The much awaited formal launch date for RelJio’s 4G services has been announced and the media has gone to town about disruption in the telecom service industry. In line with classic strategy, examples like the entry of successful low cost airlines on new routes which provides an opportunity for a ‘short sell’ of the incumbent operators, share prices of the pan India mobile phone service providers have shrunk significantly in recent days. Interestingly enough, the valuation of Reliance has taken a beating as well. There are some shades of the familiar in the story so far. Over a decade back, before the Ambani brothers parted ways in 2005, Reliance had launched its ‘Monsoon Dhamaka’ which shook the telecom industry even then. As a late entrant, Reliance had made waves with the promise of ‘calls at the price of a post card’. Bundled deals and unheard of price packages had exploded demand even then except that over time it ended becoming what some now term as a ‘fringe’ player. Analysts now expect that business to fade away with the emergence of Jio.
Before long, you might expect the Jio to be labelled a blue ocean strategy. However, unless Jio can build huge new markets of ‘non-customers’, the media headlines of disruptive innovation might be a better toolkit to make sense of this phenomenon. The country has a rather high mobile penetration which might suggest that new pockets to win customers might not be much. However the trend of dual (and more) sim holders which accounts for some metros having penetration in excess of 100% might also suggest enough untapped customers, notwithstanding the high national penetration numbers.
It has been reported that the new generation of the Ambani family has been driving Jio which is perhaps good news since the service will then be more likely well aligned with the market of youth. With huge investments in 4G network infrastructure, free voice calls, deep discounted data rates, superior experience with handsets priced well below comparable devices and a three month free service, Jio has truly shaken the industry.
As with most businesses, the incumbents have historically aimed to build relationships with corporate clients and have focused on high spend customers. This makes sense since that is where you might expect margins to be. In serving such segments, companies tend to work on continually improving their offerings, something termed as ‘sustained innovation’. In the world of ‘disruptive innovation’ this has a likelihood of leading to ‘performance overshoot’. Essentially, customers are provided more than what a large section really wants and in the process a significant mass of customers cease to be truly satisfied. The stage is then set for a disrupter who can enter with a low priced offering with some potential performance drawbacks as well. Nevertheless, underserved customers might find this attractive and to the extent incumbents are less interested in that segment, the new entrant can ‘fly under the radar’. Over time, the disrupter can enhance its product performance and soon ‘assault from below’ to take away customers from the incumbents. When such a scenario unfolds, the disrupter inevitably wins.
Switching costs for individuals in mobile services is low, what with the prevalence of dual sim phones and mobile number portability. From that perspective, incumbent operators might have much to worry about in terms of losing high value business. On the flip side, the history of Reliance in telecom or in consumer businesses is not bright. Apprehensions on the quality of interconnect etc also linger. What if RelJio were to get the subscriber numbers but not the revenue? With voice calls to be free, revenues have to flow from data. Back of the envelop computations by analysts suggest that a break even might take at least a couple of years even with a subscriber base of about 100 million.
The retail business of Reliance has been a patient, long haul and RelJio might be similar. While the ‘disrupter’ has made a splash, in order for the incumbents to be rolled over by the tide, RelJio will need its low price to be quickly supported by low cost and by a rapidly expanding market size.