RJio data pricing can give it a higher realisation than incumbents

At first look, Reliance Jio Infocomm Ltd's (RJIL) tariff for fourth-generation (4G) long-term evolution (LTE) data service at 5 paise per megabyte (MB) or Rs 50 a gigabyte (GB) may seem unviable in a market used to paying over Rs 250 for a GB, but experts estimate it can easily give Mukesh Ambani-owned telecom company an average revenue per user (arpu) of Rs 150-200.

This arpu is higher than what the incumbent telecom operators such as Bharti Airtel, Vodafone, Idea and others are earning.

So, how is it possible for RJIL to earn more arpu than established players at five times lower tariff?

A telecom expert, who spoke on condition of anonymity, said Reliance Jio's state-of-the-art internet protocol-based (IP) 4G LTE network, without any legacy equipment in it, made it more cost-effective than existing player's networks.

According to G Krishna Kumar, a telecom executive from Bangalore, the packet-switched network based on IP of RJio is five times cheaper than circuit-switched network being used by its incumbent rivals.

Add to this cost-saving the huge surge in volume of data usage per customer spurred by lower data tariff and free voice calls, and you have a winner in the market. This is what the new telecom kid in town is betting on.

The expert, mentioned above, expects the data usage to jump to around 3-4 GB per subscriber per month with falling tariffs from the current less than 1 GB per user per month.

"Giving voice free may look unsustainable to a layman, but when I look at this move along with low tariff rates, it seems to be a very smart strategy. Today, average data usage of subscribers of the incumbent on the existing network is less than a GB. What these people (Reliance) are doing is by giving such low data rates and other offers, they are driving the common man towards data usage. They are probably betting that average data usage will lift from less than a GB per user per month to at least 3-4 GB per user per month over a period of time. If you go to that usage level, then the Rs 50 per GB rate is going to give you an arpu of 150-200," he said.

However, he does not expect this to happen immediately. According to him, enterprise users, whose loyalty tilts towards competitive rates, may be among the first to migrate to Reliance Jio's network.

T V Ramachandran, chairman, Assocham National Council on Telecommunications, said Reliance Jio was changing the telecom market by pushing data, which is currently just 25-30% of the total revenue earned by telcos, in a big way.

"Somebody (Reliance) has come into the market and tried to push data. Others have to wake up and do the same. I think it is good and I welcome this kind of competition," he said.

Krishna Kumar does not expect Reliance Jio to make profits before 2-3years; "they will not be profitable for the 2-3 years. First, they will acquire customers and then monetise them over a period of time".

He said theoretically, quality of 4G LTE, both for voice and data, is better than other broadband services.

And if Telecom Regulatory Authority of India (Trai) does away with Interconnect Usage Charges (IUC), which is currently at 14 paise per minute, it would give RJio further cost competitiveness compared to its established rivals.

"Whatever rates they (RJio) are giving is viable only if it is backed by huge volumes. I'm very sure with low data rate, more and more people will be using their services," he said.

Another senior executive with a leading management consultancy firm, who did not want to be named, said RJio has lowered the entry barrier with low tariff and easy onboarding to its service to expand the data market.

"The challenge has always been the upfront subscription cost but they have lowered the barrier," he said.

Speaking of experiences of other markets, he said the price of data had typically led to churn in all market. "That's a given phenomenon. We've also seen that launch of LTE has led to change in market share in some markets like Canada and UK. The launch of LTE service has weaned away market and revenue shares in both these markets. And RJio is more aggressive (in pricing and offers) than players in other markets".