Mukesh Ambani's strategy with Reliance Jio is avoiding Anil Ambani's mistakes with RCom
- RCom made an early bet on CDMA technology which went out of style, while Jio chose LTE technology of 4G.
- Mukesh spent massively on country-wide fibre networks, yet he is cognizant of the risks that a massive debt at the group level.
- The plan to list Reliance Retail and Reliance Jio in the next five years will complete the circle of deleveraging giving his telecom venture a longer lifetime than RCom.
It is a truth commonly acknowledged that Anil Ambani has run up debts he could not service. That is especially true with the ₹46,000 crore that sunk his company, Reliance Communications (RCom).
A bet on the wrong technology meant extra investments, which coincided with the global economic slowdown, and piled debt so high, the risks of which were ignored at its peril.
Now, RCom is facing bankruptcy proceedings and Anil’s brother Mukesh Ambani’s Reliance Jio seems to be thriving. The only difference is Mukesh seems determined not to repeat the mistakes of the past, both his own and that of his brother, with Jio.
Betting on a technology that soon went out of fashion
RCom had early on bet on an obsolete-to-be technology, which became its undoing. In the early 2000s when Airtel and Hutch (later Vodafone) went with GSM technology, both Tata Teleservices and RCom went in for CDMA technology, which users did not fancy.
“I doubt if that could be termed as a mistake as many countries were using the technology but the world just went another way,” Alok Shende, Managing Director of Ascentius Insights, a management consulting firm tells Business Insider India.
Years after RCom came under Anil Ambani, as Reliance Industries was divided in 2004, he had to shift to the much-popular GSM technology. The shift required one more costly one-time investment in terms of network upgrade and spectrum; and the timing wasn’t right either.
Mukesh Ambani has stepped with Jio, which started out on LTE technology of 4G. And he is not stopping at that. “Because of our early adoption of the ongoing enhancements to LTE technology our wireless network is already 4G PLUS. And we can upgrade this to 5G at minimum incremental cost,” he promised his shareholders at his annual general meeting this month.
Jio fibre cable will deliver high-speed Internet right to homes and this will kickstart yet another set of services without having to fork out extra for spectrum.
Telecom tariff war-- then and now
Jio is currently waging a bitter price war in the telecom market. However, it is nothing new.
A raging telecom price war started by Tata Teleservices in 2008 with one paisa per second plan, had hurt many others including him. However, the shift from CDMA to GSM soaked in a lot of fresh investment that RCom could have spent to survive the price war.
There are times when investments are affected the broad economic conditions. RCom’s second round of investments was followed by a global credit crunch after the Lehman Brothers’ collapse in September 2008, which made debt expensive and business extremely difficult.
Debt is not bad, high-cost debt is. What is worse is to binge on it.
Jio too has piled on a massive debt in rolling out its services and burning cash offering discounts and ultra-cheap tariffs to lure over 330 million customers in the first three years of its operations.
The tariff attack continues with Jio Fibre, too as the company speeds to acquire 500 million subscribers, but there is a difference between the Ambani brothers.
One woke up to the debt pile on time, the other didn’t
Mukesh spent massively on country-wide fibre networks and is bleeding his competitors. Yet, he is cognizant of the risks that a debt of ₹2.8 lakh crore at the group level poses. In a timely move, Reliance Industries (RIL) announced that it would sell 20% stake in its oil-to-chemicals business to Saudi Arabia’s state-owned Aramco, the world’s largest oil producer, for $15 billion.
Not just that, he plans to turn RIL into a zero net debt conglomerate by March 2021.
Within the telecom business too, he brought in Canadian fund Brookfields which invested ₹ 25,215 crore in the towers unit. The plan to list Reliance Retail and Reliance Jio in the next five years will complete the circle of deleveraging giving his telecom venture a longer lifetime than Anil’s RCom.
“It is a very classic Reliance way of doing things which is vertically integrated model. And, the results will play out in the next 5-10 years,” Shende said about Mukesh’s plan to retire debt early.
It will allow Jio to focus on adding services, like it already plans to, and bring its A-game to the tight race in telecom with Airtel and Vodafone Idea.
“Jio will look at massive dominance in many areas like entertainment, e-commerce, Internet Of Things and will get more aggressive,” says Kunal Bajaj, a top telecom expert and consultant.