Fear, pain and loathing as Reliance Jio tries to throttle the competition

Reliance Jio is a great, big, and savvy Indian python that has recently slithered into the telecom space, threatening to swallow the lunch of existing incumbents like Airtel and Vodafone.

The question is, will it end up swallowing itself tail-first as well?

As I wrote a few months ago, and as you probably may well know, Mukesh Ambani, India's oil to telecom billionaire who is not known to think "small", decided that telecom is now a space well worth conquering. This is especially so considering all the other things that he figured he can bundle with it. (Magazines, TV stations, online wallets, music and movie streaming services, and much more, all of which he bought or built, are now part of Jio's buffet of offerings.)

Having offered free voice and absurdly cheap data plans during its launch in September, Jio went one step further a few days ago and extended its bonanza of free services and cheap data until the end of March. It has already snagged 53 million paying customers from its arch rivals Airtel, Vodafone, and Idea Cellular in under three short months but hopes to do better under this extended "happy new year" offer.

The incumbents Airtel and Vodafone are anything but happy. There they were, sitting pretty, ready to tap the wallets of hundreds and millions of Indians who were about to spend on data, having assiduously raced around shelling out big bucks on spectrum auctions and infrastructure as India progressed from 2G to 3G to 4G. Instead, they now have a ruthless competitor with a large war chest able and willing to crush them.

WHIPLASH

With its lowest rock-bottom plan of 149 rupees that comes with 300 MB of data, free roaming, and free voice, as well as others that offer eye-popping value, Jio has unleashed a force that may end up providing the recent entrant with some kind of Pyrrhic victory, where no one wins and everyone loses. Airtel, Vodafone, and Idea Cellular (the top three) have responded with their own tariff cuts in an effort to keep pace with their nemesis -- and it has had an immediate, less-than-salubrious impact on everyone's numbers.

Airtel, for instance, posted a 4.9 percent drop in quarterly net income. It is a painful zero sum game -- you can slash data rates but you better be sure that your customer base increases to keep at the same run rate in revenues, but clearly that's easier said than done. Even before the Jio invasion, data revenue for the industry was more or less flat for the last few quarters and flat revenues are the last thing you want when trying to raise and spend even more gargantuan sums for increased spectrum and infrastructure investments.

So, no surprise that investment research outfit ICRA, whose job is to understand risk in India's economic sectors amongst other things, thinks Reliance will ensure that the telecom as a whole will take a 5 to 7 percent revenue hit during the next two quarters. This is nothing short of disastrous in a booming market, not to mention its weakening of the entire credit outlook of the industry. Idea, the number three player pre-Jio and a perennial overachiever, has taken a beating. Its shares have fallen by more than 20 percent since the Reliance launch.

To add to the collective misery, Reliance has announced a further increase in imminent network capex spend of 1 trillion rupees, which will further make the rest of the fray sweat and bleed.

THE WALTZ OF DEATH

What all this means is looming consolidation as the smaller players -- of which India has many -- will simply not be able to survive. As far as the biggies are concerned, it's anybody's guess as to how this battle of attrition will turn out. Even Reliance's gambit is far from a done deal. In fact, global ratings outfit Fitch says that for all of the upheaval that it has caused in telecom, Jio will not even eke out a 2 percent of revenue market share gain in 2017. That should alarm the company considering all the muscle it has employed.

Right now, Reliance is a little short of 50 million customers -- or 10 percent market share -- from its ultimate one-year target, not an inconsiderable achievement. Still, its average revenue per user (ARPU) target of 300 rupees is a little delusional considering industry ARPUs are at 165 rupees. Goldman Sachs, however, considers these Jio targets to be pipe dreams and expects the company to attract just 35 million subscribers over the next two years, with data volume growth for incumbents throttling down to 50 percent in the 2017 fiscal year from 70 percent in 2016.

Still, numbers are anyone's game and Jio is putting a lot of chips on the table to ensure it's all-in for the long haul, and it will play big and bold to win. For now anyway. It will all go according to plan until it is forced to start charging and keeping customers after the honeymoon is over, when it will have to start paying back its financial investments. The Indian customer is a notoriously price-conscious one and a level playing field will emerge very quickly once the threshold of pain has been reached for Jio and it needs to up ARPUs and gain revenue, all the while fending off its very seasoned and bluechip rivals.

Until then though, Reliance is calling the shots and everyone will be compelled to follow like reluctant partners in a waltz of death. The only people enjoying watching this grand telecom symphony unfold are Indian customers for whom the average bill is likely to come down by as much as a staggering 60 percent.