Can Reliance Jio will success if fallow China 4G model

Reliance Jio Infocomm Ltd (R-Jio), the telecom unit of billionaire Mukesh Ambani’s Reliance Industries Ltd (RIL), seems to be modelling its fourth-generation (4G) telecom services rollout on that of China Mobile Ltd, the success of which should reassure investors who may be nervous ahead of R-Jio’s long-awaited launch.
What R-Jio is trying to do in India largely mirrors what China Mobile, China’s biggest telecom services provider, has done in the last two years of its 4G launch. R-Jio plans to ride on the Chinese 4G model in at least four areas—technology of transmission, low-cost handsets, low-cost data packages and a value chain of digital offerings.
R-Jio has a pan-India licence in the 2300 megahertz (MHz) frequency band, which has not seen many international 4G launches using the so-called long term evolution (LTE) technology standard. That’s mainly because the higher the frequency, the lower the signal strength, although it offers higher data delivery speed. This has been perhaps the biggest concern of analysts.
Yet, China Mobile has successfully shown that 2300MHz, when used in tandem with other frequency bands, can offer seamless connectivity, partly allaying that concern.
“China Mobile is not offering its service on a standalone band; it has an overlay of 1800 MHz and 2100 MHz. When you integrated two-three spectrums together and have a network, you are largely able to overcome that problem of reach. In India, too, R-Jio would also not be operating on a standalone network per se,” said an analyst with an international brokerage who did not wish to be named as he does not cover the company.
An e-mail sent to RIL seeking comment on its strategy on Tuesday remained unanswered.
RIL is investing Rs.85,000 crore in R-Jio, which marks Mukesh Ambani’s return to the telecom business that he first built and later handed over to his estranged younger brother Anil under the terms of a 2005 accord which led to the division of the business empire created by their late fatherDhirubhai Ambani.
Given the high stakes, investors would be understandably nervous about R-Jio’s rollout in a long-gestation business like telecom that requires a seemingly endless wait before turning a profit. In modelling itself on China Mobile, R-Jio may have played its cards right, at least so far.
In October, China Mobile started testing a hybrid LTE (Time Division-LTE, or TD-LTE, in the 2300MHz network, Frequency Division-LTE on others) network, and has 150 million 4G subscribers already, wrote analystAbhishek Agarwal of Macquarie Capital Securities (India) Pvt. Ltd in a 12 June report.
“We expect R-Jio to go the same way, using other bands as a fall-back for where 2300MHz signal strength is weak (like inside buildings),” Agarwal wrote.
R-Jio intends to provide 4G service, using LTE technology, in the 800MHz, 1800MHz and 2300MHz bands through an integrated ecosystem. R-Jio has spectrum in 20 of the 22 circles in the country in the 800MHz band and 14 circles in the 1800MHz band. Its licence for the flagship 2300 MHz covers all 22 circles.
According to Vaibhav Dhasmana, an analyst with international brokerageJefferies India Pvt. Ltd, if one draws an analogy between China and India, there are some common factors—the population dynamics of the two countries are the same; the market has room for growth but penetration rates are high; and the geographical spread is also similar.
China Mobile is one of only two companies in the world that have the licence to offer 4G connection on a 2300MHz band. The second company is Indonesian telecom service provider Bolt that has a license for only the 2300MHz band.
Beyond the technology of transmission, the second most important common factor between R-Jio and China Mobile are low-cost handsets.
According to Bloomberg, on 12 June, China Mobile introduced its own cheaper version of 4G-enabled smartphones at a cost of 699 yuan, nearlyRs.7,500 in Indian currency. This is pretty much on the lines of what Ambani announced during the company’s annual shareholder meeting on 17 June.
“The combination of Jio’s strong initiatives and a supportive global environment, gives me the confidence that we will see 4G LTE smartphones in India at prices below Rs.4,000 by December of this year,” said Ambani.
Having a strong line-up of smartphones, tablets and devices across all price points will remove a key barrier to mass adoption of broadband data, high definition voice, video calling, messaging and rich value-added services, he said.
“It is interesting to note that in China, 4G LTE devices as a percentage of overall device shipment has increased from 10% to over 84% in just the past year,” he said.
Sachin Salgaonkar, an analyst at Bank of America Merrill Lynch, agreed.
“At the moment 4G handset shipment is 80% of the total handset shipment to China, much higher than 20-30% seen a year back. It does show that when you have a large operator, who will be able to push the ecosystem in one direction, then ecosystem evolution can happen,” added Salgaonkar.
Besides devices, R-Jio is also planning to be disruptive in terms of data packages, something which has already been done by China.
One of the reasons analysts attribute to the success of China Mobile is shifting subscribers to 4G from its 2G and 3G subscriber base through attractive low-cost data packages.
According to a Bloomberg Intelligence report, China Mobile is offering a data package expecting average revenue per user (Arpu) of 61 yuan, around Rs.625 in Indian currency. Again, this is on the lines of what Ambani indicated at the shareholder meeting, saying the company will offer data packages in the range of Rs.300-500 per month.
The biggest differentiator that R-Jio has talked about in its telecom offering is to be present in the entire value chain of the telecom and e-commerce business—something not done by any telecom company in India before.
The model is not new. Chinese telecom companies have already started diversifying into digital business by investing in music, video and social networking apps.
“The telcos (of China Mobile, China Telecom, etc.) have all established independent subsidiaries or joint ventures (JVs) in many new businesses including traditional music, video, and social networking etc.,” said a 12 May report by China Securities International Research, a leading Chinese brokerage firm, referring to the wave of digital diversification that Chinese telecom companies are adopting to counter falling revenues from data.
R-Jio, with a raft of apps lined up for its 4G offering, also plans to be a diversified service-content-device company rather than merely a telecom service provider.
To be sure, this will not be easy. For one, the basic challenge R-Jio will face is the sheer number of firms it will have to compete with, which is more than what China Mobile has to tackle. As Jefferies pointed out in a 15 June report, “the key difference is while China has three mobile operators (all state-owned); India has, on an average, eight in most major circles”.
Other than that, China Mobile enjoys an edge considering that it is already an existing operator with 2G and 3G services and has recently launched TD LTE—which is what R-Jio will use to launch its service too.
For an existing operator with 2G and 3G services, it is easy to upgrade subscribers, and move to 4G, says Salgaonkar of BofA Merrill Lynch.
“One reason why China Mobile momentum was high was because they were up-selling their service to an existing customer. That’s why addition in terms of 4G has been super strong,” he said. R-Jio does not have that advantage to begin with.
Also, while China Mobile is shifting its own customers by subsidizing handsets at the cost of its margins, R-Jio will have to pull customers from other established companies.
Another key difference is that spectrum cost in India is significantly higher and there is lesser headroom for capital expenditure to build a strong network.
“As a case in point, as on 2013 China Mobile, the largest mobile player in China, had a total of 1.5 million base stations, Bharti Airtel Ltd even now has under 150,000,” said Dhasmana of Jefferies.
China is in the midst of its 4G rollout while India is still in he early stages of 3G with 4G still in testing/pilot phase for most incumbents, Bharti Airtel andIdea Cellular Ltd have 49,000 and 30,000 3G base stations respectively, pointed out Dhasmana. In comparison, China Mobile already has 720,000 4G base stations.
Dhasmana also wrote in a report on 15 June that India is still in early stages of data services adoption compared with China .
“This is evident from the contribution of data services for Indian players as well as the absolute amount of data carried on the network. China mobile carried 6.6x the data carried by Idea and 4x the data carried by Bharti in the last fiscal,” said the Jefferies report.
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