The $40 billion question
Much like the e-commerce market places and the cab aggregators, Reliance Jio’s early success can be attributed to pricing—or the lack of it, since the company currently charges nothing
Reliance Jio Infocomm Ltd, Uber Technologies Inc, ANI Technologies Pvt. Ltd (the company behind Ola), Flipkart Ltd, Jasper Infotech Pvt. Ltd (the company behind Snapdeal), and Amazon.com Inc. face the same problem in India—building a business model around rational pricing.
E-commerce marketplaces Flipkart, Amazon, and Snapdeal grew their businesses rapidly on the back of huge discounts by sellers on their platforms they effectively underwrote. Amazon.in’s growth was funded by its parent; Flipkart and Snapdeal’s by venture capital firms seeking a piece of India, specifically the country’s vast retail market that is mostly closed to foreign investors.
Uber and Ola convinced drivers to sign on to their platforms by facilitating the purchase of cars and promising generous incentives linked to the number of trips completed. They also convinced customers to use their services by offering rock-bottom rates. They—both are funded by venture capital firms—underwrote both from their own pockets.
Reliance Jio, which launched its 4G telecom network last September, now has more than 100 million customers largely acquired on the strength of its offer (everything is free till 31 March). The company’s growth has also highlighted the hunger of Indians for data (largely videos), as long as it is free.
There is, however, no such thing as a free lunch—to use a line popularized more by Robert A. Heinlein (more up this writer’s street) than Milton Friedman—and some of these companies are changing their approach. Others are trying to. Those that aren’t doing so, soon will.
The $40 billion (for that’s roughly the amount invested in all these ventures) question is whether they can get enough people to pay.
E-commerce has several things going for it. Access is one; anyone with a decent Internet connection or a smart phone on a 3G network can shop online. Range and variety is another; customers can find online what they may not necessarily find offline, at least not without visiting several stores. And not having to deal with traffic, the hassle of parking (if one drives to a store), and unhelpful sales staff is still another. Even in the absence of the deep discounts marketplaces in India offer, these should suffice to attract some customers. The companies are hoping that they can do enough to build a sustainable business.
Like e-commerce, cab aggregators have a lot going for them. They replace a fragmented and unorganized market, although many of the initial conversions they have seen have to do with incentives (in the case of drivers) and prices (in the case of customers). Some customers, perhaps even a majority, will not mind paying more, but both Ola and Uber have run into problems with their drivers who see themselves not as the micro-entrepreneurs the two companies claim they are, but employees. The companies have also deviated a bit from their asset-light models (of owning no cars) in India. Their challenge is to return to that, and also get drivers to see themselves as entrepreneurs.
Much like the e-commerce market places and the cab aggregators, Reliance Jio’s early success can be attributed to pricing—or the lack of it, since the company currently charges nothing. It is a given that at least some of the 100 million users on its network, especially first-time phone and data users, will drop off once the company starts charging for its services in April. The rest will stay on, but expect the company to at least match the service quality of its rivals (which shouldn’t be too difficult because the bar is really low for telcos in India). Then, Reliance Jio’s parent Reliance Industries Ltd has never really been as comfortable in a consumer business as it is in industrial ones.
Still, of all the companies mentioned in this column, Reliance Jio’s task is the easiest. While it will have to work on service quality and marketing, it doesn’t have to invent an entirely new business model. Nor does it have to create a market by getting customers to pay for data—many who are subscribers of its rivals already do. Interestingly, Reliance’s move to start charging for its services from April will also help the cause of its rivals and the overall telecom market.
Amazon, Flipkart, Snapdeal, Uber and Ola, in contrast, have created markets where none existed. They have formalized informal markets, or aggregated fragmented ones. Now, they have the task of ensuring these markets stay intact, or at least do not shrink too much, as they take up their pricing to more rational levels.
R. Sukumar is editor, Mint.