Reliance AGM or Finance Budget, 2020?
If there is one company that has managed to had a terrific period during the on-going corona crisis it would be RIL. After having raised a cumulative of approximately 1.5 lakh crores by selling a third of Jio Platforms, RIL is now net debt free once the cash from rights issue comes in next year.
Before we get into analyzing all the announcements, read about Reliance's all out war on all fronts here.
5G and Make in India
This biggest buzzword these days is 5G. The 5th generation of telecom technology has already been deployed in several countries and major telecom equipment vendors such as Ericsson, Nokia and Huawei also have their 5G gear ready for deployment.
After having raised such as enormous amount of cash in a record time, it is clear that Jio clearly has the financial muscle to move into 5G just like how it moved into 4G. Jio will once again have the first mover advantage here which should make it the indisputable network in terms of technology once the 5G airwaves are auctioned by DoT.
However the much more interesting part of the whole AGM was Jio’s claim that it had developed the necessary technology to launch 5G in house without the need for a third party vendor.
This in our opinion is something that needs a little more interrogation as the details were pretty sketchy on what exactly Jio meant when it said that it would launch 5G in-house. Our presumption is that Jio would develop its telecom gear on its own without having to rely on any third-party telecom equipment vendor such as Ericsson, Nokia or its dominant and sole network gear provider Samsung.
From what we know, entering the telecom gear market is no easy task and is actually quite tough. Even the world’s largest and most diverse operator in terms of number of countries served i.e. Vodafone doesn’t manufacture its own telecom gear despite having enough incentive to do so and for a good reason.
A new telecom technology such as 5G is developed for quite a few years before it is eventually commercialized. The winners and losers of a new generation telecom technology such as 5G are determined partly during the technology’s development stage and partly during its deployment stage.
The development phase involves a SSO i.e. a Standard Setting Organization. A SSO develops a standard which is then used by various smartphone manufacturers and telecom operators worldwide. SSOs themselves are often comprised of various wireless companies such as Qualcomm, Nokia, Huawei, Ericsson etc which are involved in the development part of a standard. During 2G there were two primary standards i.e. GSM and CDMA. 3G also had two standards in the form of HSPA and EVDO. When there are two competing standards in the market place that means there are also two competing SSOs. Each SSO competes with the other one to ensure that its standard wins. The CDMA Development Group SSO which was behind CDMA and EVDO was backed by Qualcomm eventually lost and from 4G onward there has been just one standard and by extension one SSO involved in its development.
As we said if there is more than one SSO in the market place, each SSO has to compete to ensure that its standard gains dominance. You would remember how one telecom operator for example Reliance or Verizon would go ahead with CDMA while the other for example Airtel or AT&T had GSM during the old days. You would also remember how a GSM phone would not work in a CDMA network and vice versa. The existence of multiple standards and by extension multiple SSOs is where the competition during the deployment stage comes in. You need to convince as many telecom operators and smartphone manufactures as you possibly could to adopt your standard. If your standard has a competing standard in the market place and if the deployment of your standard didn’t get enough traction or scale then the competing standard wins and your investment in your standard significantly loses its value.
As things stand today, there has been just one standard from the 4G era. For 4G the single standard is LTE and for 5G the single standard is 5G-NR. With just a single standard in place for both LTE and 5G, the competition during deployment phase has gone away. Smartphone manufacturers and telecom operators have no choice but to adopt LTE if they want to be 4G ready or to adopt 5G-NR if they want to be 5G ready. So the competition in standards is now in the development stage.
The development of a standard such as LTE or 5G-NR spans several years. During the development phase many members of the SSO i.e. Standard Setting Organization finalize what technology which member would contribute to which part of the standard. If a member’s technology is adopted as part of the standard then the member of the SSO is entitled to earn a royalty for its part in the standard whenever someone uses the standard such as a telecom equipment manufacturer or a modem manufacturer.
Ensuring that you have the necessary technology for it be to adopted as a part of the standard is no easy task at all. Companies like Qualcomm which play a significant role during the development phase of a standard such as 5G-NR or LTE often spends billions of dollars on R&D to ensure that their technology gets accepted by the SSO members as a part of the standard and that they eventually get to earn royalty from it.
For example, Huawei has spent around $13 billion on R&D last year while Qualcomm spent around $5 billion. These companies spend so much on R&D to ensure that their technology gets accepted as a part of the standard and they get eventual royalty payments when the standard moves from the development phase to the commercialization or deployment phase. Another aspect is that if a company’s technology eventually does get accepted as part of the standard by the SSO then the company gets a head start in terms of developing end user products such as telecom equipment or modem.
Let’s now come to Jio. The company as far as we know has had no say in the development of 5G-NR. The company’s R&D expense is nowhere near what Qualcomm and Huawei spend. The company has no prior experience in developing telecom gear. If Jio does indeed goes ahead with its own in-house 5G telecom gear, it is bound to pay a good amount in royalty to various companies like Qualcomm and Huawei. We are also not certain what the quality of Jio’s in-house telecom equipment would be considering that it was not involved in the development phase of 5G-NR as a member of the SSO and by extension has had no insight into the deliberations during the development phase.
Our guess is that instead of fully in-house telecom equipment, Jio might go with a hybrid model whereby it partners with an existing telecom equipment manufacturer such as Nokia or Ericsson and has its own ingenious telecom equipment as well.
The Google Show
There were early rumors that Google might buy a stake in Vodafone Idea however those rumors never materialized. Google later on set up a $10 billion digital India fund and there were already rumors that Google was planning to invest in Jio Platforms. Those rumors did materialize during the AGM when Google announced that it would invest 33,737 crores in Jio Platforms in exchange for a 7.7% stake. During the AGM it was also announced that Google would partner up with Jio to launch a Jio powered 4G/5G smartphone.
We believe the reason behind Google’s investment is pretty straight forward. When Jio launched 4G, one of the things that were vital for its success as a 4G operator was to ensure that there was a vibrant ecosystem of affordable 4G devices to choose from. To that extent, Jio partnered up with Samsung, Qualcomm and several others to ensure a ready 4G device ecosystem when it launched its services.
Jio also wanted to bring onboard feature phone subscribers. This led to the launch of Jio Phone which was priced just Rs 999 and had a special Rs 149 Jio plan specifically for it. The device was a hit with Jio announcing during its AGM that Jio Phone has amassed as many as 100 million subscribers.
During all this, one company was clearly missing out all the action and this was Google. Those 100 million Jio Phone subscribers were running a phone powered by Kai OS and not Android. This meant that Google lost a potential 100 million users for Android and our guess is that Google doesn’t want to lose any further. Mukesh Ambani announced during the AGM that his aim was 500 million subscribers. If even 200 million of these use JioPhones then that’s 200 million people using Kai OS and not Android. Google definitely would not want to lose out on those 200 million users.
Jio TV+ and the Streaming War
During the AGM, Jio continued to push the Jio Fiber broadband service the way we expected. With the wireless network of Jio providing as much as 3GB of data per day, the vast majority of the country does not feel the need to have a full-fledged fixed broadband network. In such a scenario, Jio’s best bet at reaching its 50 million households target is to position Jio Giga Fiber as a cable TV first that also doubles up as a broadband network.
Continuing in the same direction, Jio has announced Jio TV Plus which apart from featuring all the channels which a normal DTH subscription has also features a single log-in for all major OTT apps. How Jio managed to pull this off is unknown as the single sign on works with almost all major OTT apps.
We always believed that the acquisition of Hathway and Den Networks solves a very crucial last mile problem that almost all broadband providers faced. However, the expansion of Jio Fiber was still quite slow despite the acquisition of two of the largest MSOs in the country.
For some reason, Jio has not shown the same type of aggressive tariffs for its Jio Fiber subscription that they had shown with Jio wireless. We do not know why the prices even at launch were kept above what many people paid their local ISPs. Unless and until Jio aggressively cuts prices of Jio Fiber and expands it physical footprint, the 50 million household target seems impossible to reach.
We feel the decision to position Jio Fiber as a TV service first with the help of Jio TV Plus was the right decision as more than fixed broadband Indians own TV. However the company needs to expand the service rapidly to cover more geographic area and cut prices as well. What price the Jio TV Plus gets sold at will be crucial in determining its fate.
Jio Glass - A Google Glass like experiment?
Another interesting announcement during the whole AGM was the unveiling of the Jio Glass. From what we could pick up from the on stage demo this seemed like a handy AR/VR device that mimics the Google Glass but isn’t quite the same thing.
We are once again unsure of what appeal Jio Glass would have on the market and how competitive it would be. If we were to take a guess, our guess is that Jio Glass is most probably being manufactured by a China based ODM for use by Jio. However this is where the limitation also starts to creep in. We do not think Jio has the cutting edge prowess of Apple in terms of hardware or Google in terms of software to be able to pull off a mixed reality headset.
Even if we were to assume for a second that Jio Glass does click in the market at whatever price point it sells for, we can’t help but see a future where someone like Xiaomi steps in with its own mixed reality headset or a completely new Chinese company erupts out of nowhere and starts selling better and cheaper mixed reality headsets in India.
As we said, our guess is that some China based company is manufacturing these headsets for Jio to be sold in India. Maybe Jio could complement it with 4G connectivity packs specifically for the Jio Glass. However if that were to happen, it is once again easy to see someone like Xiaomi partnering up with Airtel and achieving the same.
The only scenario where Jio Glass succeeds is if Jio sells these below cost like how they are doing with the JioPhones and then makes up for it by selling connectivity plans for Jio Glass or selling apps and services on the Jio Glass. At this point, we would just have to wait and see what it is that Jio brings to the table with the Jio Glass, at what price points and with what features before we can make any more comments on it.
Jio Mart and Partnership with Facebook
RIL is posing Jio Mart as an Omni channel commerce platform. You can purchase anything offline or have it delivered to your home. The choice is yours. With the impending acquisition of Future Retail, RIL will undoubtedly become the largest retail player in the country. Such economies of scale can definitely help bring down prices and improve quality.
Because of restrictions on multi-brand retail FDI, someone like Amazon or Flipkart will never be able to provide an omni channel commerce experience. This is definitely something that gives RIL an added advantage with Jio Mart.
Coming to the partnership with Facebook, Facebook is hoping that it would leverage Jio’s massive subscriber base and the eventual hit launch of Jio Mart to turn WhatsApp into a kind of WeChat. Again, we feel this is a bit of a stretched assumption. Apps built for China almost always have never worked out of China. This is why most Chinese companies that have made it big globally never redesigned a Chinese product but rather created a completely new product for the global market.
As things stand, WhatsApp is predominantly being used to provide customer support in India. We have never seen a big company conduct their business through WhatsApp in India. Even ticketing companies or travel companies that literally just have to book a ticket have never used WhatsApp to carry out the actual transaction but rather just used WhatsApp to send the ticket once the transaction occurred in their app or website.
We would have to wait and see what WhatsApp does to turn itself into a WeChat or if that’s even its goal in the first place. WeChat is an OS in itself. It is replete with its own APIs that developers can leverage to create their own mini apps within WeChat. WhatsApp is nowhere near WeChat in terms of developer tools to create mini apps.
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