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Free services for customers, how profitable is Mukesh Ambani’s Reliance Jio

According to Morgan Stanely, Reliance Jio can become profitable by 2020, if average revenue per user (ARPU) is increased to Rs 218 in 2018, Rs 209 in 2019, and Rs 233 in 2020. At its current ARPU, it will still make some losses (of about $854 million in 2020).

business Updated: Apr 05, 2017 12:47 IST
Sunny Sen
A Reliance employee demonstrates Jio LYF phone at their headquarters on the outskirts of Mumbai.
A Reliance employee demonstrates Jio LYF phone at their headquarters on the outskirts of Mumbai.(REUTERS)

It took Reliance Jio just seven months, a massive price war and more than Rs 2,00,000 crore of investments, to get to 120 million subscribers, with internet and voice services being offered for free.

But Mukesh Ambani, whose Reliance Industries owns Reliance Jio, is a thorough businessman, and his newest telecom venture is not a charitable organisation. The free services, both in the form of Welcome Offer and then the Happy New Year Offer were launched to hook subscribers. His newest “Summer Surprise” is an extended almost-free offering.

Still, global brokerages think that Reliance Jio can become profitable in the next three to five years.

According to Morgan Stanley, Reliance Jio can become profitable by 2020, if average revenue per user (ARPU) is increased to Rs 218 in 2018, Rs 209 in 2019, and Rs 233 in 2020. At its current ARPU, it will still make some losses (of about $854 million in 2020).

If the ARPU is increased, Reliance Jio can also post about $7.58 billion in revenue, with profits of $1.08 billion.

On March 31, Ambani said that by April 15, Reliance Jio’s users would have to start paying. However, he also said that users who recharge with Rs 303 (with 28 days validity) – the tariffs would be applicable only by July.

“We believe Reliance Jio’s goal is (to have) at least 15% subscriber market share… and, within that, a larger number of premium subscribers who will be high-data consumers willing to pay for bundled plans. In a March 2,2017, Jio presentation, the company said that it is well positioned to achieve 50% revenue market share in the next five years,” wrote Parag Gupta, analyst with Morgan Stanley.

Since the launch of Reliance Jio, the data usage in the country has quadrupled, and has crossed that of the US and China.

Ambani also said that his company has 72 million paid subscribers, who have opted for the Prime membership, paying Rs 99 for a year, which offers additional 4G data to its users.

According to Hong Kong-based equity firm CLSA, the number of Prime members could cross 80 million, and 100 million by March 2018. “We believe Reliance Jio expects subscribers to sign for the ’fear of missing out’ on future offers,” wrote Srinivas Rao and Peter Milliken, research analyst with Deutsche Bank Markets Research.

The Deutsche Bank report also mentioned that the ARPU of the industry stood at around Rs 130 in the second quarter of 2017, and would increase to Rs 145. In Reliance Jio’s case, “the unique subscriber base is estimated to be 70% of the reported subscriber base. This would imply per subscriber ARPU of Rs 185 to Rs 190,” Rao and Milliken wrote.

According to a report by Badrinath Srinivasan of Credit Suisse, Reliance Jio would slowly increase the tariff, “to ensure high customer retention and the strategy to offer three months of complimentary services aims to do just that.”

The Morgan Stanley report also mentioned that Reliance Jio has tried to lock-in higher revenue customers with the Prime membership, by capitalising on its brand new network, and offering nearly unlimited monthly data plans.

“Concerns on Jio revenue now reduce; focus moves to ARPU and subscriber growth,” writes Sanjay Mookim and Krishan Binani, research analysts with DSP Merrill Lynch.