There’s no doubt that Jio has come a long way since its launch on September 5th, barring certain long distance calling issues with Airtel. POI issues are now all but over. The network has started getting back at least some of its speed (which it had seemed to have lost) when the daily data cap was revised from 4 GB to 1 GB. Things seem a lot more stable now and one can comfortably port into Jio’s network as long as they are willing to bear minor glitches which are likely to be ironed out as time passes.
Although Jio had launched plans during its September 5 launch, those plans soon started looking outdated, as the competition too decreased the price of its data packs in order to retain their subscribers. It was known that Jio had to rework its tariff plan in order to remain competitive but while I was expecting a uniform decrease in the price of all data packs, Jio went a step further and launched an all-you-eat plan for Rs 303, which was unexpected.
The general sentiment is that the Rs 303 plan is a good one as it would boost the average revenue per user (ARPU) for Jio. However, I feel most people are not considering the bigger picture and ARPU as a standalone metric is pretty meaningless in the broader context.
At the end of the day, what really matters for telecom operators is their earnings before interest, taxes, depreciation and amortisation (or EBITDA) and EBITDA margin. While ARPU plays a crucial role in determining both the factors, it’s not the only factor that matters.
Jio’s current subscriber base: quantity, yes; quality, well…
It is a well known fact that most people are currently using Jio as their secondary SIM. There have been reports stating how 42 percent of those surveyed are using Jio as their primary SIM but I feel those reports are fundamentally flawed as the definition of primary SIM in those reports is the SIM that the user inserts in SIM slot 1 a.k.a primary SIM slot. Now, in most smartphones, only the first SIM slot supports 4G and with Jio being a ‘4G only’ operator, there is no other choice but to insert the SIM in slot 1. That does not necessarily make Jio the primary SIM and any interpretation based on this is deeply flawed.
The Q3 results of all of India’s top four telecom operators have come out and the numbers put out by them have been very revealing in terms of the quality of subscribers Jio has managed to attract. The data point that has really stood out is that the top four telecom operators have lost more 2G data subscribers than 3G/4G data subscribers.
Take a look at Number of data subscribers lost between Q2 2017 and Q3 2017 –
2G – 4.1 million
3G+4G – 3.6 million
2G – 3.6 million
3G+4G – 1 million
2G – 2 million
3G+4G – 1.1 million
2G – data not revealed
3G – 3.15 million
4G – 532,000
With the above figures in mind, it is certain that for the most part, operators have lost 2G subscribers more than 3G or 4G. Now it would not be a stretch to assume that most of these losses have been because of people choosing to use data on Jio instead of their primary operator. But the very fact that more 2G subscribers than 3G/4G have used Jio is troubling.
A plan worth Rs 303 is a tough sell in a market where the overall ARPU has hardly ever crossed Rs 250. If an operator wants to sell a Rs 303 plan, then the quality of subscribers needs to be such that they are willing to spend extra on data which is exactly what Jio does not have. The 2G subscribers that have left their respective operators to start using Jio are the ones whose ARPU can hardly be increased. If these 2G subscribers were indeed capable of being pushed onto higher priced plans, then they would have been using 3G before Jio’s launch.
The logic here is simple: a 1GB 3G data pack per month used to cost around Rs 250 before Jio’s launch. The 2G subscribers that moved to Jio (a 4G only network) definitely possess handsets that support 3G. 3G provides much better speeds than 2G and the experience of using modern smartphones is much better on a 3G connection than a 2G connection. If these 2G subscribers who started using Jio could really be pushed onto higher priced data packs, most of them would have already been using 3G on their primary operator itself.
The fact that these 2G subscribers who started using Jio never moved to 3G, indicates the inability of the operators to be able to push these subscribers on to higher priced plans. What is worse for Jio is that these 2G subscribers who have started using their network far exceed the 3G/4G subscribers that have come on board. I am very certain that the moment Jio starts charging for its services, none of these 2G subscribers will use the Rs 303 plan. While it might seem tempting to quote the Rs 303 plan of Jio as above industry average ARPU, Jio’s subscriber quality simply isn’t high enough.
It ain’t just about ARPU, mate!
Telecom operators worldwide have a more or less fixed operational expenditure (opex) for running their networks; revenue minus opex is what results in EBITDA. Now, the opex for Jio is large enough considering that the company is powering so many 4G cell sites and plans to install more in the coming months. The only way Jio can become EBITDA positive or break even on EBITDA basis, is by either increasing the revenue to the current opex levels or decreasing opex in order to match it to revenue. With all the capital expenditure (capex) investments Jio has lined up to increase capacity and coverage, opex is only bound to increase so the only option is increase revenue in order to break even or become EBITDA positive.
Now revenue itself is the multiple of ARPU and subscriber base. While industry wide overall ARPU for telecom subscribers in India averages around Rs 160-190, most telecom operators also have an equally high subscriber base to compensate for the low ARPU. For example, Airtel has around 250 million plus subscribers and an ARPU of Rs 170 and above generally, which helps it earn enough revenue in order to not only be EBITDA positive but also turn in an overall profit. The same goes for Vodafone, Idea etc.
In case of Jio, however, even if the Rs 303 plan is above average ARPU, the number of paying subscribers Jio would have would be far lesser than the current incumbents. It would be of no help to Jio if its ARPU is Rs 100 more than competition when only 10 million would pay for its plan, while the competition has 200-250 million paying at a slightly lower ARPU.
I had earlier mentioned Jio’s low quality subscriber base. Well, having fewer users pay is also another potential problem even if the ARPU is higher. When seen in terms of total revenue, it becomes very clear that Jio still has a long way to go before matching its peers and a high ARPU plan alone won’t help in that.
Pushing AVOID further into the data void?
Already by making voice free, Jio has potentially eaten away as much as 80 percent of the industry’s revenue source but the company does not want to stop at that. The Rs 303 plan will put further pressure on Airtel, Vodafone and Idea (AVOID). The problem over here is that before Jio’s Rs 303 plan, AVOID would charge as much as Rs 1000 – Rs 1500 and even more for data. A lot of data card users and other heavy users would often spend more than Rs 1500 on data.
Even when Jio launched, AVOID was of the expectation that even if the average cost per GB of data falls to Rs 50/GB, they can still make Rs 1000 or more from users who would consume 20 GB plus data on their network. One must remember that it is because of these heavy users that spend more than Rs 1000 on data that AVOID has been able to maintain a respectable ARPU.
For example, if one user recharges Rs 1000 for data every month and five other user recharge for just Rs 40, then the total revenue from the six users ends up being Rs 1200 giving an ARPU of Rs 200 per user even though it is just one user that is meaningfully spending on data.
Now Jio having introduced an unlimited plan for as low as Rs 303 is significantly going to arrest the top dollar AVOID can charge for data. Why will anyone want to pay more than a single dime above Rs 303 for data when Jio is offering unlimited at that price? I am reasonably sure that AVOID would have no choice but to offer a similar plan so as to retain their top users.
In such a situation, consider the above example again. The user who was spending Rs 1000 on data now spends just Rs 300 and the other five spend Rs 40 as usual. The total revenue from the six users now ends up being Rs 500 and the ARPU drops from Rs 200 to Rs 82. Jio is being absolutely brutal over here. Not only has the company completely eroded any chance of making money from voice but it is also significantly restricting data monetization. The entire 2017 calendar year is going to be painful for the Indian telecom industry with a lot of red ink being spilled on balance sheets.
Prime: a signal rather than a strategy?
In my opinion, the only reason why Jio introduced the Prime membership was to use it as a pricing signal. In short, Jio wants to test how many members would be willing to pay for its services and that is why it is asking people to pay Rs 99 between March 1 and March 31 even though the Rs 303 plan does not come into effect before April. I guess depending upon how many people pay for the Prime membership, Jio would further tweak its plans in order to either get more subscribers on board or retain the existing ones.
We have not seen the end of the Jio pricing story, take my word for it.