Over the past two years, more than 200m Indian phone users have flocked to take advantage of arguably the greatest corporate gamble in the country's history.
Mukesh Ambani, India’s richest man, has spent $32bn building up his telecoms company Reliance Jio— the biggest private sector investment in India’s history — as he fights for dominance in the world’s second-biggest telecoms market by user numbers.
Much of that money has been spent giving away free access to what Jio says is now the world’s largest mobile data network, with its clients consuming about three times the amount of data of an average European customer.
The launch of Jio has helped to engineer a socio-economic revolution in India. For the first time, millions of Indians are able to access the internet to register for benefit payments, download school textbooks or simply watch India beat Pakistan at cricket.
The rapid growth in the telecoms network has encouraged some of the world’s biggest retail and technology companies to plough money into the country. Walmart this year announced the world’s largest ecommerce deal by buying 77 per cent of Indian online retailer Flipkart for $16bn. Google is beefing up its India team, while Netflix says it hopes to add 100m customers from the country.
However Jio’s aggressive expansion has caused headaches for some of the world’s biggest telecoms groups, including the UK’s Vodafone, which has written off €6.3bn from its Indian business as a result of the subsequent price war.
The consequences have been more severe for Mr Ambani’s younger brother Anil, who inherited the family telecoms business RCom during the 2005 break-up of their father’s conglomerate. Anil is in the process of selling his mobile towers, spectrum and fibre-optic cables to his brother, having been one of the hardest hit by Jio’s entrance into the market.
The deal is a powerful symbol of how Mukesh Ambani’s side of the Reliance empire has outshone his brother’s since their acrimonious split.
Yet Jio’s stellar rise has also raised some concerns. In particular, it has been accompanied by persistent questions about how much it owes to the elder Mr Ambani’s business acumen or to favourable political and regulatory decisions.
Many of those rulings since Jio’s inception in 2010 are drawing criticism from rivals, a former regulator and even India’s supreme court.
The controversy threatens to become awkward for Narendra Modi, India’s prime minister, who has promised a level playing field for business.
In the view of Rahul Khullar, former chairman of the Telecom Regulatory Authority of India, the recent judgments made by his former organisation have tipped over into discrimination in favour of Jio. “In my 40 years as a civil servant, I did not see a single instance where a regulator was accused of bias,” he says. “But now there is clear partisanship in favour of Jio.”
The early days of the fast-growing Jio were shrouded in mystery. In June 2010, the government conducted an auction of part of the telecom spectrum. The bandwidth being sold was not particularly attractive to most of the incumbent companies, so they were surprised when a little-known company called Infotel Broadband Services emerged victorious, having bid Rs128bn — then worth $2.7bn — 5,000 times the company’s own net worth.
Hours after the auction closed, Infotel made another announcement — it was being bought by Reliance Industries, Mukesh Ambani’s part of the family business, which had agreed to invest Rs48bn for a 95 per cent stake.
Looking back, executives at Jio’s rivals admit they were outsmarted. “We would have entered the bidding if we had known Mukesh was going to end up owning this bandwidth,” says one. By emerging from “behind this unknown company, he managed to get the spectrum at a far cheaper price”.
Jio did not comment on this point.
Even with this new chunk of spectrum, however, Mr Ambani still had a problem — the licence he had acquired did not allow him to launch voice services. In 2013, this problem was resolved when, at the request of the government, the regulator announced that all licences should now allow companies to transmit both data and voice calls. Mr Ambani agreed to pay Rs16.6bn as a “migration fee” to convert the licence, giving him a viable telecoms company.
That deal attracted the attention of India’s state auditor, known as the comptroller and auditor-general. In a 104-page draft report, seen by the Financial Times, the CAG was scathing in its provisional findings about the process, adding that, based on the value of more recent spectrum sales, Jio had in effect underpaid for its eventual unified licence by nearly Rs230bn. The best course of action, it said, would be to cancel the licences and rerun the auction.
A pared-back final report, in 2015, found Jio’s underpayment to be a much smaller Rs33.7bn, and made no mention of cancelling the auction. Asked why the final report was so different from the draft, Suman Saxena, the deputy CAG, told reporters: “A draft is a draft.”
In the end no action was taken on the CAG’s findings. Prashant Bhushan, a public interest lawyer, went to the Supreme Court in 2016 in an attempt to have Jio’s licence revoked. But his case failed, with judges ruling that Jio had not underpaid for its licence, given that the government was by then offering such licences for a flat fee of Rs150m.
The tensions with rivals continued as Jio ran an extensive trial of its new services before the formal launch. Unusually, however, it expanded aggressively during this period, accumulating millions of clients by handing out free sim cards.
In this way the company did not need to submit its pricing plans to the scrutiny of the regulator, which otherwise would have had the power to consider taking action against what rivals viewed as “predatory pricing”.
The Cellular Operators Association of India wrote to the government complaining about the behaviour of one of its own members. “This is no test,” the COAI wrote in August 2016. “This is the provisioning of full-blown and full-fledged services, masquerading as tests, which bypass regulations and can potentially game policy features.”
When the trial period ended and Mr Ambani formally launched Jio’s services on September 1, he announced he was giving away voice calls for free and data for next to nothing. Three months later, he made small adjustments to the offer and rolled it over. Combined, the offers saw his company attract more than 100m customers.
Rivals accused Jio of violating TRAI’s guidelines by offering six months of giveaways, pointing out that in 2002 the regulator warned companies not to issue promotional offers for more than 90 days and saying it undermined its broader mandate of stopping predatory pricing — low prices offered for so long that rivals pack up altogether.
“Jio is providing telecom services below its average variable cost with the sole intention of eliminating competitors,” alleged Bharti Airtel, India’s biggest telecoms company by subscribers, in a complaint to the competition commission in 2017.
Neither the competition commission nor the telecoms regulator agreed. The former ruled that, because Jio was not the market’s dominant player, it was not undermining competition.
A spokesperson for Jio says: “Examination of Jio’s free offering has been done by TRAI, TDSAT [the telecom disputes tribunal], as well as [the] Competition Commission of India, and in all these cases Jio was found to be compliant with extant laws and regulations.”
One Reliance Jio insider argues that its success was the result, not of any infraction, but of its management’s minute studies of regulatory documents in search of loopholes missed by competitors. The TRAI did not respond to a request to comment for this article.
Meanwhile Airtel along with Vodafone and Idea — the three biggest operators — had a bigger problem. Not only did the telecoms regulator disagree that Jio was pricing its products in a predatory way, but it also believed that the three biggest telecoms companies were deliberately dropping calls made by customers of its upstart rival.
In 2015, TRAI had imposed a mandatory Rs1 fine on operators for every call dropped. This was thrown out the following year by the Supreme Court.
A few months later in October, however, the regulator recommended a one-off penalty on Airtel, Vodafone and Idea of Rs30.5bn for failing to build enough connection points for calls from Jio customers. The companies were furious, arguing they had not had enough time to respond to Jio’s expansion, and appealed to the telecoms department.
Jio argues that TRAI was right, and that the poor service provided to its customers by rivals was one reason why it has had to price its product so low. “The free offerings were forced on Jio by the competitors who, in a collusive and obstructive manner, did not allow calls from Jio to terminate on their networks,” a spokesman says.
A rule change last September reignited concerns over whether Jio was now exerting influence over the regulator.
Jio’s customers, entitled to unlimited free voice calls, had been making as much as eight times as many calls as they were receiving. This pushed up the costs for the new entrant, which had to pay its competitors Rs0.14 every time one of its users called another network.
In a July presentation to TRAI, seen by the FT, Jio had proposed that this charge be eliminated. It argued that this would encourage its rivals to follow Jio’s lead by using 4G mobile data technology to carry voice calls at lower cost.
Two months later, TRAI announced that the termination charge would be slashed by 57 per cent — and abolished altogether from 2020.
The decision came despite frantic lobbying by other operators, which argued the move would benefit Jio by Rs50bn at their expense and began to question the regulator’s impartiality. It would be “undesirable for a critical core industry like telecoms to be regulated based on the ambition of a new operator”, wrote Vodafone chief executive Vittorio Colao to communication minister Manoj Sinha, in a letter seen by the FT.
Many analysts agreed. Balaji Subramanian, at the brokerage IIFL, called the decision “suspect” in that it benefited only one company while being unlikely to bring down charges for customers.
Mr Khullar, the former TRAI chairman was also critical, accusing the regulator of using a flawed analytical model with no regard to the high spectrum costs faced by Indian operators.
“This model was always going to bring about the lowest termination charge,” he says. “And there is only one group that will benefit from that.”
TRAI did not respond to a request to comment on any of these points. But Jio says Mr Khullar’s comments are “frivolous and unsubstantiated”. It also points out it did not entirely get its way with the regulator, which decided on a more gradual elimination than Jio had called for.
The company’s willingness to go to unexpected lengths in its quest for market domination was underlined in January, when the company successfully lobbied for a hefty cut in the termination charges for incoming international calls — paid to operators by counterparts abroad — from Rs0.53 per minute to Rs0.30. The incumbents say they expect to lose around Rs20bn a year as a result.
Its customers may now receive only a small proportion of calls from abroad, but in the long term it will reduce its own income as well as that of its rivals.
Jio has enjoyed a stellar first two years. The company has been profitable for the past three quarters, making Rs6.1bn in net profit in the three months to July. But many believe the group could be an even bigger cash cow for Mr Ambani. If he can keep Jio’s prices lower than its rivals for a long time, he will be able to increase market share before having the option to raise prices from a position of market dominance.
“They’re playing to their strength: the parent’s balance sheet,” says Rohit Chordia, an analyst at Kotak Institutional Equities. “They’re giving up on future revenues for the sake of hurting the incumbents now.”
Mr Ambani’s supporters say he has brought a burst of innovation to the Indian telecoms market, which could have long-term social and economic impact on the country.
Jio’s rivals argue, however, that its ruthless approach will leave India with a sector that is financially strained and unable to fund the investment needed to keep up with technological advances. Competition could suffer, with few big international operators likely to risk entering the Indian market, says Rajan Mathews, director-general of the COAI.
And as Mr Modi promises an end to the era of unaccountable tycoons, the criticism of the regulator threatens to undermine confidence in his agenda. “The regulator and the policymakers haven’t played their role,” Mr Mathews says. “Clever people will find ingenious ways to thread the eye of the needle, and that’s exactly what has happened.”
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