[The Outline By Inc42 Plus] JioPhone’s Missed Call

Dear reader,

In 2015, yours truly was working at a startup in Goa, when Reliance Jio launched. At first, I did not pay much attention to Jio, but soon enough, it just so happened that I needed a second phone as an internet hotspot. So I walked up to a Jio kiosk in Panaji and signed myself up for a Lyf smartphone, which came with a Jio SIM card installed.

It was a cheap phone and the user experience was less than satisfactory, but it served its purpose. It got me online pretty much everywhere in Goa, which was notorious for poor connectivity at that time.

Six years later, Jio is everywhere and something no one can ignore. Since 2015 of course, the JioPhone has replaced Lyf as the device brand, and now Reliance is looking for a repeat of the magic with the JioPhone Next, which was supposed to be unveiled on September 10, 2021. This has now been pushed to somewhere around Diwali this year.

With the JioPhone Next launch delayed due to the global semiconductor chipset shortage and additional testing as the company claims, Jio’s next revolution is running late. But a lot has changed in the past six years, so even when it does arrive, will it have the same impact on India as the launch of Jio did?

In many ways, JioPhone Next represents the impatience at the Mukesh Ambani-led telecom giant, analysts tell me. An impatience to prove that Jio can venture beyond the feature phone base to the smartphone base, which is more mature and is definitely more lucrative from a revenue perspective — we will come to that in a few minutes. The launch delay and any subsequent tardiness in making this leap is likely to exacerbate that impatience, especially after Jio raised over $20 Bn last year.

And it will definitely pinch Reliance, which has already faced some major hurdles in the retail business with the Future Retail deal still hanging in the balance and at the mercy of courts. We will go into that some other day; right now, let’s see why the JioPhone Next launch delay is likely to hurt Reliance and its dream of changing India once more.

Price Is King For Jio

The first thing we need to know about the JioPhone business (feature phones and smartphones) is that it’s not about superior device experience or having the best features in a phone. It’s about selling as many handsets as possible to get people into the Jio walled garden, which is why the earlier Lyf series and even today’s JioPhones are not that great in terms of day-to-day use, but beat the market on pricing.

It’s not so much a hardware play as it is a platform play, because Jio itself is hardware agnostic. The idea was to give people a taste of what Jio could offer for a low-entry cost, and then convert them into more mature users that have high volume of data usage. As such price is a key factor, which Jio met with internet plans essentially being free for the initial set of users.

This worked wonders given that Indians love a bargain. Jio skyrocketed and no one remembers Lyf phones (except me). Even though the first and second generation JioPhone have a significant share of Jio’s overall base, these devices lack popular social media apps, games or global entertainment apps like Disney+Hotstar, Netflix, Spotify,  and others. With JioPhone Next, Reliance is looking to bring these apps and more to the same user base by primarily targeting this audience. Again, price will be a critical factor.

IDC India research director Navkendar Singh said that while we don’t yet know the price of the JioPhone Next, the speculation is it will start at roughly INR 5K for the entry-level model. Reliance is likely to bring the price further down by offering subsidies to the existing JioPhone user base, like it did with the first and second-gen JioPhones. Even at INR 5K, Jio stands out among other sub-$80 competition as seen in this analysis based on unconfirmed but expected specs of the JioPhone Next.

Even in the more expensive smartphone segment ($100 range), the JioPhone fares rather well, believes Tarun Pathak, research director with Counterpoint, as most major smartphone players such as Xiaomi and Samsung are retreating from this segment due to low margins. But the semiconductor shortage will not make things easy for Jio to achieve the price point.

“If we analyse the impact of component shortage by price tier, the entry-level price tier is the most impacted. The price of certain components have increased by almost 20%, but it’s not just about the price, the lead time to procure these components has also increased significantly from eight weeks to almost 16 to 20 weeks for some of the components,” Pathak told Inc42.

For Jio, the game is now all about managing the supply and this is where smartphone incumbents will have an advantage over the telco. This could also result in the JioPhone Next having a short shelf-life of seven to eight months, as the company is likely to start focusing on new SKUs given that component shortage is likely to exist for the next eight months.

The Revenue Pressure 

Jio Platforms, which operates Reliance Jio and the company’s array of digital services, was in the news throughout 2020. It raised more than $20 Bn (INR 1.5 Lakh Cr) from top global investors and the who’s who of Big Tech even when funding seemed to have slowed down in the first half of 2020.

Even before this funding spree, Jio’s market share growth was staggering. The company had 436 Mn subscribers as of June 2021, compared to second place Airtel’s 352 Mn. But in terms of extracting the most of the user base, Airtel’s average revenue per user (ARPU) is stronger. Airtel’s ARPU grew to INR 146 in June 2021, while Jio had an ARPU of INR 138.4 in the same period.

Jio’s focus on 4G from the very beginning was because monetising 2G/3G data users is difficult as product and app experience on these networks is not that great. As all telcos are looking to phase these legacy networks out, there is a paradigm shift happening in terms of revenue among India’s telcos. But Reliance has not yet managed to usurp Airtel in terms of ARPU.

To push adoption of services and drive revenue growth through data usage, Jio has launched more than 30 apps for both consumers and partner ecosystems. These include RIL-owned digital businesses such as My Jio (subscriber management app), JioTV (digital TV), JioSaavn (music streaming), JioMeet (video conferencing), JioMart (online shopping) and plenty more across entertainment, media, edtech and healthtech space. The outreach has grown significantly as these apps are available across low-cost JioPhones, but to what extent they are used by the Jio user base is undetermined.

Given that Reliance Jio has 12%-72% higher tariffs for smartphone users compared to JioPhone feature phone users, mass upgrades to JioPhone Next could potentially boost Jio FY23 revenue estimates by up to 10% assuming no changes to tariffs, as per a Jeffries report on the impact of the JioPhone Next. But there’s no guarantee of such upgrades coming.

Analysts could not point out any data that suggests that the 110 Mn or so JioPhone feature phone users are primarily internet users rather than just telephone users. Even if they upgrade to a JioPhone, the usage of internet apps is not a given.

“Firstly, I doubt that 110 Mn JioPhones are active. I believe the real number would be close to 70 Mn or 80 Mn, given that the 110 Mn figure is for shipments, while our estimate is that sales were lower. Till some time back, you could get a JioPhone 2 for free with a Jio SIM. This shows that the stock is not selling out,” said IDC India’s Singh.

If people are not buying a basement-bargain like the JioPhone which was available for INR 500 till some months ago, then we cannot claim with any certainty that the INR 5K phone will sell among this same audience.

Jio’s problem may be that it has become a bit too bottom heavy. It may be carrying too many low-value subscribers that jumped ship from Airtel or Vodafone due to the low price, but these subscribers were already weighing down the ARPU for Airtel and Vodafone in the past few years. So we know they are not quality spenders.

For monetisation strategies to work for any telco, its big-spending postpaid customers are a top priority. “Jio has an INR 199 postpaid plan at a 60% discount to Airtel’s entry-level postpaid plan for over two years. However, when we observe Bharti’s postpaid plan, we see no evidence of churn. In fact, Bharti’s postpaid customer base has marginally increased over the past two years (by 0.5 Mn),” noted a September 2020 report by Goldman Sachs.

The situation has not changed much in the year since, as indicated by the June figures above.

Unlike Reliance, which has entered every major digital business, Airtel is happy to focus on home entertainment, broadband services and enterprise tech besides the telecom business. It has no intention of a hardware play or entering arenas like ecommerce, where Jio has placed a big bet with JioMart.

The revenue push among telcos after a couple of years of aggressive pricing, India’s lead as the world’s cheapest mobile data market has vanished. According to an April 2021 report, India no longer has the cheapest mobile internet plans in the world.

Even though at $0.68, the average cost of per gigabyte (GB) of data in India is well below the global average of $4.21, overall, the country has slipped 28 ranks to lose the top spot. The price of data plans in India has increased by 7.5X on average from late 2020.

Telecom players are no longer offering freebies, which is expected to be curbed even further as they spend billions to launch 5G networks and services. India was enthralled once, but if the magic has to happen a second time around, Jio cannot just ask its users to pay more. Again, it boils down to pricing — the component shortage and its potential impact on price will not help Reliance.

Which brings us back to the impatience among Jio, Reliance and Ambani. There are billions at stake here and while the JioPhone Next launch has only been delayed by a couple of months, it could be a critical few months for Jio as the pace of digital evolution has grown tremendously in the past 20 months.

The JioPhone smartphone hype train has been running for more than a year, and in the world of electronics, the next big thing is only one week away. Missing the initial launch date may very well make the JioPhone Next irrelevant by the time it arrives.

Till next week,
Nikhil Subramaniam