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Jio Gets into Action: Set to disrupt the fixed broadband market

September 03, 2019
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By Devangshu Datta

At Reliance Industries Limited’s (RIL) recent AGM, its chairman, Mukesh Ambani, unveiled the schedule for rolling out the company’s long-awaited fixed broadband service. Starting September 5, 2019, subsidiary, Reliance Jio Infocomm Limited, will launch commercial fixed line services under its new JioFiber scheme. By January 1, 2020, RJIL will also start offering internet of things (IoT) services.

As Ambani stated, this move opens up more “engines of connectivity” revenue streams such as home broadband, enterprise broadband, IoT, and broadband for small and medium enterprises (SMEs). Tariffs will range from Rs 700 per month to around Rs 10,000 per month. (Refer to updated service deatils here : http://tele.net.in/index.php?option=com_k2&view=item&id=25997:reliance-unveils-jiofiber-details-claims-plans-are-priced-at-less-than-one-tenth-the-global-rates&Itemid=39&tag=Wireless)

The company started inviting registrations of interest for its home broadband services about a year ago and trialled them for about 500,000 recipients. These test runs have led it to believe that it could aim to pick up 20 million home broadband subscribers spread across 1,600 towns. It also thinks it can target 15 million business establishments.

On the IoT front, Jio already offers a pan-Indian 4G network called Narrowband Internet-of-Things or NBIoT. Given a combination of fibre-to-the-home and fibre-to-SMEs, data from billions of smart sensors could be collected and processed from residential, industrial and public users. Ambani estimates that by 2021, there will be more than 2 billion IoT devices in use across India and Jio hopes to corner around 50 per cent market share in this nascent market by connecting at least 1 billion on Jio’s IoT platform. This could be an annual revenue opportunity of Rs 200 billion, according to Ambani.

For the SME segment, JioFiber will enable a combination of fixed line connectivity and cloud applications, partnered with Microsoft’s Azure cloud services. That could mean a paradigm shift for Indian SMEs, which are generally low-tech. It would offer SMEs a line-up of technological tools that would be plug-and-play and easy to handle. Large enterprises would receive scaled-up versions of the same services, with cloud-based solutions that would be much cheaper than those currently available.

Jio clearly intends to continue with its price war. It plans to charge lower tariffs than those prevailing currently. It, moreover, plans to offer broadband speeds starting at 100 Mbps and going up to 1 Gbps, and throw in a landline phone (with videoconferencing capability) and a digital set-top box. For some home offers, it will even bundle an LED TV. In tune with its mobile tariff philosophy, domestic voice calls (including STD) will remain free and international calls will be charged at lower rates. The JioFiber tariffs will include bundled entertainment subscriptions including, eventually, first-day, first-show access to movies as they are released. (This offer will kick in mid-2020.) Airtel’s V-Fibre service seems to offer lower speeds and a less comprehensive bouquet of entertainment options. For enterprise and SME cloud services, Jio will also charge much lower fees than the prevailing rates.

Another potential revenue stream Ambani mentioned was blockchain-based technology for managing transactions. Exactly how this will be placed on tap for users, including enterprise users, is still unclear, but blockchains can be used to manage all sorts of “trustless” transactions and to efficiently monitor supply chains and verify the authenticity of goods. Blockchain can also deliver anonymity to users.

Jio is also setting up an Edge computing and content distribution network with thousands of nodes. This will mean accelerated downloads for content and applications. The cloud partnership with global giant Microsoft should mean access to cutting-edge technology with the cloud offering artificial intelligence-based services in 13 Indian languages.

Another interesting factor in the content delivery experience is the integration of local cable operators (LCOs) into the Jio network. The company has controlling stakes in three leading cable multiple system operators – Hathway, DEN and GTPL – which have direct relationships with over 30,000 LCOs. Those LCOs will remain a part of the Jio entertainment network – presumably going digital since their services will be integrated with the Jio set-top box. This diverges from the direct-to-home (DTH) model pursued by other telecom service providers where LCOs are cut out of the loop.

According to Bank of America Merrill Lynch, DTH companies could be the most vulnerable to Jio’s bundled broadband and cable services as they are unlikely to offer dual services.

What can one make of the new initiatives? First, while everybody was aware of the Jio fibre roll-out, this is breathtaking in its scale and dimension. The fixed line home broadband market amounts to less than 18 million users at present. Jio hopes to double this base and, therefore, capture at least 50 per cent market share. It is also targeting SMEs in a big way, apparently with carefully curated offerings that might bring technology to a new user at highly affordable rates.

The price cuts are no surprise, but the details won’t be available until September 5, when the commercial tariffs will be known and can be compared and evaluated. Enterprise solutions, including cloud-based services, and the push into IoT may include many new offerings. Blockchain-based services are new for sure, and also extremely difficult to evaluate. What utility blockchain has for Jio itself and for users is unclear for now.

Obviously, this could be a game-changer for several market segments. It could lead to a sharp increase in fixed line broadband penetration and yet another surge in data usage. The entertainment space could be transformed, and that is a very big market. Entirely new segments such as smart homes and IoT-based services could open up. Moreover, Jio’s entry could have an impact on ad spends as advertisers start focusing more on over-the-top platforms.

It is also quite possible that the SME market would gain in operational efficiencies if moderately priced cloud-based services become available. Balanced against that, it’s hard to make revenue estimates for many of these segments since they are new and demand is difficult to judge.

In a broader sense, India needs more fibre-based backhaul. Most developed nations have nearly all telecom towers connected via fibre, with over 80 per cent penetration in countries such as Korea and Japan. In India, barely 20 per cent of towers are fibre connected. Jio’s roll-out will undoubtedly force similar moves from Airtel and Vodafone, and lead to faster fiberisation.

In fact, Fitch Ratings believes that Jio’s launch will help expand the home broadband market. Home broadband penetration is well below 10 per cent in India and the addressable market stands at 240-250 million homes. While Jio’s entry into this space would, no doubt, pressure its rivals’ broadband revenues, the impact is likely to be limited as the overall fixed broadband penetration remains low (at less than eight 8 per cent) and large greenfield opportunities still exist, as the Bank of America Merrill Lynch points out.

Will the new initiatives be commercially viable, especially since Jio intends to undercut current prices severely? Given network roll-out challenges, last-mile connectivity issues, marketing costs, etc., the new services could well be loss-leaders for a significant period.

RIL has already spun off hard infrastructure worth about Rs 1.17 trillion into InviTs, which means that it can raise money through stake sales; it has also claimed an intention to list both Jio and Reliance Retail within the next five years. Jio’s existing financial liabilities are reckoned to be around Rs 1.7 trillion. Brookfield Infrastructure has a commitment of Rs 250 billion towards the infra InviTs.

RIL intends to try and go debt-free by March 2021. A deal with Saudi Aramco, where the Saudi oil giant may pay around $75 billion for a stake in the core oil-to-chemical business would be critical to meeting this target of balance-sheet strengthening. As of now, this deal is nascent with Aramco only having given a letter of intent and stating that due diligence is at the early stages.

Analysts will need to wait until the actual launch of services before accurate projections are possible. However, using a base case scenario, here are some rough projections made by Moneycontrol. By March 2021, Jio’s mobile services may have 430 million customers (it is at 340 million now), with an ARPU of Rs 134 (at Rs 123 in the first quarter of 2019-20). The operating (EBITDA) margin could drop to 35 per cent from the current 39 per cent.

The home and enterprise broadband markets could be estimated at 18 million subscribers and 45 million subscribers respectively. EBITDA margins are likely to be lower at around 25 per cent in enterprise broadband, and at around 35 per cent in the home section. At around 5 per cent penetration (Jio is obviously gunning for much more with stated targets of 50 per cent), this could add Rs 60 billion to revenues.

Jio’s high capex, high leverage and weak cash flows have been areas of concern. There have also been rumours that the fibre roll-out has been slower than expected due to issues with right of way, etc. However, the network is more or less 5G ready and the capex cycle is near completion. Free cash flows could now improve due to the monetisation of the infrastructure and revenues accruing with the launch of the fibre business.

As always, this is a big bet by the Reliance Group. If it works, the synergies between the digital and retail businesses will push things into a new orbit. In one way or the other, rival operators will have to respond to Jio with offerings of their own.

 

 
 
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