Speaking at the Uttar Pradesh Investors’ Forum in Lucknow today, Reliance Jio Chairman Mukesh Ambani said his company will make available more than 20 mln (2 cr) Jiophones for sale in the state in the next two months. This is more than three times the total number of Jiophones sold by the company across India in the initial phase.
“So huge is the demand for JioPhones all over India that there is a wait-list for it in many States,” Ambani said. “However, UP is special for me. Therefore, I am happy to announce that Jio will make available over two crore JioPhones in UP within the next two months on a priority basis.”
To put the number in perspective, consider that there are only about 120 mln adults in Uttar Pradesh. Making 20 mln Jiophones available in UP means making one Jiophone available for every six adults.
HIT FOR INCUMBENTS
Such a massive roll-out of the cheap device will hit the incumbent operators where it hurts the most — the voice business.
The voice business contributes about 75-80% of the profit of operators like Bharti Airtel, Idea Cellular and Vodafone.
And in this segment, the difference between Jio’s tariffs and incumbent operators’ tariffs is considerable, unlike in data.
For example, on a Jiophone, a person can get unlimited local and national calls and 50 SMS for four weeks at just Rs 49.
In comparison, Bharti Airtel, Vodafone and Idea Cellular charge Rs 149 or thereabouts for unlimited voice calls for the same length of time.
In other words, the pricing offered by Jiophone is 66% lower than what the rivals are offering.
A massive roll-out of Jiophone will force the rivals to cut their prices to a range of around Rs 70-90 to compete.
But this will have far-reaching consequences for their profitability.
Already, operators like Idea Cellular are recording losses of thousands of crores of rupees per year due to the fall in voice and data tariffs, while Bharti Airtel’s India mobile operations are tottering at the break-even level.
A slashing of voice prices from Rs 149 per month to Rs 90 implies a reduction of 40% in the voice revenue of these operators.
Given that voice contributes about 70%-75% of the total revenue, this has the potential to drag down their top lines by 28%-30%.
On the positive side, any reduction in pricing has always been accompanied by a surge in usage. This surge always limited the extent of fall in revenue. For example, despite a 50% fall in voice prices over the last one year, revenue has declined only about 20%-25%.
However, this time things may be slightly different, as the surge factor may not play the same role as it did in 2017.
This is because now, the user is transitioning from an unlimited plan to another unlimited plan, which is different from a per-minute plan to an unlimited plan.
When users transitioned from a per-minute plan to an unlimited plan, usage went up because they no longer had to count the minutes they spent on call. As a result, when unlimited plans were introduced, there was a sudden increase in usage. Idea, for example, saw per-user consumption increase to 509 minutes per month from 385 minutes a year ago.
However, the good news is that a large proportion of users — especially for an operator like Idea — is still not on unlimited plans, but on per-minute schemes.
These users spend anywhere between 30-100 rupees per month.
When the price of unlimited calls are brought down into two-digits, there is a strong possibility that users who currently spend Rs 50 or 70 per month, will spend an extra Rs 40 or 20 to upgrade themselves to the unlimited offer. This will generate some extra revenue for the operators.
However, this extra revenue could offset only about 5 percentage points out of the total expected hit of of about 28-30 percentage points — resulting in the same sort of pain that was seen in 2017.
In other words, far from having seen the bottom of the revenue cycle, the incumbents could see as much pain in 2018 as they saw in 2017.
The only other option is for the operators to not respond to the aggressive Jiophone strategy, and hope that their customers who spend only Rs 100 per month will not be able to afford a new device that costs Rs 1,500.