Why Jio-Facebook May Work Better Than A Google Or Amazon Combination
The partnership between Reliance Jio Infocomm Ltd. and Facebook Inc. could end up delivering more value than a potential combination of Amazon.com Inc. or Google with another Indian telecom operator.
That’s a bet True North Managers’ Haresh Chawla is willing to make.
The media executive-turned-private equity investor predicts that the natural order of evolution in the industry would be global technology giants partnering telecom firms. There are driving forces converging these two sectors together: tech giants need to reduce dependence on advertising revenue while telecom firms need to build an ecosystem of services to retain customers and extract maximum value from them.
For this, India becomes a potent breeding ground due to its large consumer base and accelerating digital adoption, according to Chawla. Telecom firms and tech giants are moving to capitalise on this.
Mukesh Ambani’s Jio Platforms Ltd. has been the first off the block. Jio Platforms has raised almost Rs 1 lakh crore from a clutch of well-known investors led by Facebook, which picked up a 10% stake in Ambani’s digital venture. Deals between Amazon and Bharti Airtel Ltd. and Google and Vodafone Idea Ltd., are also reportedly in the works. Though, to be sure, both Indian companies have denied being in conversation with these tech investors.
Chawla adds Apple Inc. to the mix, suggesting that the iPhone maker will also look to expand its transaction ecosystem in India.
“If you pull back and see the competition between the four global tech giants, what is happening is they are trying to build an envelope around their consumers,” Chawla, a partner at private equity firm True North, said. As has been successful in China, the effort will be to create platforms that offer everything—from vanilla telecom services to content, payments and e-commerce. Voice-based services will help gatekeep such an ecosystem.
There what happens is, you actually narrow the choices of consumers. On a screen you can visualise 20 choices but with voice they can narrow the choices so that they can dictate the choices.Haresh Chawla, Partner, True North
India is the fastest-growing internet market with 650 million users, the second highest in the world, according to a Bank of America research report. The Covid-19 pandemic and accompanying lockdowns have prompted a dramatic increase in digital services consumption in India. Acceleration that would have taken five years has happened in three months, Chawla said.
That makes the Jio-Facebook partnership a timely one and one that benefits both. “...there is almost 95% of market share of WhatsApp in the country, that means, Jio gets access to non-Jio customers which is actually almost 95% of the entire telecom network. Fantastic opportunity for Jio to bundle its services with WhatsApp. WhatsApp gets a play into a true transaction business which it doesn’t have.”
Also Read: WhatsApp Gets a Raw Deal in Payments
This will pressure Google and Amazon to partner with other telecom firms, according to the BofA report, with an intention of not “missing the bus”.
Chawla agrees. “You can’t not build an ecosystem,” he said. “When you've seen Facebook make a move, you will want to come in and put your stake in the ground and not just stay back and just ship out code from there that’s designed for India.”
Yet, if Chawla had to put his money in one of the three combinations, he’d pick the Jio-Facebook partnership in India.
“The Jio-Facebook partnership seems that they are going to integrate services and they have stacks outside of telecom ready. The other players don’t,” he said.
Besides a telecom service, Jio has over time acquired or built several over-the-top apps such as music streaming platform Jio Saavn and live streaming service Jio TV. It has invested in content via Network 18 Group. In broadband and cable distribution via Hathway and Den Networks. Parent company Reliance Industries also owns India’s largest grocery retail chain—Reliance Retail. Neither of the two other telecom firms can claim to be anywhere close.
“I don’t know how much value will get extracted from Airtel-Amazon kind of potential partnership. I'm seeing all that value will have to flow to Amazon in any case, and Google, again, I'm not sure. ”
Even the success of Jio-Facebook will come down to how these players coordinate, how they use the data, how they attach their services to each other, how they create layers, Chawla said. There’s not much downside though from an investment point of view. Not for Facebook nor for Amazon or Google if they were to invest.
“The economic value is that there is no risk,” he said. “Most of these companies are listed. Covid-19 has made sure that the value will gallop away as ARPUs go up. So even if you buy a stake in Bharti Airtel today, the fact is that your stake is unlikely to go down in value.”
Watch | Haresh Chawla’s interaction With Menaka Doshi on tech giants' India bet
In your assessment what does Facebook hope to get out of its investment in Jio Platforms.
Haresh Chawla: I think if you pull back and see what the war between the four global giants which is actually happening, is that, they're trying to create an envelope around the consumer. Essentially, create an ecosystem around the consumer where they can naturally cross-subsidise new businesses and essentially partake of as much transaction revenue as they can.
Remember there is advertising revenue available and that is a large pool today but all of them realise that advertising—we've all become very clever at avoiding ads and slowly you will find that it's becoming more and more expensive to find ad dollars unless of course, people are doing social commerce or doing something viral. Therefore, it’s going to be a stream that has a cap to it. The transaction stream all over the world is massive. Transaction, subscription as we are seeing; when you mention the three, there is actually a fourth—Apple. It makes tons of money selling subscriptions, hardware and retail as well. So, each of them is trying to build an ecosystem around the consumer.
Now, they have seen in China, how these ecosystems have evolved into large markets. Remember, America is only now just becoming mobile-first. China is the primary example of a mobile-first digital economy. There they have seen the rise of oligopolies—there is a Tencent ecosystem, there is the Alibaba ecosystem, there is Baidu ecosystem. Each of these ecosystems is almost like a self-propelling network, which has got a massive network effect. It has got a wrap-around on consumers in the form of a WeChat app or an Alipay app.
So, I think it is very clear that the model of the future will revolve around consumers essentially buying into one or more of the ecosystems and spending their time and money in these.
That’s the way to pullback and see this.
And they are finding ways to become even closer, they are finding ways to put in more intimate gatekeeping; by essentially putting voice. You see what Google is doing, and Apple and Amazon, all of them are trying to remove the screen as a layer as well. They are saying let’s become a zero screen company. There what happens is, you actually narrow the choices of consumers. On a screen you can visualise 20 choices but with voice they can narrow the choices so that they can dictate the choices.
So essentially - I think there are two trends there, one is get close to the consumer and try and dictate their choices. Consumers are lazy; consumers have inertia. Therefore if it is convenient, it is easy, you will naturally use that ecosystem because payment is linked, your profile is stored, your data is already available to them and they know what to sell you. And the other is become as close as possible to transaction revenue in this space.
Infact, Facebook is one the companies that is reasonably far away from the transaction space. In fact, if anything, I would say they have been the least innovative with Whatsapp. I mean, the future of Whatsapp is WeChat but they have made very few moves towards it. India presents a unique opportunity for all these companies. It’s a large, one big market, accessible to global players.
The other thing that has happened with Covid happening, I think we'll see a 2x to 3x jump in several digital services in India.
I think everybody is realising that this market, two inflection points —one was the launch of Jio, which made digital, wireless broadband so affordable, drove prices down, got adoption going, got video on mobile and OTT platforms going, and the second is Covid. When you put these two trends together, I think India has moved ahead by 5-7 years as against what it would have normally done.
Therefore, it is massively valuable to actually get a foot in to the large customer base. Of course, we don’t have the same spending power as China. We don’t have remotely the same spending power as the U.S., but the ecosystems, once you get locked into them; they generate massive collateral value of their own. Therefore the ecosystems are now sitting in a oligopolistic telecom market as well in India that is readily available. If you look at it from their perspective - you need to make an ecosystem, India is a tough market to operate in, it doesn’t have much value to throw up today, there are these three telecom players who have large swathes of the market, between 300 - 400 million consumers each, who are all becoming rapidly digitally savvy because of Covid.
Also, it’s a complex operating environment in the country. Therefore, some of these partnerships are naturally evolving. The Jio-Facebook partnership is the fact that Whatsapp needs to find a revenue model. Just providing free communication is not a business.
I think both parties have found benefits—that there is almost 95% of market share of Whatsapp in the country, that means, Jio gets access to non-Jio customers which is actually almost 95% of the entire telecom network. Fantastic opportunity for Jio to bundle its services with Whatsapp. Whatsapp gets a play into a true transaction business which it doesn’t have.
Also, Whatsapp Pay has been stuck. So, some of these things will untangle themselves.
That’s one partnership. Clearly, looking at this partnership coming together, others players have to make a move. You can’t not build the ecosystem. Those are the driving factors in a sense - some global and some local which have brought these players together.
Analysts estimate these Facebook-led investments value Jio Platforms at a 20-25% premium over its nearest peer – Bharti Airtel Ltd. Jio Platforms has the universe of Jio OTT properties - chat, music, games etc.. And it owns the telecom utility business, as well as a clutch of investments in AI startups etc. How should we be assessing this valuation, these numbers?
Haresh Chawla: You have to stack the businesses. The utility comes at the base of the pyramid where lower ARPUs drive higher lock in. And eventually all these players are attempting to increase their ARPUs. The fact that the market has also become oligopolistic also gives them the opportunity to up their ARPUs.
What will be above that stack will define the valuation. Bharti Airtel so far has strayed very little from the utility stack. They’ve not added to the value added services. I think Jio’s desire is to build the stack above the utility. They already have the components. They have the commerce part - they have Reliance Retail. They have done some work on online retail too with Ajio and stuff. They already have the content part - they’ve been working hard on that for a while. Plus they have at-home and on-mobile as well, which are again equally strong. Yes, they still have to integrate all these services. But they have a reasonably large footprint there with Den Networks and Hathway on the landline access.
If you consider these ecosystems, the fact is that the value really sits on the top. So all these ecosystems are cross-subsidising ecosystems. That’s what we will see.
We’ll see Amazon cross subsidising Amazon Prime or free delivery. So you really have to pull back to see the full stack. And the full stack is being built by Reliance and we’ll probably see Bharti making moves on that front, or even Vodafone Idea, depending on how its future pans out.
So, the base stack has value in it - you’ll see ARPUs go up, even as they increase prices they’ll discover that there is reasonable amount of elasticity. Consumers will pay for higher value-added services and more bandwidth.
You’re seeing Reliance bringing its components of the ecosystem together - either through a Whatsapp interface or the JioMart interface, and building a layer over the utility.
To that extent the models may differ - Amazon is the only company that directly handles merchandise, among the global players. There’s a fundamental difference. You can’t say Amazon, Google and Facebook are the same product. Amazon gets its hands dirty. While the rest are digitally layered, with coders sitting deep in Silicon Valley who don’t want to get into transaction handling, merchandise handling, return handling.
Now, in India, the battle will move between Jio as a platform and its ecosystem, and the Amazon platform, or even the Flipkart platform. At some point the transaction businesses will become the driver of the stack above utilities.
I get that e-commerce is the way to go for Facebook or Google. What does the telecom player bring to the table. 300 to 400 million subscribers, yes. But it’s not necessary that subscriber is wedded to an OTT service on that same network.
Haresh Chawla: Telecom players get you access to that consumer, right? It brings you optionality. Remember, they're not buying large stakes. They're buying 5-10, 15% stakes, right? The partnership has optionality because remember that the way is to access 300-400 million customers, and then launch voice-based access services - it is like creating an envelope. I don't know how exactly the envelope will evolve. But is it time for me to go and put a stake in the ground in a large, massive consumer base available? I get data from there, I get local knowledge, the Indian environment is complex to navigate and I get a partner to help me do that as well. Eventually, I am able to get closer to the transaction, hopefully, by either creating a layer or doing the transaction myself. I think you'll find that Google will probably do a layer on the transaction. So, when they get into let’s say, Vodafone, if that happens; they will really get closer to the whole data available from the utility.
Data, e-commerce, monetisation for Whatsapp - but will the marriage of let's say a platform like Facebook, or Google or Amazon with a telecom service provider actually leads to real revenue opportunities.
Haresh Chawla: You will find that there are so many collateral benefits to having these partnerships even from a point of view of even handling the environment. Remember there are licences to be got; a local partner will help these companies navigate their way in India. Remember, that can be of immense value to these companies.
But you do remember Walmart Bharti, right? I mean, that local partnership never really did work in Walmart's favour; eventually Walmart exited and had to return via Flipkart.
Haresh Chawla: There would several others that were successful. I think the fact is that they need relationships on the ground. You know that these companies are run out of Silicon Valley.
So paying a 20% premium for a relationship, a potential opportunity and data sharing of some sort, you think that that makes sense given the multiple opportunities that sort of lay on the route, even though we can't see them immediately?
Haresh Chawla: Absolutely. Remember that the voice war will come to India. That has got another play. We don't know how these services will get integrated with your telecom player. There are multiple ways to integrate them.
So, my sense is, you put the whole package together, it’s a market in which you need presence, in a sense, the only accessible market in the world. Cash is available, virtually free to these companies. Put all these factors together.
And you've seen Facebook make a move, you will want to come in and put your stake in the ground. And not just stay back and just ship out code there, designed for India. You’d rather have a team here, on the ground waiting.
I know that the China market is not entirely homogenous, but India is far more fragmented is as a market. Also, the number of smartphone users is still low even though number of overall subscribers is high. But you think these are all things that will get ironed out over time? It's the creation of the opportunity that these people are betting on, not the immediate revenue potential?
Haresh Chawla: I think pre-Covid, we were massively behind China. I think with this Covid we’ll see over the next few months as to how digital services will get adopted. My sense is, there is no way we’ll bridge that transaction value gap with China, but a bunch of learnings that are there from there, will play out in the market. We are evolving in the same manner.
Infact, China is a closed market where nobody else can operate. In India there are many things that have changed which actually make it worthwhile for a western company to be here. Look at the whole UPI backbone. Fundamentally, new concept that is not available in China and not available in the U.S. either.
So you will find that some of these services are actually get accelerated in India. So if we were 20 years behind China on the digital base pre-Covid, I think we are down to 10 years now because we will see a massive adoption difference now over the next few months.
How monetisable are all these OTTs? Let me put it another way - let's assume WhatsApp and Reliance Retail do manage to make a go of it. Though right now not all the feedback is positive on JioMart. But suppose they crack it. What stops any other retail company from going to Whatsapp and saying hey, why can't you push me as well? Or do you think exclusivity will work?
Haresh Chawla: Even if the exclusivity is not there, the fact is that Jio is bringing its massive base of consumers with it, right?
Today it is crazy. WhatsApp doesn't allow you to open a link within the same platform, in a sense it's almost like ancient technology to not have an inbuilt browser into your platform. I think some of these changes will happen within WhatsApp and they will get accelerated.
So my sense is, you'll find a lot of changes if WhatsApp really wants to become WeChat, I think they'll have to do massive changes around the way they run their app itself.
And when you combine these two; remember if you have 10 million customers and you combine with a Whatsapp it’s very different than when you have 400 million customers. WhatsApp brings you non-Jio customers and that is the value. The fact that you can deeply integrate-- so I think we'll see this play out over the next few months. I'm sure we'll see many ups and downs - these services take time to take off.
Also, grocery has been the graveyard of many companies across the world. Indian grocery specifically is very tough because the assortment changes every 50 kilometres. So what you're seeing right now is an attempt to put a layer over groceries. Remember, under that layer, the kirana store does exactly what they want. It is very difficult to get them keep their inventory, data intact, make sure they scan everything, not deal in cash directly and not make bills. 40% of the inventory in the kirana store is unbranded completely. These are the challenges all these companies will face and we’ve seen all of them have faced it. If you're talking about feedback on Jio, BigBasket had similar feedback when it began. So these are tough, extremely tough, transaction heavy businesses, which really one company has really mastered globally, which is Amazon. Everybody else has had lots of trouble getting their way to these stages of the business.
How would you evaluate between these three? Which one will probably work the best, assuming that all three happen? Will they all three arrive at the same outcomes? Will we be picking between three apples, as investors, or will they be apples, oranges and watermelons?
Haresh Chawla: So, it’s a difficult question to crystal gaze. The challenge is- the real segment is much smaller than the market is. E-commerce, you put the whole grocery segment, groceries and food and the overall, retailing, digital is very tiny actually; it's 2-3%. Now, the Holy Grail everywhere is this whole market, where you want to get the entire purchasing basket of a household and pass it through yourself.
My sense is that, I don't know how Google-Vodafone would go. Google has not yet gone into handling transactions on its own. They will probably be one step removed from the merchandise, they will redirect merchandise, and they will probably handle the payment as they're doing now. So there is a slight difference in how Google plays in India unless they radically transform their strategy and decide they want to get into actually handling the merchandise.
Amazon is very clear, it handles the merchandise. So, if you look at the drivers of success proven in this business - unless you handle the merchandise, unless you handle the return and unless you handle the delivery, it is very difficult to give a consistent experience to the customer. Because the trust factor develops when you're dealing with the end company. I can get onto an Amazon call and talk to that customer service operator and he responds to me, he knows what I bought, he knows my order history rather than me trying to coordinate this. So selling is very easy, servicing is where the challenge is- where the depth of the organisation actually shows up.
Between these two models, of course, a little bit of hybrid will happen. Even Amazon is trying to make a layer over kirana stores, and even Jio is trying to make a layer over kirana stores. Now, the kirana store already has a relationship with the customer. His servicing is fantastic and he can actually give credit as well. Now, is there value in building a layer over kirana? Yes, there is. Is it easy to do it? Not at all, because the behaviour of these players will need a massive transformation for them to be able to deliver service consistent with a full stack operation. You will find that it will not be easy to make them fall in line with the rules of the marketplace. The second thing is, kirana stores may also push back because remember, they don't want to lose control over their customers. A lot of startups have gone to kirana stores and they've had their customers taken away. So there is a little negative history that stays with them. They've seen both technology solutions come and disappear overnight. Secondly, some technology players come and actually take away their consumers. So it is going to be a delicate ground for all these players.
My sense is, in the medium term, there is enough space in the market for both of them to build reasonably large sized businesses without really coming into conflict with each other.
There is an Amazon customer profile which is very different. You've seen how Amazon Prime is doing, what people are consuming there. They have a high end products selling. They have a little more, let's say, upscale audience there. Jio will appeal to the masses; massive audience there. Because you'll have to focus what you're building right? You can’t build a Louis Vuitton and build Walmart, right? So I don't see in the near term these companies will be really running into a lack of space to grow.
The losers in the market is what you need to think about, it is where this challenge will start, where the pressure will start building on the several offline players, Covid is playing into that pressure as well because companies that thought they had some time to become digital suddenly are gasping for air. So if your organisation is not flexible and not digital, you'll be a walkover right now.
You’re talking about the conventional brick and mortar- the big one in the market right now is Future Retail, we know it's struggling.
Haresh Chawla: That's there and some of these formats will start struggling, with Covid. For instance, trial rooms are not going to be easy to access and people would not want to access them. So is there a new model that will come up on how to deliver apparel home and how to make people try and buy. So there are several small shifts that will take place but the market is massive till these guys to come head to head with each other for a while. Even for a Jio-Facebook, to actually make the whole partnership work, make sure that the system is smooth and delivery happens, they have the trust of the customer, the Kirana store...it’s a long while.
How far out do you think the Facebook investment in Jio is from delivering any kind of tangible value or tangible outcome? Similarly, if by the end of this year we saw the other two players get into bed with the other two telecom companies. What is the timeline we're looking at, three years, five years?
Haresh Chawla: So let me put it in two parts - there is an economic value and there is strategic value.
Economic value is that there is no risk; most of these companies are listed. Covid has made sure that the value will gallop away as ARPUs go up. So even if you buy a stake in Bharti today, the fact is that your stake is unlikely to go down in value.
Therefore, it comes down to how you extract strategic value. Now, that all comes down to execution. Actually, again, it's an easy answer there but the fact is that, that strategic value to extract will come down to how closely they end up working and how flexible both these sides are to building things out. I mean, just remember that none of these things are rocket science. Everybody knew that you have to keep on creating new digital services over your utility platform. We all knew this but has it been done? No.
So, I think it'll come down to how these players coordinate, how they use the data, how they attach their services to each other, how they create layers. I think some of these partnerships will go nowhere. The stakes are bought because they are tiny stakes and a few years later, they are sold again. In some cases, you will find that the partnership will get deeper. Really, they will create a bundle that is almost seamless for a customer. I don't see all three of them going that way. Maybe one or two may succeed there to create a seamless bundle.
We've seen Reliance build out this empire of content, commerce, all of that. Like you said they probably had the vision that all of this will ride on top of their pipes. But have we seen them bring it together, to synergise it, to actually be able to monetise it together? Because they're still running in silos.
Haresh Chawla: It's not an easy thing to do. Remember, you have to run it in silos to make sure that you do that one job well. Equally you make you make sure that your technology allows you to combine them. So even in Amazon, the cloud team runs separate from its music team that runs separate from its e-commerce team. So I think the combination comes on the final layer where, again it's simple, but not easy. You basically bring all the interfaces together and combine them. My sense is that, the pace at which Reliance has been moving, gathering the assets...it will take a bit of time before they're able to put everything into one seamless layer.
Is there a model anywhere in the world where something like this has worked? The few efforts we've seen before, where telcos get into content or telcos get into commerce, haven't been runaway successes.
Haresh Chawla: It comes down to if it's a side effort. I don't think Reliance Retail is a side business. Remember, most of these efforts of running or combining or building the stacks have failed because they have become ‘also run’ or ‘also tried’ kind of businesses. When you have a full-fledged business, with its full weight of operations, full weight of consumer trust, and then you combine it, it is a very different situation. I agree it has not happened. But remember, the combination is different. You are getting a fully grown mature business to come and combine at the interface of the consumer.
You believe from what you can see right now that Reliance is on the right track and can make a success of this untested model?
Haresh Chawla; Yes, because it's got full stacks and everything. I mean, I'm giving you a theoretical answer to a very practical question because we'll have to see how it plays out, how the interface becomes seamless. As you said, its currently not seamless and even Whatsapp is not seamless. Whatever you do, you can’t open anything within Whatsapp.
Because at the least, you are sure that a Reliance Retail customer may want to access them through JioMart.
Just remember you have franchises within each of these stacks. First, your job will be to take that franchise and digitally enable that rather than going out to an absolutely new customer who has not ever used your service. That's the second stage. So my sense is that, even in this whole partnership, the first job will not be to get new customers through Whatsapp, the first job will be to service existing franchise customers through Whatsapp. This is not some company saying I want to go and try my hand at retail. No, it’s not. You’ve seen what has happened when you don't run with full stack. We've seen what happened with Airtel payments for example.
So they've got the parts now it's just the combining of those parts, where they will be tested. And because they've got the parts, they've got a better chance at this than anybody else?
Haresh Chawla: Technology allows you to do this combination beautifully. Now, if it is done beautifully, it will work, if it's not done beautifully, if it has breaks in it - customers have very little patience with technology. There are two sides to the sword. If you don't service me well, I will switch out completely. Therefore any break there is, it is extremely expensive on the enterprise.
And you're saying maybe two or three years down the line is when we'll get a better sense of whether a Jio-Facebook kind of partnership is able to deliver anything tangible?
Haresh Chawla: Yes. And it would deliver more on the Jio side because they are the ones innovating on the platform.
This is Jio innovating outside its own core customer base on WhatsApp’s customer base. We should evaluate from that lens, did it work for Jio?
Because we yet have to see what WhatsApp does. Because WhatsApp has got many jobs to do if it wants to become the WeChat of India. It first has to publish API, it has many levels of work that needs to be done to be able to really build an ecosystem which is like a WeChat. A lot of work there.
If you had 100 million dollars, which I suspect you do, which combination would you bet your money on?
Haresh Chawla: So I would buy the Facebook-Jio combo in India and buy Amazon and Google abroad.
I don't know how much value will get extracted from an Airtel-Amazon kind of potential partnership. I'm seeing all that value will have to flow to Amazon in any case, and Google, again, I'm not sure. At least the Jio-Facebook partnership seems that they are going to integrate services and they have stacks outside of telecom ready. The other players don't. I don't see a situation where Amazon will transfer value into Airtel. The stake itself is small - how will you transfer value? These are going to be a little bit of loose partnerships, whereas Jio is bringing a full stack to the table of vertical services.