Five Steps to Domination: Jio’s India Game Plan
How Jio turned Indian telecom on its head
I have written a number of articles about Jio in the past. And in every one, I discussed various details of Jio’s strategy, such as the one to release a feature phone or analyzing its tariff plans. This article is similar. And different.
Yes, it once again takes a look at Jio’s strategy. But this time, I will be trying to give a grand overview of what Jio’s overall strategy is. Why did I not do so before? Well, because I relied a lot on Jio’s tariff plans, but I am beginning to realize that Jio does not have any fixed set of tariff plans in mind. Instead, it seems to have an average revenue per user (ARPU) target in mind. With that in mind, I think I can finally write about Jio’s overall game plan.
I can broadly classify Jio’s overall game plan into five sections –
- Get a technological lead
- Use the cheapest possible resources
- Build an ecosystem
- Construct a pan-India network
- Corner the competition
Now, let us look at how the company has gone about this:
1. Get a technological lead
Jio always wanted to have a technological edge on the competition. This helps explain why the company started working on a 4G network right from 2012, while the competition was still working on 3G. It also helps explain its IP network architecture even while some players still are yet to have a 100 percent IP network.
It does not end there. Jio’s implementation of features like VoLTE, VoWi-Fi, and LTE Broadcast, put it in a league of its own which rival telecom operators would need quite some time to match. But having all this technological lead is of no use when it is achieved through the same route as that of the competition. When it comes to telecom, there is more or less a fixed cost pattern associated with the section. There are just a handful of companies from whom you can source BTS such as Ericsson, Nokia, and Huawei. There are also just a small number of companies that could work upon your backhaul (such as Cisco). And considering how heavily regulated telecom is, there is little scope to be innovative and have a fundamentally different cost structure.
So, to convert its technological lead into something that would give it worthwhile cost savings, Jio resorted to building a network that while technologically advanced, used some the cheapest possible resources available.
2. Use the cheapest possible resources
When I talk about resources that go into building a telecom network, two that primarily matter are the spectrum and the BTS. In both, Jio has managed to cut costs.
The spectrum coup
Let us tackle spectrum first. Jio’s first spectrum play was the acquisition of Infotel Broadband which was the only company that won a pan-India 2300 MHz spectrum during the 2010 spectrum auction. While the rest of the telecom operators were busy concentrating on the 2100 MHz band so as to roll out 3G services, Infotel quietly bagged 2300 MHz spectrum on a pan-India basis. Interestingly, the only other major telecom operator that bagged a 2300 MHz spectrum during 2010 was Airtel. The result of Jio acquiring Infotel was a pan-India 2300 MHz spectrum that was suitable for deploying LTE. And Jio got that in 2010 at very low prices. I will give a comparison of prices below for what Jio paid for 2300 MHz and what telecom operators like Airtel, Vodafone, Idea, etc. paid for 2100 Mhz. Please remember that Airtel, Vodafone, and Idea acquired just 10 MHz of 2100 MHz spectrum (2 x 5 MHz paired), whereas Jio had acquired 20 MHz of 2300 MHz spectrum.
During 2010, the following were the amounts spent by Airtel, Vodafone, and Idea for 2100 MHz spectrum on a per MHz basis. For the purpose of this calculation, I have selected one Metro, one Category A circle, one Category B circle, one Category C circle and compared it with the amount Jio paid for the same circle.
Rs 324.70 crore/MHz – 2100 MHz
Rs 114.64 crore/MHz – 2300 MHz
Jio’s price per MHz was 2.83 times lower than what Vodafone and Airtel paid for it.
Category A: Tamil Nadu
Rs 146.49 crore/MHz – 2100 MHz
Rs 103.47 crore/MHz – 2300 MHz
Jio’s price per MHz was 1.41 times lower than what Vodafone and Airtel paid for it.
Category B: Madhya Pradesh
Rs 25.83 crore/MHz – 2100 MHz
Rs 6.23 crore/ MHz – 2300 MHz
Jio’s price per MHz was 4.14 times lower than what Reliance and Idea paid for it.
Category C: Assam
Rs 4.14 crore/MHz – 2100 MHz
Rs 1.65 crore/MHz – 2300 MHz
Jio’s price per MHz was 2.50 times cheaper than what Airtel and Aircel paid for it.
The price that Jio has paid for 2300 MHz spectrum on a per MHz basis has been multiple times lower than what Airtel, Vodafone, and Idea paid for 2100 MHz spectrum during 2010. I realize that 2100 MHz spectrum was for 3G while the 2300 MHz spectrum was for 4G but broadly speaking all these are broadband spectrums. And when seen from that angle, Jio has definitely managed to get a better deal compared to what the competition had to cough up.
Even if you want to have a similar comparison, consider the recently ended 2016 spectrum auction and the price Airtel had to pay for 2300 MHz spectrum: Rs 53.84 crore/ MHz. By comparison, Jio paid Rs 29.19 crore/Mhz for 2300 MHz in 2010. The math is simple: Airtel paid 1.84 times more than Jio for 2300 MHz spectrum.
No matter how one looks at it, it is becoming clear that Jio’s acquisition of Infotel Broadband in 2010 gave it access to spectrum at extremely cheap rates. The 20 MHz spectrum of 2300 MHz that Jio got on a pan-India basis gave it a high capacity layer to deploy 4G services.But to economically deploy a 4G network and ensure excellent coverage, Jio needed low-band spectrum as well. If Jio were to deploy 4G on 2300 MHz alone, it would need a lot more towers to ensure optimal coverage and would still not be able to reach certain hard to reach areas such as elevators, and underground car parks.
So, in order to get low band spectrum, Jio chose to move ahead with 850 MHz spectrum and got access to near pan-India 850 MHz spectrum. For this, Jio collaborated with Reliance Communications (Rcom), which is run by Mukesh Ambani’s brother Anil Ambani. Reliance Communication had pan-India 850 MHz spectrum which was being used for providing CDMA services. However, with the CDMA ecosystem steadily dwindling and Reliance Communications’ financial status deteriorating every passing quarter, it became difficult to invest and modernize the CDMA network. Rcom had precious low-band spectrum, but the 850 MHz spectrum was being wasted upon CDMA which was in a freefall state, and Rcom did not have the financial muscle to roll out LTE.
In order to create a situation that helped everyone, Jio suggested that Rcom acquire MTS and liberalize the entire 850 MHz spectrum holding of its own 850 MHz spectrum and that of MTS as well. Meanwhile, Jio also bought 850 MHz spectrum in auctions. Finally, Jio stitched a spectrum sharing deal with Rcom because of which Jio got access to 5-10 MHz of 850 MHz spectrum on a pan-India basis.
Although it’s difficult to calculate how much the 850 MHz cost Jio, one can rest assured that the price Jio paid for that was reasonably lower than what Airtel, Vodafone, and Idea paid for the 900 MHz spectrum. Also, the 700 MHz spectrum that was put up by DoT was so expensive that none of the players bought it. All in all, thanks to some clever deals, Jio is the only 4G operator in India to have low-band spectrum. Pretty much every other operator either has 1800 MHz or some other higher band.
In a very shrewd manner, Jio managed to gain both 2300 MHz band and 850 MHz band spectrum on a pan-India basis so as to create a robust network. To complement 2300 MHz and 850 MHz spectra, Jio also acquired 1800 MHz spectrum through auctions. However, one must note that unlike 2300 MHz and 850 MHz, Jio didn’t have any price advantage over its competitors while acquiring 1800 MHz spectrum. But, on an overall basis, it is safe to say that Jio has managed to gain spectrum in a very price efficient manner while not compromising on quality.
Getting BTS at a bargain
In order to further save costs, Jio picked Samsung as its BTS (Base Transceiver Station) supplier. Samsung has been the sole BTS supplier for Jio in India. What one must not forget here is that Samsung is not a leader in the network equipment market. In fact, when Jio started out building its network in India, Samsung would not even have had more than 5 percent market share of the worldwide network equipment market. Samsung was a niche player in a space that had been dominated by Nokia, Huawei, and Ericsson (in that order).
Since Jio was an LTE-only operator, its LTE contract was one of the largest in size considering that it wanted to deploy its LTE network all over India. Considering the size of Jio’s contract and the fact that Samsung was a small player looking for a way to break through, we can be reasonably sure that Jio must have negotiated a better deal with Samsung in order to build its LTE network than would have been possible had it made a deal with the likes of Ericsson, Nokia or Huawei. Jio choosing Samsung might also have had to do something with building an ecosystem. That takes us to the next point.
3. Build an ecosystem
Jio’s technological lead and its desire to use the cheapest possible resources came at a cost – it potentially limited the addressable market for Jio. The penetration of 4G smartphones in India was pretty low. Add to it the fact that Jio did not have a traditional 2G or 3G network fall back and it meant that VoLTE or VoWi-Fi were the only options to make calls. 4G VoLTE smartphones were tough to find when Jio was starting out. Jio’s technological lead was actually inhibiting it.
Apart from that, devices that worked on the 2300 MHz and 850 MHz bands were few. The vast majority of devices worked on the 1800 MHz band only – this was one of the reasons why Jio got 2300 MHz and 850 MHz at such cheap prices. Jio knew that in order to make the most out of its network and its spectrum holdings, it needed to build out a device ecosystem. Jio got to the root of this by partnering up with device manufacturers and SoC manufacturers as well.
It has become clear that manufacturers such as Micromax and Samsung were in talks with Jio well before the company’s commercial launch. Smartphones like the Samsung Galaxy J7 that was launched in June 2015, almost one and a half years before Jio’s launch were supporting the 850 MHz band. During Jio’s commercial launch in September 2017, the vast majority of smartphones that were compatible with Jio were from Samsung, and that should come as no surprise since Samsung was the sole supplier of network equipment to Jio. Apart from price, one of the primary reasons why Jio might have decided to procure BTS/network equipment from Samsung was to make sure Samsung’s smartphones were compatible with Jio’s network as Samsung’s devices were at the time holding anywhere near 25-30 percent market share in the smartphone segment.
At an SoC level as well, Jio put in a lot of effort to ensure compatibility with its network. This was evident with the launch of Qualcomm’s 205 Mobile Platform which has been entirely dedicated for 4G VoLTE feature phones. There has been talks and collaboration with SoC manufacturers like Spreadtrum as well. Fortunately for Jio, all its efforts and the intense competition amongst smartphone manufacturers has paid off as was evident by the fact that in the previous quarter, a whopping 97 percent smartphones were 4G enabled.
4. Construct a Pan-India network
Most telecom operators started out in a few circles first and gradually expanded their presence, but Jio started off by building a pan-India 4G network right off the bat. For Jio, pan-India did not mean covering only the cities and towns but covering almost every habitable place. The company invested vast amounts of capital expenditure in building a pan-India 4G network from the very beginning. The result has been a 4G network that probably has the best coverage in India and is miles ahead of the competition at least for now.
While rival telecom operators have managed to match Jio’s coverage in the metro cities, the places where Jio’s lead is really visible are the Tier 2 and Tier 3 towns. Once someone starts coming out of the city, the coverage of Jio’s network automatically starts to shine. There are many small towns in Category C circles where telecom operators do not provide even basic 3G coverage, and Jio has these towns covered with rock solid 4G.
Jio’s capital expenditure drive for the medium term is largely over. The telecom operator has already covered a vast number of towns and villages, and comments from the management seem to affirm the fact that over the next few months, Jio’s capital expenditure will decrease.
5. Corner the competition
Jio, for the most part, has a lot of things going in its favor. The proportion of 4G devices improved significantly after its launch. There’s now a healthy ecosystem around the 2300 MHz and 850 MHz bands. Jio completed its LTE network built out on a pan-India basis covering more places with 4G than the 3G coverage of all other operators combined.
Now Jio has its competitors cornered. Their 4G network coverage nowhere rivals that of Jio’s. They are stuck managing three generations of networks namely 2G, 3G, and 4G. They do not have VoLTE or an all-IP network for the most part. For rival telecom operators to be able to match Jio’s coverage regarding 4G would require a massive investment in terms of capital expenditure. However, this is where Jio is playing spoilsport. Most of the current telecom operators derive their capital spending from free cash flows, and Jio is doing all it can to cut down their free cash flow.
Jio started by eradicating any and all revenues from voice. It does not charge for voice nor does it have any blackout days or roaming charges, all of which were crucial sources of income for legacy telecom operators. Recently, Jio also started asking TRAI not to allow legacy telecom operators to give specialized packs to certain consumers that want to leave the telecom operator. Jio just intends to ensure that by providing specialized packages, rival telcos are not able to arrest the drop in data and voice realizations. Apart from this, Jio’s free offers for seven months extended for another three months for just Rs 400 or so and is turning out to be a royal headache for telecom operators. This has been evident from their losses increasing and/or profits dropping every passing quarter.
It has been a long-term strategy, and many are the time that people (myself included) have raised their eyebrows at it. But as it all falls into place, it is clear that Jio knew right through what it was doing. The ball is now squarely in the competition’s court. And it is up to the likes of Airtel and Vodafone to come up with something as comprehensive to counter Jio.
Mind you; it would take some doing.