How Does Jio Offer Such Cheap Plans?

Jiorsquo;s Strategy: How Cheap Plans and Feature Phone Subsidies Revive the Telecommunications Market in India

Introduction:

Jio, a subsidiary of Reliance Industries, aims to provide affordable and accessible connectivity to a vast population that previously faced high costs and limited access to telecommunications services. This article explores the strategies Jio employed to make its plans affordable and why it has become a game-changer in the Indian telecommunications market.

Factors Contributing to Jio#39;s Successful Affordable Plans

Infrastructure Investment:

Jio has made substantial investments in building its own network infrastructure, including a nationwide 4G LTE network. By deploying state-of-the-art technologies and infrastructure, Jio has successfully optimized costs and offered services at lower rates. This strategic investment in infrastructure paves the way for efficient service delivery and supports Jiorsquo;s affordable plans.

Digital-First Approach:

Jio adopted a digital-first approach by utilizing internet-based technologies and platforms for service delivery. This digital-centric strategy allowed the company to operate more efficiently, reducing its reliance on traditional infrastructure. As a result, Jio was able to cut costs and offer competitive pricing plans to its customers.

Disruption of Market Dynamics:

Upon entering the telecommunications market, Jio disrupted the existing competitive landscape. To capture market share and attract users, Jio introduced aggressive pricing and promotional offers. This competitive approach led to a price war among telecom operators, ultimately driving down prices and offering better deals to consumers.

Economies of Scale:

Jiorsquo;s strategy focused on acquiring a large customer base quickly. By providing affordable plans and competitive pricing, Jio was able to attract millions of subscribers, creating economies of scale. With a larger subscriber base, Jio could leverage cost efficiencies and negotiate better deals with suppliers and partners, further reducing costs and allowing it to maintain its competitive edge.

Jio’s New Target Market and Strategy for Feature Phone Users

The New Target Market:

Reliance Jio has now shifted its focus towards 150 million feature phone users, who contribute to 15-17% of the sectorrsquo;s revenues. This new target market represents a significant opportunity for the company to expand its customer base and revenue. However, to offer feature phones at affordable prices, Jio will provide Rs 500-1000 subsidies per device, assuming that the cost of each feature phone would be Rs 1000-1500.

Promotional Tariffs:

To drive mass adoption of its 4G feature phones, Jio may introduce promotional tariffs bundled with these devices. This strategic move will help Jio tap into the large feature phone user base while maintaining cost efficiency.

Twin Target Markets:

Jio will have the advantage of addressing two target markets: the 150 million feature phone users and the replacement market of feature phones. With around 500 million feature phone users in India, Jiorsquo;s strategy is geared towards capturing a significant portion of this market, both for new subscribers and those looking to upgrade their devices.

Cost Considerations and Future Outlook

Interconnect Cost Reduction:

In 2017, Jiorsquo;s interconnect costs stood at Rs 26 billion, implying a full-year cost of Rs 46 billion. If Jio manages to add an additional 100 million subscribers, its market share could reach 19-20%, higher than Idea Cellularrsquo;s current 15.7%. This increased market share could drive interconnect savings of Rs 10-12 billion annually, which could help offset the costs associated with the feature phone subsidy.

ARPU Dilution Risk:

One potential risk of offering 4G feature phones is ARPU dilution. The launch of Jiorsquo;s promotional offer for 4G feature phones could lead to ARPU dilution among mid-ARPU subscribers, which form around 21% of total subscribers and 22% of sector revenues. Analysts suggest that ARPU dilution could occur due to the lower pricing offered for these devices.

Industry Impact:

A significant benefit of Jiorsquo;s entry into the 4G feature phone market is that it has made it possible for 80% of Indiarsquo;s population to afford a 4G phone, compared to 68% without Jiorsquo;s VoLTE feature phone. However, this has also led to increased competition in the market, with incumbents losing some of their low-end voice subscribers due to the advent of affordable VoLTE phones.

Future Predictions:

CLSA predicts that sector revenues will fall by 7% year-on-year in FY18 due to promotions and retaliatory tariffs. However, they expect a rebound in FY19, assuming that Jio fully transitions to fully utilizing its subscriber base and leveraging cost efficiencies.

In conclusion, Jiorsquo;s approach to offering affordable plans and providing feature phone subsidies has not only transformed the Indian telecommunications market but also presented new challenges and opportunities for the industry. By focusing on cost optimization, strategic market entry, and cost-efficient operations, Jio has established itself as a leader in the market, driving both innovation and competition.