As Jio Splurges To Attract Users, Airtel Takes Nimble-Footed Strides

In the mature telecom market of the US, two major players are following divergent strategies. While AT&T wants to be a convergence player and bets big on media and entertainment with the acquisition of Time Warner, Verizon is upgrading its wireless network to 5G in order to open newer avenues of business-to-business revenues.

That game is being replicated in India, where Reliance Jio and Bharti Airtel, the two leading telcos by market share, are charting different strategies to swell revenues and stay ahead in the race. And Vodafone-Idea, the third ranker, is betting on cost synergies from the merger.

As in the US, the telecom market in India has matured. Mobile phone density has crossed 89 per cent, and mobile use has proliferated even rural markets. As the growth of the subscriber base is slowing down, telcos have to grab subscribers from competitors or increase average revenue per user (ARPU). Moreover, as voice calls become virtually free, companies must see high data usage. That would mean consumers would need a lot of content — movies, serials, gaming, videos and TV. And just like in the US, the telcos are up against technology majors such as Google, Facebook or WhatsApp, which are denting revenues by offering free video calls, content and messaging services.

Jio’s answer has been to splurge money and build an empire that converges telecom and entertainment. The Mukesh Ambani-owned company has ploughed in over $36 billion, according to Bank of America-Merrill Lynch estimates. Apart from telecom, this investment includes: content companies (5 per cent in Eros International and 25 per cent in Balaji Telefilms); broadcasting players with a bouquet of channels under the Colors brand (it raised its stake in Viacom 18 to 61 per cent); movie-making (Reliance Movies); music (it has bought music over-the-top or OTT Saavn); and building a vast array of OTT channels, some on its own and others by picking up stakes.

The telco is also creating a fibre-to-home network through which it seeks to push content and increase data usage. It just recently bought a majority stake in cable companies Hathway and Den, which would give Jio access to 20 million households. This gives it a huge edge over Bharti which caters to only 3 million households.

The sector disruptor has built a formidable fibre network helped by an acquisition of capacity from RCom. At 350,000 km, the network is far bigger than that of Bharti which lags behind at 263,000 km. Jio has also invested in future technology companies, buying a majority stake in US-based Radisys, a company that works on cutting-edge artificial intelligence.

Prompted by its limited ability to invest more, Bharti is spending cautiously. The group is building a content infrastructure through partnerships rather than investing in stakes. It has signed exclusive tie-ups with Netflix and Zee for content on OTT for its mobile subscribers. The gamble has worked as they have been able to offer Netflix over 300,000 Airtel customers. With a non-exclusive tie-up for Airtel customers, they have been able to rope in over 1 million of their customers for Amazon Prime.

Bharti is also going slow on building its fibre-to-home network (targeting 3 million addressable houses every year out of which about 20 per cent are converted to Airtel) because it believes the market is not as big as Jio anticipates. Bharti believes that 30 million homes, and not 50 million, can afford such a service, of which 18 million homes already have broadband services. Instead, Bharti wants to leverage its direct-to-home business (which Jio thinks has no future) to reach larger audiences with affordably priced content.

In the telecom space, too, Bharti is in no hurry to hit the 5G road and has made it clear that fresh spectrum purchases would be calibrated (Jio, on the other hand, has demonstrated various applications on 5G and is tying up with vendors for new services).

The varying approaches are prompted by how much investment appetite each group has. Jio can bank on its parent, Reliance Industries Ltd, with its vibrant refining and petrochemicals business that generated net profits of over Rs 95 billion in the quarter ended September and has cash reserves of over Rs 760 billion. It can leverage the company’s balance sheet to get cheaper foreign loans and can raise money through an IPO of Reliance Jio or even a private placement.

Its strategy to straddle its investments across telecom, technology, content, B2B applications emanates from its ambition — it wants 400 million customers (currently 252 million) and at least a 40 per cent revenue share of the market (currently at around 26 per cent) and would continue to put in money till those targets are achieved. That apart, Jio has publicly declared that its tariffs would be 20 per cent lower than the competition.

Bharti, on the other hand, does not have another big business to generate cash but it has assets that can be monetised to keep it battle-ready for at least another three years. For instance, if the proposed merger of Indus Towers with Bharti Infratel goes through, it would own a 35-36 per cent stake in the company, which could fetch them around $5.4 billion. That would be enough to see the group through in terms of additional investment for over a year.

The proposed IPO of its Africa business can also substantially reduce debt. The group has already raised $1.25 billion from private equity investors by offloading a 28 per cent stake in the Africa subsidiary, and it is expected to dilute another 10 per cent through the IPO. This would reduce group debt by around $2.2 billion, improve its debt-to-EBIDTA ratio, which is pegged at 4 and provide leeway to raise more debt to fight Jio, say analysts. Moreover, talks are on to raise up to Rs 300 billion through a rights or a public issue in the flagship Bharti Airtel.

So what’s the prognosis on these strategies? Industry insiders say the solution could be if one of them blink or they call a truce. “Jio will continue to put in money to reach its objectives and pare tariffs. And, Bharti is clearly not in the mood to call a truce. So the battle will continue,” says a senior executive of a leading telco. – Business Standard