How Jio Became the Darling of Silicon Valley
Why have Facebook and Google invested billions into an Indian telecom company?
Few international companies have generated the kind of fundraising frenzy that Jio Platforms has over the past few months. The telecom operator, which is a subsidiary of Reliance Industries, India’s most valuable company, launched its services less than four years ago in 2016. It already boasts close to 400 million subscribers.
In April, the company announced it had secured $5.7 billion in funding from tech giant Facebook. In the months that followed, barely a week went by without Jio adding a new investor to its roster: private equity firms like Silver Lake and KKR, sovereign wealth funds like the Saudi Public Investment Fund, and strategic investors like Intel and Qualcomm all announced they were investing in the company. And in July, Jio announced that Google was investing $4.5 billion. In a matter of just four months, Jio had raised some $20 billion from external investors. And all this in the middle of a pandemic. Jio, now valued at about $65 billion, managed to raise more money than the entire startup ecosystem of India did in 2019.
Very few telecom companies are at the receiving end of the kind of attention Jio has received. Few can value themselves like a technology company; fewer still can get both Facebook and Google on board as investors and maintain a strategic partnership with Microsoft (which was also allegedly in talks to invest). Add to this the fact that the core business of Jio’s parent company, Reliance, is oil and gas (more than 50% of the company’s revenue from 2019 to 2020 came from its refining business). Where did Jio come from, and how did it suddenly become the darling of Silicon Valley?
From oil to mobile internet
Jio’s parent company, Reliance, was founded by Dhirubhai Ambani in 1966 as a trading business. Ambani started out trading synthetic yarns, which were in high demand due to the lack of industrial capacity in the country to produce synthetic fabric. Over the next 40 years, Reliance became an industrial powerhouse by expanding into manufacturing and began venturing into petrochemicals, petroleum refining, and oil and gas exploration. Reliance was a rare example of a company that thrived during the most restrictive period of India’s experiment with socialism. Key to its success was Reliance’s ability to forge, maintain, and use political connections. When Ambani died in 2002, without leaving a will, Reliance was already one of the most valuable companies in India.
Reliance could very easily have become one of the many family-run businesses that starts degenerating within a generation of being founded. In fact, it nearly did. Following Dhirubhai Ambani’s death, a very public cold war broke out between his two sons, Mukesh and Anil, that ended with them splitting the company into two in 2005. Mukesh got the core petrochemicals business, Reliance Industries Ltd (RIL); Anil took control of the telecom arm that had been established a few years prior, along with a bunch of other entities, Reliance-Anil Dhirubhai Ambani Group. The two signed a 10-year noncompete agreement that fell apart midway, allowing Mukesh Ambani’s RIL to reenter the telecom sector. Reliance Communications, the telecom arm of Anil Ambani’s group, remained in operation until 2019, when it shut down and filed for bankruptcy.
A smart bet on 4G
Mukesh Ambani’s reentry into telecom was both audacious and a bit secretive. In 2010, the Indian government began auctioning both 3G and broadband wireless-access (BWA) spectrum, or 4G, which was used primarily for high-speed data access. The incumbent telecom players focused their energies on getting 3G spectrum as they sought to upgrade their infrastructure and services. The BWA auction was swept by an unknown company with only about $32,000 in revenues and a single internet subscriber. The day after the auction results were announced, RIL acquired the company and boldly stated that its aim was to build a broadband network that would cater to the Indian mass market.
RIL entered the telecom sector with a blank slate, which could have been a handicap. The Wall Street Journal noted at the time, “By the time Mukesh Ambani builds a 4G wireless business, rivals will have had the chance to sign up millions of customers for 3G services, leaving a smaller pool of potential broadband subscribers. Also, 4G technologies are still being fine-tuned, whereas 3G networks have been up and running for years in other parts of the world. And 4G devices will likely be more costly than 3G ones initially, because there will be a smaller universe of manufacturers.” With the benefit of hindsight, we know that RIL’s bet on a 4G data network was the right one, allowing them to leapfrog the existing technology and high-cost structure of the incumbents by building out a data network that could offer voice calls at relatively low rates.
This is exactly what RIL’s new telecom service, named Jio, did when it was formally launched in 2016. Jio hit the market offering customers free voice calls and zero roaming charges. The data plans were so incredibly cheap, they undercut the incumbents by more than a third. At launch, Jio’s 4G network already covered 18,000 cities and towns and more than 200,000 villages. Within six months, the company was promising to cover 90% of India’s population. Ambani said he wanted to get to 100 million customers as soon as possible.
Jio’s impact on India’s digital landscape in the three short years since it launched has been nothing short of revolutionary. The default network for most of the country is now 4G, and Jio carried about 70% of the country’s 4G traffic in 2019. Within four years, Jio has gained about 388 million customers. The cheap data plans that Jio offered were lapped up by Indians, and India’s digitization has galloped. Indians used an average of 12GB of data per month in 2019, up from about 90MB in 2014. The country is now the second-largest online market in the world. All of this has happened largely on the back on Jio. These statistics start painting a clearer picture of why there has been such a frenzy to invest.
What’s in it for Jio?
For Jio, the foreign investments of the last few months came not a minute too soon. Jio was able to achieve this scale in such a short period because it invested more than $30 billion, the biggest private-sector investment in India’s history, to build a broadband network to cover the country, an investment that was financed largely through debt and cash reserves from the parent company’s oil and gas business. But as oil and gas prices cratered over the last year, the company faced increasing pressure from public markets to reduce its massive debt load. Raising money for Jio made sense since it was suddenly the most immediately monetizable part of Reliance. With the fundraising frenzy of the last few months, Reliance wiped out all the debt it had incurred to build out Jio and then some.
At Reliance’s annual shareholder meeting on July 15, Mukesh Ambani pointed to the direction Reliance is likely to move in. He was plain in stating that Jio is the vessel through which he aims to lead a transformation and diversification of Reliance’s business. The company will continue to build out its app ecosystem. JioMeet, which was launched in June to compete with Zoom and has already been downloaded 5 million times, was one of the platforms viewers could use to watch the entire shareholder meeting. The company is also planning to use its partnership with Google to develop a customized Android operating system to propel a shift of users from feature phones to smartphones and offer cheap 4G phones.
Given recent geopolitical tensions between India and China, Reliance is clearly positioning itself to make the most of a nationalist zeitgeist. Any dent it can make in India’s heavy reliance on cheap Chinese phones will be a political success for the firm. At the July meeting, Ambani also talked up plans to roll out a homegrown 5G technology, explicitly tying it to Prime Minister Narendra Modi’s recent campaigns for a “self-reliant” India and emphasizing the potential to export their solution. Ambani is also seizing the geopolitical moment to position the company as an international player. Jio, since its inception, has marketed itself on the vision of an India that is more confident and important on the global stage.
The recent flurry of investments have been eyebrow-raising, not just for the amount of money Reliance managed to raise but because its partnerships with key international players, who could perhaps have been competitors, raise pertinent questions of regulatory capture and how much of a role that will play in Reliance and Jio’s continued success. Every time an investment in Jio was announced over the last couple of months, reporters, especially at foreign publications, made a pointed note of Reliance’s closeness with the current government.
These allegations, of course, have dogged Reliance for decades regardless of the party in power. While the CEOs of Facebook, Google, Amazon, and Apple were hauled in front of the U.S. Congress for antitrust hearings this week, Reliance has worked hard to cultivate deep ties with the government at the state and national levels. While this doesn’t mean Reliance and the government can’t come into conflict — they have in the past — the company has very successfully cultivated the perception that it can bend rules in its favor.
What’s in it for Facebook and Google?
For investors who want exposure to India’s untapped potential in the hope that it will bloom, what better investment vehicle could there be than Jio? Facebook, for example, has more active users in India than any other country, and it still has scope to grow. But Facebook has struggled to monetize its user base and clear regulatory hurdles. Its attempts to launch an internet provider called Free Basics in the country in 2014 was stymied by regulators, and it still hasn’t been able to launch payments on WhatsApp in the country, though this has been in the pipeline for years now. The social media giant’s investment in Jio was specifically couched around launching payments for small and medium-sized retailers. Reliance’s reach and core infrastructure, make it — on paper — a great partner to Facebook.
Google, meanwhile, seems to be banking on the partnership to expand the market for Android smartphones in India while chipmakers Intel and Qualcomm, who have a smaller stake in Jio, hope to have a role to play in Jio’s 5G strategy.
A fraying US-China relationship also help explain the kind of interest Reliance has received from American tech firms and investors. China, the largest market of internet users, is increasingly closed to U.S. tech companies. India, the second-largest market, is one that both welcomes them and still represents a potentially untapped market. Reliance has pitched itself as a surrogate for India itself.
It’s not a great sign for India that Facebook, and other international investors seem to think a partnership with Reliance is their best route to navigating India’s complex regulatory landscape. Google Pay’s phenomenal performance in India shows that it does not all have to be “Jio or bust”: India’s digital market does have room for competition. But if foreign investors treat Reliance as the regulatory gatekeeper to the market, that could become a self-fulfilling prophecy and feed the company’s monopoly power. Already, nearly $20 billion of foreign capital has gone toward wiping out Reliance’s corporate debt as opposed to funding new startups in the country.
What’s next for Reliance
While Reliance’s strategy and execution with Jio has been nothing short of impressive, continuing to execute on it will be tougher. There are broader organizational questions about how Reliance will balance its new, younger digital arm and its more traditional oil business. Whether Jio can fully transition to building a robust software layer on top of its undoubtedly impressive infrastructure, is an open question. It’s also where Jio remains most vulnerable to competition. The company already boasts a suite of more than 20 apps that span from education and retail to music and video streaming. But none of these have, yet, become a breakout winner.
Reliance’s strength really is in building out hard infrastructure, something it’s begun to apply to retail. At the end of May, Reliance announced the launch of e-commerce arm JioMart in 200 cities. Taking advantage of market changes driven by the pandemic, JioMart began by selling groceries, the most in-demand category of goods. The company relied on its own network of retail stores and the multiple kirana (or mom and pop) stores it had spent the past year signing up for JioMart. JioMart already has some 250,000 daily orders, beating both Amazon and BigBasket, which was until recently the country’s largest e-grocer.
During the July shareholder meeting, Ambani indicated that strategic and financial partners have expressed interest in investing in Reliance’s retail arm. It is already being reported that Amazon is considering acquiring a stake. Reliance’s next chapter is likely to be focused on using the infrastructure of Jio to power its ambitions in digital retail. This chapter is just beginning.