Reliance Jio has made its presence felt in India since it launched its 4G-only network three years ago, but there has been some disappointment that its service models have not been more innovative. In a price-competitive market where consumers badly need higher network quality and greater variety of services, Jio has largely followed the time-honored way to gain market share in India, undercutting its rivals’ fees.
Yes, it does proclaim itself to be a digital service provider rather than a connectivity provider, offering a suite of Jio-branded applications and content spanning the home, phone and car; and it is building quad-play propositions with its investment in fiber and media. But the strategy that has enabled it to overtake Bharti Airtel to become India’s second MNO after Vodafone Idea – itself a result of a wave of consolidation partly sparked by Jio’s entry – has been heavily focused on price.
The really interesting question about Jio, then, is how it is managing to keep its prices so low while investing in one of the world’s biggest infrastructure roll outs – remaining profitable while its competitors often report losses and rising debt. The answer is an asset-light, low-opex approach which will increasingly be emulated by other operators round the world.
New entrants, like Jio or Rakuten Mobile in Japan, have the advantage of not having to support or migrate expensive legacy systems (though of course they need a deep-pocketed parent or investor to pay for the high upfront cost of launch, build-out and marketing). But they will not be the only ones to turn their back on the operators’ tradition of sole ownership of most of their physical assets. Many others are already taking steps towards, on the one hand, consolidating many types of infrastructure, including wireless and fiber, to support greater diversity of services and increase the addressable market; and on the other, ensuring those assets are shared, reused or leased as much as possible to reduce capex and opex, and give a greater flexibility to offer low prices while staying in profit.
For Jio, this approach to infrastructure is enabling it to expand rapidly and position itself for new markets. Initially, it leveraged spectrum and site sharing deals with other operators – including Reliance Communications, now forced out of the market by the new price wars – to build out 4G at lowest possible cost. It also emulated cablecos like France’s Iliad in harnessing WiFi to reduce the cost of supporting heavy wireless data users.
Next it moved on to the home and multiplay sectors, investing in fiber and media assets, directly or via partners. These will expand its share of a household’s spend on content and connectivity while increasing the ways it can monetize 4G and future 5G. And now it has its eyes set on establishing a significant enterprise presence, ahead of Vodafone Idea (which has limited enterprise business). This will expand the monetization of its cellular and fiber assets – Jio has about 300,000 kilometers of fiber now, almost double Vodafone’s 156,000. And it will enable it to increase its revenues and margins, and escape from the spiral of being only a price-cutting provider.
The enterprise plan, and the economics of delivering it, were boosted last month by a 10-year deal with Microsoft, similar to one the US firm recently signed with AT&T. This will see Jio building data centers across India – two to start with, in the states of Gujarat and Maharashtra – to support cloud services based on Microsoft Azure for Indian businesses.
The companies will offer connectivity, computing and storage, with associated technologies and services in data analytics, AI, cognitive services, blockchain, IoT and edge computing, mainly for small and medium enterprises. They will develop services in major Indian languages and dialects.
Again, prices will be competitive – reports indicated cloud deals as low as $21 a month for smaller businesses – but they could help Jio develop a new market where it faces less competition from the older MNOs, with Microsoft as a powerful partner.
“By working together to develop innovative and affordable cloud-enabled digital solutions built around Jio’s world class digital infrastructure and Microsoft’s Azure cloud platform, we will accelerate the digitization of the Indian economy and make Indian businesses globally competitive,” said Mukesh Ambani, chairman of Jio’s parent company Reliance Industries, in a statement.
As with the AT&T pact, Jio will also commit to standardizing on Azure for all its internal processes. At first, that will mean migrating all its non-network applications to the cloud, but over time, it is likely that it will start to run its virtualized network functions, such as the 5G core and even the Cloud-RAN, on Azure. That would see it emulating challenger operators like Three UK and Rakuten in taking the plunge and moving to a cloud network model that should, over time, reduce total cost of ownership considerably.
This would fit well with Jio’s approach to date. It has made use of the luxury of its greenfield status to virtualize many functions upfront; to work with a broad supply chain to develop low cost, software-based networks; and to push ahead with automation. For instance, it developed a self-optimizing network (SON) platform called JioSON to take cost and manual labor out of its RAN from day one, and has talked about putting this into open source. It is also a supporter of several open initiatives which aim to slash the cost of a mobile network through virtualization, commodity hardware and standard interfaces – these include Telecom Infra Project and the Open Networking Foundation’s CORD. Indeed, Jio acquired Radisys, a leading light in CORD, last year to bring those integration and software skills inhouse.
The move to a public cloud, not just for data center applications but for the network, remains daunting for many operators. Jio will reduce its risk by investing in at least some of the data centers itself and becoming a cloud/network operator, not just a cloud user. That will help it to gain a share of an Indian public cloud market that Gartner predicts will be worth $2.4 billion this year, up 24% on 2018.
Investing in physical infrastructure such as fiber and data centers will help Jio achieve economies of scale, while it mitigates its cost and risk through partnerships and asset sharing. And it will also use those assets to increase its value over time through further partnerships or divestments. It has already offloaded its tower business, Reliance Jio Infratel, to Brookfield Asset Management in a deal which will help to reduce its debts of INR 365 billion ($5.2 billion), and the debt mountain of its parent, which stands at INR 2.87 trillion ($40 billion).
The next set of assets up for sale might be Jio Digital Fiber, in order to reduce debt further but also fund expansion of the Giga Fiber home broadband, and enterprise, businesses. Earlier this year, Jio Digital Fiber raised INR 270 billion ($3.9 billion) in loans from a consortium of three Indian banks but the operator may go a step further, especially if regulator TRAI sticks to its resolve to set high minimum prices for 5G spectrum. Selling a stake in the fiber network could put Jio in a better position than its debt-ridden rivals to buy large amounts of spectrum, to support even more new services and markets.
Divestment of physical assets after the first capex phase, while retaining the services that ride on them, is usually a strategy that the investment markets like. It generates better value from the assets and they can be more easily shared with rivals – and so monetized further – if they are controlled by a neutral third party.
The other large Indian MNOs, as well as those in many Asian and African markets, are taking this approach to improving their balance sheets and generating greater value.
Earlier this year, Bharti Airtel transferred 32% of its stake in Bharti Infratel, its tower operator, to its wholly owned Nettle Infrastructure subsidiary, to make it easier to monetize those sites. And Bharti Airtel and Vodafone Idea have merged their fiber assets into a venture called Telesonic which will, over time, become an independent company leasing capacity to service providers.
The logical outcome of such moves is the full separation of the ‘netco’ running the physical network from the service providers, something already seen in the passive infrastructure space with the rise of neutral host towercos. Regulatory and business model change will be needed to achieve a complete split in the active mobile network, but the rising pressure to adopt an asset-light model to ensure profits and shareholder value in the 5G era will push many markets another step along that path.
Reliance Jio has 27.8% share of the Indian mobile market by subscribers, or 320 million users, according to regulator TRAI’s figures as of the end of May. This compares with Vodafone Idea, which has 387 million, though only 84.8 million of those use 4G, while all Jio’s base is on 4G.
Jio’s numbers are still growing while Vodafone’s have declined since early this year, when it introduced a monthly minimum recharge obligation of INR 35. This lost it some low end customers but boosted ARPU from INR 104 ($1.46) to INR 108 ($1.52) between the first and second calendar quarters of 2019, according to TRAI figures. Jio has a higher ARPU, but it is falling, from INR 126 ($1.77) to INR 122 ($1.72) in the same period.
Vodafone reported revenues of INR 112.7 billion ($1.58 billion) in calendar Q2, while Jio made about INR 116.8bn ($1.64 billion).