total investment in Jio currently stands at about Rs 1.8 lakh crore — one way of looking at this therefore is that what effectively cost the company about Rs 18,000 crore (a 10% stake) is now being sold for over three times that amount (Rs 43,574 crore).

But beyond this, what do both giants get out of this deal? There are more than a few theories, all of which come with their own implications for rivals like Amazon and Flipkart and should spark healthy concerns from a regulatory perspective for India’s consumers.

Theory Number 1: ‘Phygital’ commerce… and a super-app?

Reliance Jio has always been a tech giant in waiting. Back in September 2016, when Ambani announced its 4G plans, the idea was for it to go beyond being a simple telecom operator and become a digital platform that could turn the data of a billion Indians into something profitable.

The problem is that nearly four years later, there hasn’t been much headway made in this regard. While Jio has succeeded in winning over 300 million Indian customers with its cheap data plans, its suite of apps (JioCinema, Jio Money, JioTV, JioChat) haven’t made a big splash and it’s still unclear when they will be monetised. It’s only after Reliance starts charging, say, for an app like JioCinema will we know how well it can do against established services like Netflix, Hotstar and Amazon Prime Video.

This issue was clearly brought out in a research note by CLSA in October 2019. “In most valuations used by the Street, including ours, Jio is valued mainly as a telecom service provider. No value is ascribed for Jio’s suite of apps, digital investments and capabilities like AI, IoT, etc…,” said Vikash Kumar Jain, research analyst at CLSA, at the time.

While Ambani no doubt has plans for unlocking the value of the Jio ecosystem’s apps, one key line of attack was unveiled with the Facebook announcement – mixing WhatsApp with JioMart.

Both Zuckerberg and Ambani, the latter more so, went out of their way to describe how the deal will give Reliance access to the over 400-million-strong database of WhatsApp as it seeks to jump-start its commerce business under JioMart.

Under this partnership, the company said, it would offer consumers the ability to access the nearest kirana, which can deliver products and services, after transactions via JioMart using WhatsApp.

“In the very near future, JioMart and WhatsApp will empower nearly three crore small Indian kirana shops to digitally transact with every customer in their neighbourhood. This means all of you can order and get faster delivery of day-to-day items from nearby local shops. At the same time, small kiranas can grow their businesses and create new employment opportunities,” Ambani said in a video on Wednesday.

This ‘phygital commerce’ strategy – where your local kirana store is on WhatsApp and you send him a message to order your groceries – appears to be the first major project that Facebook and Jio will work on.

Will it succeed? It’s unclear especially considering that many others like India’s modern retail king Kishore Biyani have made similar attempts and failed miserably. Nevertheless, its something that should give pause to rivals like Amazon.

“(Out of the investment made by Facebook) about Rs 15,000 crore would remain with Jio, and this is a huge amount which JioMart can use for building its (e-commerce) network. If they are able to execute this properly on the ground, I think they are going to create massive problems for the likes of Amazon and Flipkart due to the kind of scale that they can achieve,” said Satish Meena, a senior forecast analyst at Forrester Research.

To begin with, Meena said, JioMart is expected to aggressively chase the grocery space, where they can reach a large number of households and work in a way where customers end up buying a lot of services from Reliance itself, related to areas such as mobile connection, television, music and education. “The bigger worry for Amazon and Flipkart now is to reevaluate their business model or logistics as they are not able to fulfil the grocery demand. There is a lot of demand but companies are not ready to deliver.”

According to Salman Waris, managing partner at New Delhi-based specialist technology law firm TechLegis Advocates & Solicitors, backed by the investment which makes Jio the fifth-largest firm in India, the company can also create an ‘e-commerce monopoly’ and upturn e-commerce ecosystem.

“Facebook wants to use WhatsApp for e-commerce opportunities with small businesses. Amazon, Flipkart can’t compete with Jio-Facebook because they don’t have an edge on data. While in the short term, there may not be much market impact as due to COVID-19 nothing significant shall happen in the next 3-6 months, however in the long term the alliance will not only counter competitors like Amazon and Flipkart, but will rupture the entire e-commerce ecosystem in the country,” said Waris.

There are also broader mutterings about how Jio and Facebook could eventually create a super-app, along the likes of WeChat in China, although it’s unclear how both parties could come together to create something like that, as it would inevitably be a danger to the individual identities of both parties.

Theory Number 2: Regulatory Woes and Facebook needs an Indian Protector

The second explanation doing the rounds is that Facebook’s investment in Jio is a safe bet on avoiding the future wrath by India’s authorities. There has never been more scrutiny of ‘Big Tech’ and the challenges posed by foreign companies in terms of law enforcement and how they handle the sensitive personal data of Indian citizens and organisations.

The theory here is that COVID-19 pandemic will only accelerate these protectionist concerns and by picking up a near 10% stake in Jio, Zuckerberg appears to be buying ‘protection’ in a manner of speaking. Or at the very least, Reliance and Facebook may find more common ground when it comes to their lobbying efforts in the future.

There may be some truth to this, especially considering the regulatory hurdles that WhatsApp has had in rolling out its payment service in India. Having a domestic partner like Ambani, who has significant clout, is a useful tool for Facebook, provided it can be used in the appropriate manner.

Theory Number 3: Mukesh Ambani’s Debt-Free Ambitions

Another reason why Ambani should be excited by Facebook’s investment is that it will help RIL’s aim of becoming free of net-debt by early 2021. This plan has had a few setbacks recently, with the delays in the Saudi Aramco deal and the curious lack of regulatory approvals for Jio’s agreement with Brookfield to sell its mobile network towers.

Of the cash inflow from the Facebook deal, Jio Platforms is expected to retain Rs 15,000 crore, while the rest will be used by RIL to lower debt by redeeming the optionally convertible preference shares it holds. This investment, coupled with the Rs 7,000 crore investment by BP in the oil marketing joint venture, is expected to peg back debt by Rs 50,000 crore. RIL had a gross debt over Rs 3 trillion and net debt of Rs 1.53 trillion as of December 2019.

Analysts at Credit Suisse say the deal follows the restructuring announced by RIL in October 2019, when the company transferred Rs 1,080 billion of debt from RJio to a standalone entity, leaving liabilities of around Rs 640 billion (spectrum liabilities and capex creditors) at Jio.

“The deal will aid in achieving net debt free by March 2021. As of December 31, 2019, the net debt for the group stood at Rs 1,531 billion and with Facebook’s investment, this should put RIL on course to be net debt free by March 2021,” analysts at Credit Suisse said in a note.

Those at IDBI Capital, too, share a similar view. RIL’s total net debt, according to Sudeep Anand, an analyst tracking the sector at IDBI Capital, would also come down by 28.5 per cent to Rs 1-lakh crore, which was at Rs 1.53-lakh crore at the end of Q3FY20.

“This is a big leap towards its intention to be net-debt free by the end of financial year. We remain optimistic for its core business like refinery and petrochem where we expect revival from the second half of FY’21,” he said.

Theory Number 4: Facebook wants More Data

The last and final incentive for Zuckerberg could be that even if all the projects that are conceived as a result of the partnership end up flopping, it gives it a potentially direct pipeline into the data of India’s small and medium businesses and Jio’s network of users.

While Reliance and FB officials insist there is no data-sharing agreement on the cards, this doesn’t preclude the option and nobody can say how it will pan out in the coming months and years.

After all, what has been left unsaid is the inherent data give-and-take in this JioMart project. WhatsApp, through its commercial agreement with JioMart, could end up providing deeper and richer data to Facebook. That would mean more intense and localised insight into the consumption patterns of Indian customers. This could give Facebook a new perspective on Indian consumers, which will only add to its its already formidable advertising machine.

More importantly though, it could pave the way for Reliance in terms of monetizing Jio’s huge subscriber base.

“Advertising is the holy grail. Jio is sitting on a goldmine since it hasn’t been able to monetise its users,” Neil Shah, partner at Counterpoint Research told Economic Times. “Besides, Jio can also integrate Facebook’s ad platform into its products on a revenue share basis,” Shah said.

All of this depends on whether a data-sharing agreement of any sort is eventually signed or included in the future as part of separate project partnership.

“Facebook may get access to Jio’s data, but the other way could also be true, given the changes in discoverability. They could monetise discovery. How do you do that? You feed the data of apparel you likely saw on Instagram, into Reliance Retail’s inventory, which can inform the customer about its availability, and the transaction can be initiated and completed,” says Arvind Singhal, chairman of Technopak Advisors, told the newspaper.

All of this should spark concerns both at a regulatory level —  where TRAI, the Competition Commission of India and other regulators take a close look at the potential side-effects of this deal on the Indian tech ecosystem — and at a consumer level, where there could be privacy issues.

As technology journalist Nikhil Pahwa has noted, India’s competition law review committee last year acknowledged that “control over data is a factor to be considered for determining the dominant position of any enterprise, and that any ‘most favoured nation’ kind of agreements can have anti-competitive effects, seeking to facilitate a cartel, and should be scrutinised by the CCI”.

“While the agreement inked between Facebook and Jio is not public, and we don’t know if data is being exchanged between the two, in the interest of a healthy and competitive internet market in India, this deal should be scrutinised by CCI, based on the principles outlined by CLRC for new-age markets,” Pahwa noted.

(With inputs from Business Standard and agencies)