Sleepless nights for telcos as Reliance Jio prepares for 2G war

The veil of secrecy is slowly being lifted over Reliance Jio. No sooner was it made public that Reliance Industries’ telecom venture has shown interest in bidding for the upcoming spectrum auction, the analyst community seem to have woken up from their slumber. Some have downgraded other companies in the sector while some others say that the present tariffs are low itself and Reliance Jio will have little impact on the players, just like entry of new players in the market had little impact in 2008-09.

But unlike other companies, this is about Reliance Industries which has an aggressive track record as far as competition in their respective sectors. Let’s go back in history in the later eighties and early nineties to see evidence of its competitiveness.

Reliance planned to enter the synthetic textile market with a plant size that was unheard of in direct competition with some of the richest and most established players in the industry with a track record of nearly 100 years. Within a decade, Reliance was the single largest player, with most of the competitors either wiped out or had sold their companies to Reliance.
The ambanis changed the rules of the game to their convenience. Having a mammoth sized fully integrated plant, they ‘requested’ the government of the day to bring down import duties of some of its finished products (synthetic fibre intermediates) which was the raw material of its competitors. This single move more than any other changed the game in favour of Reliance.

This was done at a time when Reliance was a mid-size company and just starting its petrochemical operations. Textile and its intermediate market was at that time considered to be one of the most competitive markets in the country, which only those companies with deep pockets could manage to navigate.

Today Reliance Industries is sitting on a cash pile that will very soon cross the Rs 1 trillion mark. It is generating nearly Rs 20,000 crore every year with little idea on what to do with its cash.

Dominating a market is in Reliance’s DNA. Mukesh Ambani is known to be more aggressive than his father. He has demonstrated this in the case of KG-D6 gas pricing issue where he made the entire government machinery come out with a gas formula which suited the company. It did not matter to him or his company that this move would push the entire gas based power sector into crisis.

Expecting the company to follow the rules of the game in telecom like a school boy and not disturb the pricing structure is living in a fool’s world. The only way the company can grow and get market share is by seizing market shares from others. Reliance Industries shook the telecom market when under Mukesh Ambani it first entered the telecom market in the early part of the century and offered rock bottom tariffs. In the current scenario it would take very little for the company to shake its competitors. Most are already neck deep in debt (and some in foreign currency debt) and any lowering of prices would severely impact their ability to service their debt.

Reliance’s entry could not have been at a worse time for its competitors. The sector is witnessing a shift from voice to data. New client addition has slowed down and average revenue per user is barely higher than the lowest levels. Increasingly revenue and growth is coming from the data space. But if one looks at the services being offered in this space, it has left everyone dissatisfied. Against an advertised 3 MB download speed, one would be thankful if the services are available at one-tenth the speed. Most of the time the poor instrument is searching for a 3G tower to achieve the speed promised.

Given this backdrop, Reliance comes in with a 4G technology at speeds experienced never before. The company recently displayed its offering at the annual technology festival at IIT Mumbai (Read here). Even if the company is able to offer only better speeds and better quality, it can cause a big dent to the existing players.

As for its tariff, Reliance Jio has bagged its broadband licences at a fraction of the cost that other players did. Rather than building an infrastructure, the company is utilising the excess infrastructure created by its competitors, further reducing its capital cost. Financially speaking, there is little reason why it should not offer lower tariff, it has created enough space to operate in a lower tariff environment.

Reliance’s competitors have got a whiff of what is coming. They have slashed their data rates by 90 per cent or are offering 3G services at 2G rates.  But people in the industry believe that Reliance will be coming to the market with rates even lower than 2G services and a host of financing schemes to sell its services along with instruments. The game spoiler for Reliance can be its service standards, which in the past has raised a lot of questions.

Reliance has shown its first card by applying for the upcoming 2G spectrum auction. The company is not here to get a single digit market share and then consolidate its position slowly over the years. That is not how Reliance works.

Irrespective of what analysts feel, market has given its verdict when the news hit the market. Telecom sector stocks were down by nearly 5 per cent on the day of the news and further 2 per cent the next day. Regardless of the financial impact on its competitors, days of high price earnings multiples of telecom sector stocks (in their 30s) would be over if Reliance Jio gets its price and services right.

Source : Business Standard.

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