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No Matter Who Wins, Everyone Will Leave This Battle Worse Off

Sep 2, 2016

In this issue:
» Jio's data pricing to disrupt the telecom apple cart
» The 100 smart cities mission faces hiccups
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

A couple of weeks back, I came across an article that 'kaali-peeli' taxis are looking to offer a 20% discount to attract Mumbaikars. The 'kaali-peeli' saga in the city is well known. Strikes have been frequent. It is their way of voicing their gripes with app-based taxi services Ola and Uber. Their bone of contention? Ola and Uber are charging cheaper fares to lure customers, which they can do because they have bigger pockets. This, the 'kaali-peeli' taxis believe, will drive them out of business.

The 'kaali-peeli' drivers clearly think starting a price war will win them more customers. But it is not that simple.

I use Uber fairly often. But the price point is not the big driver (no pun intended) for me. It is mainly that the cabs are clean, and more importantly, the drivers are willing to go wherever I want. It's the quality of service that matters most.

Uber will eventually have to raise prices if it wants to remain a viable business. But customers like me who prefer quality will not stop using the app-based services just because prices have risen. Especially not if 'kaali-peeli' taxis continue to pick and choose where they go.

The larger point here is that starting a price war is not how you go about creating a sustainable and profitable business. The focus has to be on quality.

Look at the airlines business. A few years ago, we saw a flurry of low-cost carriers enter the market. Most kept slashing airfares to lure customers. Has that worked? Not really. Most carriers are bleeding, and Kingfisher Airlines is now out of business. The price wars only led to deteriorating conditions for the entire industry at a time when airlines were already grappling with a high-cost structure.

A similar price war is playing out in the ecommerce space. Flipkart once made headlines for the continuous funding that it kept getting from venture capitalists. Valuations soared. Then Amazon entered the market. A price war ensued as they pitted against each other to offer the most discounts. The story today? Flipkart has no profits to speak of. The business is floundering. And the company is making headlines for all the wrong reasons - high profile exits and a substantial markdown in valuations.

And now we appear to have another price war in the making - the entry of Reliance Jio into the telecom space. Mr Mukesh Ambani announced that Jio will offer free voice services to its active users. It will also offer data at Rs 50 per GB. Jio's peers are charging Rs 250 per GB. So clearly, Jio's strategy is all about entering the market and capturing as much share as it can.

Not surprisingly, as soon as Mr Ambani made this announcement, shares of Bharti Airtel, Idea Cellular, and Reliance Communications plunged. Their combined market cap losses were a massive Rs 120 billion.

The real question is - will Reliance Jio make any money if it keeps providing free lunches to one and all? Does the company even think that running a consistently profitable business is what makes a company valuable?

Warren Buffett loves companies that have strong moats and pricing power because these are the companies that grow profits and build shareholder wealth. Here's the Harvard Business Review with a harsh conclusion regarding price wars:

  • Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability. No matter who wins, the combatants all seem to end up worse off than before they joined the battle.

So you see, in the long run, price wars help no one. You might get a quality product cheap right now. But maintaining that quality is costly. And if a company resorts to price wars, it is compelled to cut corners. Ultimately, the quality suffers. And the business bleeds. A lose-lose proposition for all.

Do you think that industry leader, Bharti Airtel, will engage in a price war with Reliance Jio? Let us know your comments or share your views in the Equitymaster Club.

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------------------------------

03:01 Chart of the day

Reliance Industries has been quite a late entrant in the 4G mobile phone space with peer companies such as Bharti Airtel, Vodafone India and Idea Cellular having already launched their services. Although the company had won the spectrum rights way back in 2010, stabilisation in the relatively new Long Term Evolution (LTE) technology adopted by its partner Jio led to the six-year delay in the roll out of services. This technology was first unveiled in North America in 2010.

Additionally, building the pan-India network comprising of the optic fibre network and telecom towers and procuring low cost 4G devices pushed ahead the company's 4G foray. But now with all the groundwork in place, Reliance Jio wants to leave no tables unturned to make its 4G venture a success.

The company wants to literally hit the ground running as reflected in the mouth-watering offer used as a bait to attract the maximum subscribers. The offer not only includes low cost Lyf phones, but lifetime free voice calls as well as ultra-cheap data plans and tariffs. As per the company presentation, the mobile phone data will be priced as low as Rs 50 per gigabyte (GB) which is not only the lowest in the country but also globally. While this huge price disruption will no doubt benefit the mobile phone users, we are not quite sure whether the pricing math will be sustainable for telecom companies in the long run.

Jio's Data Pricing to Disrupt the Telecom Apple Cart


04:12

The government's ambitious 100 smart cities mission has not found much favour with foreign investors. None of the Indian cities identified under this mission have garnered foreign funding so far. The project has failed to attract foreign investments despite talks and visits made by the Urban Development Minister. As per the Smart Cities Council India, shortage of projects in the public-private-partnership (PPP) is hindering the flow of foreign investments.

While the cabinet has approved Rs 480 billion - with rupees one billion earmarked for each city per year for five years - under the mission, the states will also have to pool in similar amount of funds through PPP projects and other schemes. Although the smart cities mission can be a big stepping stone for overhauling the country's infrastructure, its success is proving to be a tall order for now.

04:45

After opening the day flat, Indian equity markets continued to trade marginally higher. At the time of writing, BSE Sensex was trading higher by 25 points and NSE-Nifty was trading up by 3 points. Each of the mid cap and small cap indices are trading higher by 0.3%.

04:56 Today's investment mantra

"You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else." - Warren Buffett

Editor's note: There will be no issue of The 5 Minute WrapUp on 3 September 2016 and 5 September 2016 on account of Ganesh Chaturthi.

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

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9 Responses to "No Matter Who Wins, Everyone Will Leave This Battle Worse Off"

Manik

Sep 4, 2016

Relianc Jio is a 4G only network. The voice goes in the network as data which is charged so it is not entirely free. Joi will have to pay interconnect charges anyway which I hope is covered by the cost of data.
Historically when Reliance came with such schemes, they got customers as long as the charges were low but the service was so bad that people eventually migrated back to other operators.
I see the same happening here but till Jio continues to put money in the system, others will loose money. No business consumer will move to Jio for voice.

Like (1)

mp Jain

Sep 4, 2016

Agree with your analysis of disruptive entry of RJio into telecom space. I think, given the scale of caves, Reliance had no choice but to grab a huge pie of the market. The only way they could have done is to offer lower price. One key differentiater many self styled analysts (not equitymaster) are missing is the claimed very high speed of data. Once, high end customers get addicted to high speed, they will pay higher price too. I will give my own example. I have been using Airtel broadband at home for the last 10 years which used to provide me a speed of 2 Mbps. Then, But, my data limit of 42 GB per month used to get consumed within 3 weeks. Frustrated, I got a connection from Nextra . That is started providing me a speed of 10 MBPS that I had not experienced before. Now, I am unable to tolerate the 2MBPS Speed of Airtel. So, will get Airtel disconnected. Waiting for Jio Fibre. In my view, Jio is going to expand the data market in a big way . Indians love to watch videos and it's not affordable at current data prices and speeds. By the way, Airtel's current 4G speed is pathetic.

Like (1)

Rajeev Arora

Sep 3, 2016

JIO plans are good in two scenarios:

1. If someone needs to make calls for more than one hour and requires bare minimum internet access (Rs. 149 pack with 300 Mb data).
2. Someone needs hi speed internet access at 4G / LTE speeds (otherwise, as an example, why not use BSNL's recently announced unlimited 3G plan for Rs. 1099).

Check out the details for all the plans from JIO - it is not really a price war but more of a well marketed option. Other competitors are likely to reduce their prices somewhat but also bring out all the counter points.

Like (1)

SJ

Sep 3, 2016

Reliance is said to own the longest fiber optic network in the country which is a guarantor for high speed and quality. Cheap tariffs will result in customer acquisition. Comparing it to Ola, Uber or the airlines may not be completely appropriate, the reason being these services are popular among the Middle to High Income groups and that too in Tier I and Tier II cities. Whereas mobile usage caters to all income groups in cities, towns and villages. Air travel may not be in budget of low income families but mobile phones are still affordable.

If Reliance can capture substantial market share by its offer, then maybe three-four years down the line it will be able to break even. It is a calculated risk with high probability of high profit in the future.

Like (1)

Sanjay

Sep 3, 2016

Radhika, this is the only strategy of RIL to capture large market share & rule in any industry they enter. Here also, it may succeed as they will get volume of business. Later, they will integrate vertically to mfg hand-sets, hardware etc to further strengthen their pricing power

Like (1)

Surendra

Sep 3, 2016

In todays world competitiveness is better a feature than specialty for any industry, but when this becomes to a battle that probably take the ugly turn for any industry. What we are seeing today in Telecom or ecommerce or Airline industry is probably one of those price war, when that leaves lots of challenges to the established companies where entry barrier is not tough, but today's customers are much more aware and clever than anyone else, they understand the difference between infatuation and love, like if you are infatuated by What JIO offers today, might question for others which has quality service, excellent converge, better technology and most vast experience, I think its eminent to say whatever offer you put you can't just walk in and win over organization who are doing business for decades and has deep industry knowledge , its like making a film with all super start and fantastic location to shot the film, that is going to be flop at the end of the day, because these stars are excellent on isolation but there has to be technique to get them in sync to make it work which probably JIO doesn't have, so check JIO after 3 years it will be line today's RNRL, Relience Power..etc

Like (1)

S K LIMAYE

Sep 2, 2016

JIO would offer free calls only till 31st December this year.The low price data is also an introductory offer.This way it would make large scale market penetration.Thereafter it would raise prices but maintain its customer base by offering high quality service.

Like (1)

Sudhir Hande

Sep 2, 2016

I am common man who understands simple thing that if for something I was paying Rs 22 at one point of time is now free, is good unless and until you get addicted to it, keeping in mind that nobody provides you anything for free. I am looking forward to this as end of dictatorship of telecos as you buy Rs 200 talktime or data, and compulsion to exhaust it within specified time limit. Although caution is to not trap into more worse in any means.

Such a completion should happen in everyday life preserving thing like meds, groceries, etc

Like (1)

Vijay Kumar Trivedi

Sep 2, 2016

I think bharti airtel continues with its quality expansion moto rather than focusing on jio. Reliance do not have wide spread network as compared to bharti airtel and it can't deliver quality over a long run.

Like (1)
  
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