Reliance Jio’s Contrarian Approach to Airtel – Adopts Asset Heavy Model

Contrary to the current trend, Reliance Jio prefers an asset-heavy model. The basic premise is that assets created at a large scale and competitive capital cost provides a long-term competitive advantage through business cycles. Cost-leadership is the core mantra of Reliance Group – this is achieved via capacity creation at a massive scale. For the telecom sector, spectrum and technology are viewed as the two factors of production – the former is scarce and finite whereas technology costs tend to decrease exponentially. So Jio would tradeoff in favour of cheaper spectrum with nascent ecosystem compared to a technology with good current ecosystem.

At launch we estimate Jio to have a capital employed of US$14bn, comparable to market leader Bharti and 30% more than Idea. Jio intends to have 75K sites at launch which compares to around 119K for Idea currently and 150K for Bharti. It will also have fibre (leased and owned) of around 250,000rksms compared to 100,000 and 202,000rksm for Idea and Bharti, respectively. Reliance Group has an existing retail footprint of 1,379 locations which it would leverage for both sale of handsets and telecom services.

With three strong pan-India incumbents and numerous smaller players, the market structure works against Jio. However, two factors favour Jio – the scale of its launch and the nascent stage of the Indian data market. We estimate 3G penetration at 15% (FY16E) and internet data revenue at 20% of industry revenues. Jio’s 4G-led strategy provides a potentially competitive position against the incumbents.

While expectations are built high that Reliance Jio will compete on cheap pricing, such a strategy will fail without a robust cost structure. We believe the answer lies in achieving data throughput which is materially larger than some of the incumbents. Jio’s medium-term goal would be to have a cost position which is significantly lower than Idea and Vodafone, the two incumbents, which are likely to have a smaller scale than Jio on 4G. We believe Jio will offer larger data bundles in their mobile plans (3x-to 4x the current level) but it is unlikely to lower the price points significantly but will give incumbents a run for their money.

Cost / MB Dynamics in Indian Mobile Data Services
The current cost of producing 1 MB of 3G data is Rs 0.18 for Idea Cellular. To compete effectively, we assume Jio’s cost/MB will need to approach or surpass the incumbents. We expect Jio’s cost/MB to reach Rs0.07 by FY18, a level comparable to the incumbents

Jio’s key goal would be to stimulate data usage manifold which would result in rapid ramp-up of data throughput in its network. With its massive scale at launch, this usage growth will translate into a falling trend unit cost of data, which will be key to Jio’s competitive position in the long term.