Prakash Diwan, Altamount Capital Management is more impressed with the announcement of JioMoney Merchant application and the aim of bringing around 10 million small retailers and merchants under the net.
Starting December 4 every Reliance Jio user will get data, voice, video and a bouquet of other Jio applications fully free up to March 31, 2017, announced Mukesh Ambani, Chairman and Managing Director of Reliance Industries while addressing stakeholders via a live broadcast on Thursday.
The scheme called "Jio Happy New Year offer" will cover new as well as existing customers.
Reacting to the news, SP Tulsian of sptulsian.com said it is going to be tough for the other telecom incumbents because when the free data and voice was offered till end of December, the incumbents had started selling their various assets to meet costs but now with further postponement of the offer from Reliance Jio, what assets would they have to sell.
According to Tulsian, this new move could also be a bit negative for Reliance Industries since there was an expectation that revenues from RJio would start flowing in from January 2017.
There is also the fear that more litigations would be filed by incumbents, which start questioning the extension of the scheme.
According to TV Ramachandran, President, Broad Band India Forum says one could see more consolidation in the space, which would be the health for the overall sector and customer would be the biggest beneficiary.
Prakash Diwan, Altamount Capital Management is more impressed with the announcement of JioMoney Merchant application and the aim of bringing around 10 million small retailers and merchants under the net. There is huge potential to grow in this space, he says.
Diwan says it would now put even more pressure on spends by incumbents. Tulsian too agrees, saying they are already bleeding, so an increase in ad spends would be difficult for them.
However, if the incumbents focus all their energy on improving customer service and satisfaction they would benefit with loyal customers sticking with them.
Naveen Kulkarni, Co-Head, Research, PhillipCapital said accessing the price damage for other incumbents would be difficult as of now but do not see a huge hit on ARPUs as such.
He said, so far for Jio, free voice did not gel with free data because of problems in points of interconnect. So customers are unlikely to shift to Jio unless that service is on track.
Incumbents may have already anticipated an extension of unlimited data usage plan and may already be underway to try retaining their customers, says Jaideep Ghosh, Partner, Telecom, KPMG. Incumbents will be adequately prepared
Ghosh says such offers will not only help Jio but also subscribers as competition becomes fierce.
Even though Jio's customer base rises, the loyalty remains low, says Ramachandran. Talks of touching 150 million user base is pointless.
The average Indian consumer is very smart, he or she will only use the service which is the cheapest. What matters most is the usage on an average per customer, says Ramachandran.
(Disclosure: RIL, which owns Reliance Jio, also owns Network18 and moneycontrol.com).
Below is an excerpt of the interview.
Prashant: You just told us before we started this speech you didn't expect a rollover and extension. We have that now till March 31, 2017, your first thoughts?
Tulsian: On September 1 when we saw this announcement came from Jio that the three months and 25 days free offer was given, all the telecom stocks have seen a big beating and now we have seen in this interim period for the last couple of days we have been hearing Bharti Airtel is looking to monetise Bharti Infratel, Idea Cellular is looking to monetise the assets, Reliance Communication is looking to monetise many of their assets. Now I wonder that with this extension what assets they will all be left with to monetise.
Definitely the bad counting, again the second round of bad counting for all these telecom stocks have started now when things are going to be really very tough. But yes, this will also be seen mild negative for Reliance Industries also because people have been expecting that probably FY18 will have the full effect on the revenue generating to the kitty of Reliance Industries which is now ruled out for the time being because March 31, 2017 is certain then definitely in my view Reliance Industries will be targeting the subscriber base of at least 110-120 million. No doubt that the response has been phenomenal of 50 million customers already having come in but this is not the threshold which they will be looking for. Anything above 100 million customers will be the threshold when things will get rewarding for Reliance Industries.
However, now again this litigation will all start, maybe the competitors of the incumbent will start questioning the extension of this free offer or this free bouquet which has now been extended to March 31. So, bad days for all the telecom stocks and mild negative for Reliance Industries as well in view of this extension.
Reema: One will the incumbents question this extension of order and second, is it legally tenable is there any reason to believe that Jio is violating any Telecom Regulatory Authority of India (TRAI) rules?
Ramachandran: I think this is something phenomenal, the way the further addition is happening at their end and I would not comment on whether it is legal or permissible because I don’t have the details so I am unable to comment, it is not proper of me to comment on that.
All I can say is this is going to heighten competition pressures and as a result yes, there would be pressures on other player, but on the whole it would benefit the consumers and the growth for the industry.
In the medium-term consolidation would be quickening up and that is going to make the overall industry healthier. For the main reason we should appreciate that industry is having all the problems because the industry is too fragmented. Now with all this happening I look forward to a consolidation which should make all the players who are there healthier and the consumer will benefit from the more aggressive competition and all this is excellent for broadband, because I explained in the Broadband India Forum I am all for making every play of technology, every play of service to make broadband happen in this country and that is going to happen I think.
Prashant: Your first thoughts?
Diwan: If I were to look at the area of interest, it is that Jio Money thing. Two things out of that of course, one is the extension of the free offer means that you still don’t put yourself to test as a company, how many people finally you are retaining as subscribers but as SP Tulsian said the magical number could be upwards of above Rs 10-12 crore. In light of the fact that Mukesh Ambani mentioned that we would start making margins in the mid teens, we will not be bleeding money too long, so probably he is waiting for that critical mass to happen in terms of transmission.
The 10 million new merchant establishment they are talking about adding - that is going to be a big change because that is an open market which except for a Paytm or some of these MobiKwik or some of these smaller players from the unlisted space, if not really small, have been venturing into that is going to change and that is going to build stickiness in this whole process. So, every clearly, the revenue model will alter dramatically much earlier than what we thought thanks to the demonetisation timing that is about it.
On the incumbents it is like you had a guy been put to the gallows the deadline was x, you extended it by three more months so the pain and that anxiety of how you stand is going to be even dragged further. So, how much do they invest is the big question, how much do they do to retain market share? Nobody knows, so marketing spends, infrastructure spends all of that it going to go in a limbo.
Prashant: Do you expect aggressive promotional offers etc to counter what Jio is doing from incumbents Bharti, Idea or do you think they will wait and see once Jio starts charging customers to assess what the stickiness there is and then respond in a big way. Tariffs etc, are already coming down but apart from that?
Tulsian: In my view it will be foolish on part of the incumbents to increase their ad spends and all that. Let me just give you an experience here. Maybe if you see the behaviour or the customer service of last maybe six months or so, it was really on a falling trajectory, it was pathetic and the client response and all that definitely that will be getting strengthened by the existing players both by Idea and Airtel, I will put it in this way. I don't have much experience of Vodafone because Vodafone has been as such pathetic in the customer service prior to that. I am giving my experience and of many others.
So, I don't think there is any point plus where is the money. You don't have money in your pocket, you are already bleeding and that is the reason you are monetising your tower assets for both the companies. Vodafone have rich parent, they will keep pumping in the money. So, I don't think that just increase in the ad spends is really going to serve the purpose. Yes, if they can improve the customer service and all that, believe me, that will really be a key advantage going in favour of them. So, that probably will get strengthened on which there won't be much spending also by the incumbents.
Reema: Just to try and get some numbers in, any early estimates of how much the pricing cold come down from here on? What the average revenue per user (ARPU) hit could be in Q3 that is the December quarter as well as the March quarter, any rough estimates?
Kulkarni: Pricing is slightly difficult question at this point in time because what kinds of pricing actions that Bharti Idea or Vodafone are going to take is difficult. But whatever we have seen is that there is a lot of elasticity in the telecom market. Even if pricing comes down, volumes do go up because consumer spends tend to remain stable in the short to medium-term. If a consumer is charging with Rs 100, he will get a higher usage package on that. So from that perspective we do not see huge impact on ARPU probably ARPU could come down a little bit, but what is going to happen is that other aspects like interconnectivity charges and network expenses, those aspects could start moving up because of higher usage in the system.
Prashant: How would you look at this extension move? One way to look at it is because of demonetisation, smart phone sales and hence adoption, etc. was becoming slower, so they got themselves more time with this, getting more customers on board to experience the service. Is it also in a way an attempt to reach a good level of service especially data so that customers who are there and who are coming on, stick around once you start charging. How would you look at this?
Kulkarni: The biggest reason why the offer has been extended is that if you look at the service that Jio is providing, so only data is not a great proposition. You need voice as well as data because the high ARPU customers are both looking at voice as well as data experience combined. If the voice experience is poor, then the high ARPU customers are not going to switch with another operator.
So, the experience on voice has been not great, it has been pretty poor for the last three months with Jio because of not sufficient interconnect points or whatever. However, they want to stabilise the whole network in terms of customer experience on every front. So, once that happens, then probably they will start looking at charging the customers. Another three months is a sufficient timeframe which Jio is providing and by that time, the network should be fairly stable, experience should be fairly stable and on par with other operators, then the move will be to start charging the customers. Before that if they start charging the customers then it is going to backfire for them.
Reema: What should be the expected counter reaction from the incumbent players according to you?
Ghosh: The incumbents as well as the industry was expecting this kind of a move because the first three-four months was likely to be used by Reliance Jio for sorting out various issues end-to-end for custom acquisition, the backend processes, interconnect so on and so forth. So I think the incumbents are fairly strong and have been in business for two decades or a little less. So I think that they were prepared for this kind of an extension offer to get in higher number of subscribers. So they will take necessary steps in terms of their penetration enhancement, their broadband coverage enhancement.
At a point of time when the Jio offer becomes paid then we may see some price cuts and so on and so forth. Till such time incumbents are adequately prepared to take the next three months whatever challenges are there. We must also remember typically that during the free offer period, the performance and the subscriber intake and the usage may be very different when the services becomes on a payment basis.
So in short, incumbents definitely -- it is not good for the industry, it is good for the subscriber as such. Even if you look at India is ranked 138 out of 180 countries in terms of the information and communication technologies (ICT) development index as per World Bank 2016 report. So these kind of free offers and so on and so forth will increase the penetration, so good for consumer, good for country at a macro level but definitely hurts the industry financials.
At some point of time, Reliance Jio needs to also take a view on those aspects. As of now it is more on a subscriber acquisition and building the market, testing the services, sorting out issues mode.
Prashant: You wanted to come in earlier on incumbents?
Diwan: On this impact on the incumbents till now the first three months we have seen people buying Rel Jio, not buying but acquiring a Rel Jio connection as an add on, trying it out particularly for data and all of us not so much on the voice. The fact that full portability is going to be introduced and focused upon as well means that you will now have somebody finally taking a decision and saying that okay let me get out of Vodafone and move to Rel Jio.
That means the market share change that will eventually get precipitated is going to be very different than the first three months. Here you had people taking add on sim. I have not come across somebody who is saying I have given up my existing sim and I am only using a Rel Jio sim. So it's more of a trial and error kind of things, so it is add on.
Now the next three months with portability also coming into the picture and they are focusing on the higher average revenue per user (ARPU) users as even Naveen Kulkarni mentioned that is where the real money lies, that is where the stickiness will finally evolve. So, this portability is going to hurt the incumbents even more than what we have seen in the first three months. So, I am sure it is even going to be more severe than what he is saying.
Prashant: Before Mr Ambani started speaking a fair number of panellist and we were also discussing the probability of a big announcement foray into home broadband, direct-to-home (DTH) kind of thing. What are your thought is that an opportunity, the total subscriber for home broadband in India is about 2.2 crore?
Ramachandran: In broadband my view is that we are today in a lower position than even mobile was 20 years ago, but on 4G data explosion is taking place like what we are talking about through use of the current players and you don’t have capacity to even backhaul it to the nearest aggregation point. We don’t have enough copper or optic fibre in the ground unlike other country.
I am not too carried away by the number of subscribers because number of subscribers are there but like an earlier speaker pointed out, they are all add on subscribers. There is no such thing as customer loyalty in the last crunch. They all be having 3-4 SIMs and Indian consumer is very, very smart, he use what benefits him most. He use data for one, voice for another, so talk of 50 million, 100 million or 200 million. I am more interested in the usage because usage is what is going to bring revenue to the operator. So, what we need to see is a real consolidation taking place in all this aspects and there I would not discount the incumbents.
Now these current operators have been in the market and they are very market savvy, customer understanding, they know the market, so there are tremendous advantages also in terms of signal coverage, they have got a big coverage, by virtue of the fact they have been there for 20 years or more, so it is not easy to match.
Reema: So far in the consolidation which has taken place, ace players like Reliance Communication, Tata Docomo, Telenor, these have been marginalised while the Bharti, Vodafone and Idea managed to keep the market share intact if not strengthen. But now with Jio just getting in stronger and adding subscribers at an overwhelming pace and a much faster pace, do you believe there is a possibility that the fourth player, Idea could also start losing market share or perhaps even Bharti, Vodafone - take us through how consolidation according to you will play out especially with Bharti, Vodafone and Idea?
Ghosh: I am not looking so much at the number of subscribers because if you look at the revenue market share which is where the money is, Bharti Airtel currently has about almost 33 percent of the revenue market share and Vodafone and Idea also in the late teens or early 20 percentage of the market share where revenue is concerned.
If Reliance Jio has 50 million and it may go up to much higher numbers in the next three-six months but revenue is not there, so in terms of revenue market share, the top three private sector operators are fairly protected at this point of time. We need to see what happens in the future.
So far as the other telecom operators are concerned, we have seen some amount of consolidation happening in the current year in terms of MTS, Reliance Communications and Aircel etc. There are smaller operators; we may see some consolidation happening there. But at this point of time my view is that the top three operators have been operating in India for long time, they have a healthy subscriber base and especially Vodafone and Airtel have got a decent strong post-paid subscriber base. So it is not -- any new Reliance Jio subscriber, high value customers has to be taken away from these operators. It may not be so easy.
The final point from my side is that higher data usage maybe good for the consumer but it is not necessarily good for the telecom operators because additional incremental investments in network processes etc is never justified by the higher usage of data, you can never charge that much more. So, higher usage of data has always put operator in a lot of stress. 1GB per day is very high because average smart phone users in India use 1.4GB per month. So 1 GB per day is like 30 times more. So higher data usage necessarily will not give you more money that is where I would like to conclude.
For entire interview, watch accompanying videos.