Jio grabbing the pie- A pricing destruction or a bait

Reliance Jio announced preview launch of services from 5th September’16 and much awaited commercial launch on 31st December 2016. All services on Jio are offered free during preview period till 31st Dec’16

 Jio announced life time free voice services across networks including roaming. Free voice offering is more negative as compared to steep cut in data pricing. We continue to highlight that Jio has three levers to succeed; 1) quality of services, 2) disruptive pricing strategy to grab subscriber share and 3) robust content offering 

 Data plans are priced in the range of Rs149/month to Rs5k and with implied GB/month cost in the range of Rs65-100. Steep discount to current data pricing, free preview launch and availability of cheaper 4G handsets (LYF) to fuel penetration 

 We maintain our thesis that structural risks in the sector would continue in medium term i.e. 1) risk to voice revenues, 2) steep correction in data realizations, 3) continued capex and 4) rise in subscriber churn and subsequent increase in costs 

 Given that Jio’s offerings are restricted to 4G handset subscribers, impact on existing telcos will be gradual while it would be interesting to see how they react. We cut our revenue assumptions for Bharti and Idea. This has resulted to EBITDA cut of 6%/12% for FY18E. Stocks to remain under pressure.

Key highlights of Jio plans and other statistics 

 Jio has announced 10 data plans with starting price point of Rs149/month increasing to Rs5k. The idea behind announcing only 10 plans across the country is to keep offerings simple. As price plans are announced, Jio will be able to implement MNP post 5th Sept’16. 

 Lower and mid-priced plans, which are highly consumed by pre-paid subscribers is missing at current juncture. In our view, additional plans will be introduced at the time of commercial launch. As stated in the AGM, most of the plans are priced below Rs50/GB while actual pricing for all the plans are above that. All the plans are at huge discount than the current offering of incumbent operators. 

 Data is available free during the night hours (most probably from midnight to 5AM), this is again significant step. In our view, subscribers consuming heavy data during night hours would not be meaningful at current juncture 

 Voice is being offered free across the networks, including roaming. As per our understanding, VoLTE calls are on data networks and consume data and do not ride on traditional networks. None of the incumbent operators have full scale VoLTE offering and penetration of VoLTE enabled handsets is very low, this would push majority of the off-net calls of Jio network to legacy network of incumbents. Therefore, Jio will be liable to pay IUC of Rs0.14/min for all call as it is subsidizing cost (translating to Rs56/sub/month with assumption of 400mins consumed by each subscriber)  If Jio calls are on IP network and consume data, still it would not eat much into monthly usage plans as per minute call consume 0.35mb and 140mb per month (assumption of 400mins consumed by each subscriber) 

 Further, free unlimited SMS is also offered 

 Jio offerings are restricted to 4G handsets subscribers and incremental subscribers. Steep discount to current data pricing, free preview launch and availability of cheaper 4G handsets (LYF) would fuel penetration. For subscriber upfront investment is in handset purchase while 4 months free preview service would recover cost 

 Impact on existing telcos will be gradual as Jio offering is for 4G subscribes while it would be interesting to see how telcos react to Jio pricing. Steep cut in tariff will be negative in medium term as financial heath is already weak for telcos