broadband, video, mobile, cloud, networking
Free voice calling? What does Reliance Jio have in mind?

Jio has cleverly structured its data tariffs to deliver a decent overall ARPU. Free voice, it hopes, will scale the network fast and reap economies of scale and scope. But competitors have similar ideas

by Jude Pinto

Reliance Jio announced the commercial rollout of its 4G services on September 1, shocking everyone by offering its customers lifetime free local/std voice and roaming. "Jio will put an end to voice call charges in India" said Chairman Mukesh Ambani

Along with this came an introductory offer: till December-end users would have access, free of cost, to unlimited LTE data and local/std voice, video and messaging services along with all Jio applications and content.

For a cash-rich late entrant, with a high-capacity network, intent on getting 100 million customers in 2016 itself, this offer is not too surprising.

The voice angle

The company has clarified that "the data used for voice calls will neither be charged nor deducted from the data balance of the subscriber". So ordinary voice calls are free to those who buy a data packet. Jio also offers video calling, but data usage for video calls will be charged

Reliance is opposing voice interconnection charges (14 paise per minute at present) paid by the mobile operator on whose network the call originates. Around Rs.250 billion of revenue is generated every year from interconnection charges. Bharti Airtel (with the biggest network) is the biggest net recipient. Payments by smaller companies for interconnection are higher. TRAI has floated a paper calling for views on the subject of reduction or removal of interconnection charges. If they remain, Jio will have to continue subsidizing them.

Voice accounts for about 70% of Indian telco revenue and profits. So in the short run Jio's moves will hurt competitors in revenue-profit terms. CRISIL estimates that Jio's offer could help reduce average monthly mobile bills for mid-to-high-end subscribers by over 50 per cent.

But competitors are expected to move towards data-only plans, making voice and text messages cheaper or almost free. They are helped by technology, which is making voice carriage more efficient and less expensive. Telcos worldwide and in India are moving to VoLTE (Voice over LTE) which handles voice like an application, using an IP network to convert the calls into bits and bytes. After a call is established, only data will flow between the two subscribers, and just around 100-200 kbps of bandwidth is needed to keep the call connected.

Competition in data

What about data? Jio's tariffs, ostensibly low, are cleverly structured to deliver a decent ARPU. And competitors may have already matched them.

Jio has indicated an average data charge (applicable from January next) of Rs.50 per GB, low even by world standards. But there are hidden extras. Cost of refills/topups is significantly higher than base data rates. Consider this. Jio's monthly 4G tariffs start at Rs. 149 for 28 days, but for just 300MB !! For Rs. 499 per month you get a more respectable 4GB of 4G data, plus unlimited 4G at night (between 2am and 5am !!), for 28 days. However, if you run out of the 4GB data pack, the charging rates don't start at Rs 50 per one GB. The rate is Rs 250/GB at 10 KB charging pulse, which is not exactly cheap and also it's on par with other operators. According to Rajan Mathews, Director General at COAI, "most of [Jio's] price points in the mid to high range plans are already being matched by the incumbents in some form or fashion".

Volume play

Compare Jio's most reasonable tariff pack of Rs.499 per month to the average monthly revenue per user (ARPU) of market leader Bharti Airtel: Rs 210! Credit Suisse Securities says in a note to clients, Jio will require revenue close to that of market leader Bharti and ARPU of Rs 210 to achieve its targeted return on capital of 18-19%. Airtel has over 260 million subscribers. Clearly volumes are needed to enable Jio get reasonable margins.

Jio's national-level 4G network can currently support 250 million users. It has access to Reliance Communications' fiber network and has tied up with several others, including cable companies, to extend its fiber network nationwide. It also plans to roll out its own fiber network over 1,00,000 kilometers across India. It is part of two international submarine cable networks - Bay of Bengal and AAE-I. It is in the process of rolling out 1 million Wi-Fi hotspots across the country at schools, colleges and other public places. It has plays even in the content business, in media, sports etc. Such activities will help it build volumes and improve its margins.

Trouble is, competitors are working on the same lines. Indian telcos, it is clear, will now depend on economies of scale in data, video, IoT and value added services to absorb voice costs. To reap scale economies telcos are now consolidating into big entities: there will be 3 or 4 large private telcos in India in the foreseeable future.

Will Jio's strategy work?

Jio's success hinges on increased 4G devices penetration and a dramatic change in data consumption patterns in India, a country where data usage remains low. Moody's does not expect Jio to achieve its initial target of 100 million customers before March 2018 as it feels ringing in a change in consumer behaviour on this scale in such a short period will be a challenge. "While we expect Jio will achieve its 100 million subscriber target by March 2018, it remains uncertain to what extent data consumption will increase, especially once consumers are asked to pay for it".

While Reliance has re-defined the structure of India's telecom industry, it will have to work hard to get volumes and compete with its peers. No doubt, Vodafone and Idea may have to grow bigger to effectively compete in the new marketplace. But Vodafone has the might of an MNC behind it. And Airtel and Idea have managements that are no strangers to cost cutting and cut-throat competition.

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Indiatel provides detailed, customized reports on India-telecom-related topics, using published, available unpublished or field sources.

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