Reliance Jio Fiber: Why Mukesh Ambani’s Wired Broadband Launch Is Timid

The billionaire’s Reliance Jio Infocomm Ltd. started with free unlimited 4G data and voice services three years ago. This time, it’s offering higher broadband speeds but has capped usage.

When it began charging in April 2017, Ambani’s telecom unit undercut data tariffs of incumbents by half. Jio Fiber’s broadband tariffs are 13-23 percent lower than Bharti Airtel Ltd.’s, according to global brokerage CLSA Ltd., but they are effectively 8-27 percent costlier when data caps are factored in.

Reliance Jio’s combative telecom play shrunk the number of private telecom operators from nine to three, turned Ambani’s upstart India’s largest wireless carrier by revenue and gave it 33 crore subscribers while driving out rivals or triggering consolidation. Yet, the telecom market lost a fifth of its revenue and added 2.3 crore or 2.4 percent users in three years.

The telecom war has proven costly for Ambani, with the group’s debt rising. It’s among the factors that could have forced him to tone down aggression now.

Here’s why Ambani changed the strategy for Reliance Jio Fiber:

Debt Overhang

Reliance Industries Ltd.’s debt rose more than 75 percent in four years to Rs 2.87 lakh crore as of March on account of capital expenditure on Reliance Jio. The company, however, managed to contain its leverage because of its profitable consumer and petrochemicals businesses. Its net debt, according to its filings, stood at Rs 1.56 lakh crore, as of June 30, 2019.

Ambani targets to be net debt-free in the next 18 months by raising funds and asset sales. He plans to sell 20 percent in refining and petrochemical business to Saudi Arabian Oil Co., bring in strategic and financial investors in its retail and telecom businesses and to evaluate -unlocking options for real estate and financial investments.

Deep discounting in Reliance Jio Fiber would have led to operating losses, forcing the company to take on more debt.

Reliance needs to keep in mind investments for e-commerce and retail, Rajiv Sharma, telecom analyst and co-head, institutional research equities, at SBICAP Securities, told BloombergQuint.

Aggressive pricing is not an option in the high-speed wired internet segment, he said, adding that RIL should rely on loyalty and long-term plans, and content, so that there is a continuous stream of revenue to fund capex.

Stagnant Market

The broadband market in India is dominated by state-run Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. with 50 percent of the share and close to 1 crore users. But it’s not as fiercely competitive as telecom, and Jefferies attributes that to expensive pricing and lack of focus and execution among incumbents.

Unlike telecom, broadband doesn’t warrant a price war to win customers. Moreover, Ambani has lowered its subscriber target from five crore to two crore.

The quality of service provided by state-run companies is low, according to Viju George, telecom analyst at JPMorgan. “One doesn’t need to disrupt the market to get entry in the broadband space.”

Jaideep Ghosh, partner (telecom) at KPMG, said, “We are unlikely to see mobility-like tariff competition here (wired broadband), except in specific clusters in top urban locations. There is adequate room for all to expand as it is a vast untapped market.”

Higher Costs

Capital needed to wired broadband is higher compared to wireless services.

A single tower, depending on the spectrum band, allowed a wireless operator to services 1,000-1,500 users. Broadband requires last-mile fibre connection to each home. And then there are overhead expenses on routers, installation and service.

The cost involved in broadband is higher and sales time is longer compared to mobile, said Rajan Mathews, director general at industry lobby Cellular Operators Association of India. “Jio is known to be aggressive only if its costs are lower and here, as the cost is not low, Jio cannot charge lower as that will impact its return.”

Future Strategy

While Reliance Jio has cut its subscriber target by more than half, analysts don’t expect it to slash pricing.

“We can expect some revisions in pricing as they are offering more speed and less data,” said Hanish Bhatia, senior analyst (devices and ecosystem) at Counterpoint Research. But as of now, he said, consumers seem to be fine with lower speeds as long as they get higher data limits.

George of JPMorgan, too, doesn’t expect aggressive pricing as that could shift Reliance Jio’s wireless users to broadband the same could lead to loss of mobile subscribers to broadband that can be used by multiple devices. "Jio is not looking to cannibalise its mobile subscriber base. They are looking to expand the broadband space along without cannibalising their mobile subscriber base,” he said.

Ambani might look to tap 3-5 million users, who can afford to pay Rs 700-800 plus, and users unhappy with state-owned players who are still paying Rs 500 plus on average, he added.