*Really* Understanding Jio

A while ago, I wrote an essay called “Airtel, Amazon and Untangling some Thoughts“. Today’s essay is a continuation of that one, and we’ll begin with a diagram I’d put up in the last one:

The basic thesis in that essay was that the reason the Amazon/Airtel, Google/Vodafone ideas made sense was because all the major players wanted to be present in the entire space.

But the recent investments in Jio take our story down a different path:

I wrote that Daily Update on the occasion of Facebook investing $5.7 billion for a 10% stake into Jio Platforms; it turned out that was the first of many investments into Jio:

In May, Silver Lake Partners invested $790 million for a 1.15% stake, General Atlantic invested $930 million for a 1.34% stake, and KKR invested $1.6 billion for a 2.32% stake.

In June, the Mubadala and Adia UAE sovereign funds and Saudi Arabia sovereign fund invested $1.3 billion for a 1.85% stake, $800 million for a 1.16% stake, and $1.6 billion for a 2.32% stake, respectively;

Silver Lake Partners invested an additional $640 million to up its stake to 2.08%, TPG invested $640 million for a 0.93% stake, and Catterton invested $270 million for a 0.39% stake. In addition, Intel invested $253 million for a 0.39% stake.

In July, Qualcomm invested $97 million for a 0.15% stake, and Google invested $4.7 billion for a 7.7% stake.

With that flurry of fundraising Reliance completely paid off the billions of dollars it had borrowed to build out Jio. What is increasingly clear, though, is that the company’s ambitions extend far beyond being a mere telecoms provider.

https://stratechery.com/2020/india-jio-and-the-four-internets/

That excerpt is from an essay written by Ben Thompson over on Stratechery.com, and it is one I will be quoting from extensively in today’s post, along with two other essays.

The last sentence in that essay is the basic idea behind my essay today: what exactly are Jio’s ambitions, why are those ambitions whatever they are, how is Mukesh Ambani going about meeting those ambitions, and what will the ramification be on India – and then the rest of the world.

What are Jio’s ambitions?

Think back (or scroll up) to that diagram I have above. Jio doesn’t want to (and never did want to) build out a large telecommunications firm and stop there. Building out the telecom infrastructure, expensive though it was, was the means to an end. And when I say expensive, I mean expensive: 30 billion dollars!

From a strategic point of view, this is impressive, but one has to call out RIL’s execution and ability to deliver on its vision. Here it is really important to circle back to the core petroleum business. Not many companies in India would have the ability to plough in ~$30B+, the biggest private sector investment in the country’s history, to build a broadband network to cover the country. The legacy business gave RIL the buffer and cash reserves to do this (see below for RIL’s capex over the past five years).

https://hind.substack.com/p/from-oil-to-jio

I came across this essay via Ben Thompson himself on Twitter, and I wish I had been aware of this newsletter earlier:

But why did Jio spend those 30 billion USD? With what objective in mind?

I suppose all of you are sick and tired of the phrase “data is the new oil”, and I am too – but the bad news is, there really is no better answer to our question in this section.

Oil, its linkages, its by-products, and its enabling nature is what attracted Dhirubhai to oil as a business. It wasn’t just about oil itself – it was always about all of what oil allowed one to get into as a business. And it is the same now – it’s not about telecommunications and data. That just enables Reliance to get into – well, everything, really.

The distinction is important: when I say data is the new oil, I don’t mean the fact that data about you (and everybody else will be collected). Mukesh Ambani understands that statement to mean that whoever controls the pipe through which data (or oil) flows wins.

Jio’s ambition is to be in the 21st century what Reliance was in the 20th: the sole controller of oil data

Why are those ambitions whatever they are?

People love to talk about moats in the tech world:

The term economic moat, popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.

https://www.investopedia.com/ask/answers/05/economicmoat.asp

But perhaps a better way to understand both what Dhirubhai and Mukesh Ambani have done (with oil and data respectively) is to not think of those businesses as having moats around them but to think of these businesses as walls around the Indian consumer.

A moat protects a business. But Jio in particular is a business that is a moat. If other businesses want to get at the Indian consumer, you must literally get Jio’s permission. And the other way around too: if an Indian consumer wants to get at the Internet, she must do so through the Jio moat.

Mukesh Ambani, in an analogy that might make sense in today’s day and age, wants Jio to be Heimdall.

Heimdall is the brother of the warrior Sif. He is the all-seeing and all-hearing guardian sentry of Asgard who stands on the rainbow bridge Bifröst to watch for any attacks to Asgard. He partly won the role through using his eyesight to see an army of giants several days’ march from Asgard, allowing them to be defeated before they reached Asgard, and making their king a prisoner. (emphasis added)

https://en.wikipedia.org/wiki/Heimdall_(comics)

Another way of thinking about this is to liken Jio to China’s Great Firewall:

The Great Firewall of China (GFW; simplified Chinese: 防火长城; traditional Chinese: 防火長城; pinyin: Fánghuǒ Chángchéng) is the combination of legislative actions and technologies enforced by the People’s Republic of China to regulate the Internet domestically. Its role in Internet censorship in China is to block access to selected foreign websites and to slow down cross-border internet traffic. The effect includes: limiting access to foreign information sources, blocking foreign internet tools (e.g. Google search,Facebook, Twitter, Wikipedia,and others) and mobile apps, and requiring foreign companies to adapt to domestic regulations.
Besides censorship, the GFW has also influenced the development of China’s internal internet economy by nurturing domestic companies and reducing the effectiveness of products from foreign internet companies. (Emphasis added)

https://en.wikipedia.org/wiki/Great_Firewall

I don’t mean that analogy as a criticism – far from it. Quite the opposite, in fact, I say it with great admiration. In the part that is emphasized above, substitute Jio for GFW, and Mukesh Ambani’s playbook starts to make a lot of sense!

Ben Thompson makes a similar point in his essay…

The key to understanding Ambani’s bet is that while all of the incumbent mobile operators in India were, like mobile operators around the world, companies built on voice calls that layered on data, Jio was built to be a data network — specifically 4G — from the beginning.

https://stratechery.com/2020/india-jio-and-the-four-internets/

… but to my mind, doesn’t go far enough. Yes, data first, and yes, Jio got it right, but it is the strategic thinking behind “OK, what’s next after I’ve won the telecom sector” that’s truly impressive.

This section is titled “why are those ambitions whatever they are?” The answer boggles the mind.

How is Mukesh Ambani going about meeting those ambitions?

Three excerpts, all from the same author, but across two essays:

It’s very common now to talk about Reliance’s political connections and proximity to the government. This too has a deep seated history. Quite simply, you couldn’t be an industrialist or entrepreneur in India in the 1970s without currying favour with the government or having the right friends. Ambani became adept at this, forging ties with close aides of Prime Minister Indira Gandhi, like R.K Dhawan and T.A. Pai.

https://hind.substack.com/p/reliance-origins

Reliance at the time was seen as such a creature of the Congress that Rajiv Gandhi, who had become Prime Minister in 1984 after his mother’s assassination, wanted to keep a distance from Ambani. S Gurumurthy and Shourie both have ties to the BJP, the ruling administration now. Gurumurthy is co-convener of the Swadeshi Jagaran Manch (affiliated with RSS) and currently on the Board of the Reserve Bank of India.

https://hind.substack.com/p/reliance-origins

There’s, of course, also the question of regulatory capture and how much of a role that will play in RIL and Jio’s continued success. Pretty much every time an investment in Jio was announced over the last couple of months, a pointed note was made of Reliance’s closeness with the current government. These allegations have dogged Reliance regardless of administration. One argument is that Ambani basically controls whichever government is in power.

https://hind.substack.com/p/from-oil-to-jio

You couldn’t have built an empire around polyester, or oil, or data, without at least the tacit help of the government. Mukesh Ambani, and his father before him, learnt an obvious, if difficult to master, lesson. You need to be friends with whoever is in power. This is always true, but especially so in a country like India.

Because our babudom delights in coming up with rules and then making money off of the inevitable violation of those rules, the only way to avoid this problem is by making friends with the people who sit on top of the babus in the pecking order. And that’s not the BJP, or the Congress, or the United Front: it’s all of them. And when whoever happens to be in power wants a particular tune to be sung, it will be sung.

That, like it or not, is just good business sense.

So no, Mukesh Ambani is not especially close to Narendra Modi, and neither was Dhirubhai Ambani especially close to Indira Gandhi/Rajiv Gandhi. The key word in the previous sentence is “especially”. The Ambanis are especially close to the throne, and they don’t particularly care who is occupying it at just the moment.

They do care that the occupant not get in the way of their business, and that they have managed quite magnificently. Again, I mean this in an admiring sense, not as a critique. It remains the only way to do business in India on a very large scale, like it or not.

I think an easier answer is that Reliance knows how to work the system. I recently read this article by Mark Lutter, which argues that one thing that constrains Silicon Valley’s ability to build is that it hasn’t engaged seriously with politics. “Part of politics will be co-opting old institutions. Get innovation sympathizers in key positions of power.”

https://hind.substack.com/p/from-oil-to-jio

My only contention in this section is that you can’t answer the “how” without getting creative about working around the inevitable regulatory hurdles, and nobody is more creative in this regard than the Ambanis.

What will the ramifications be on India and the rest of the world?

India will – I don’t see any alternative to this – eventually become a duopoly when it comes to telecommunications. Vodafone is a dead man walking, and BSNL/MTNL are deadweight that the Indian government can support for only so long. Airtel remains the only credible competitor, although it’s challenges are going to be many, and very painful

Original chart here: https://hind.substack.com/p/from-oil-to-jio

And eventually, a very large part of India’s communications, commercial transactions will all go through Jio’s services. This, as the author mentions, may or may not be true, but I love the uniquely Indian example:

One use case I recently heard anecdotally was of JioMeet being used for day-long satsangs. This could be an apocryphal story, but to be honest, it is such a specifically Indian use case, that I can believe it. Can you imagine the kind of customer connections Jio can build if it becomes the default satsang app during the era of Covid?

https://hind.substack.com/p/from-oil-to-jio

Second, where the rest of the world is concerned:

Jio’s network and its work on 5G, which takes years, was by definition not motivated by a phrase Prime Minister Modi first deployed two months ago. Rather, Ambani’s dedication hinted at the role Jio investors like Facebook and Google are anticipating Jio will play:
..
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Jio leverages its investment to become the monopoly provider of telecom services in India.
..
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Jio is now a single point of leverage for the government to both exert control over the Internet, and to collect its share of revenue.
..
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Jio becomes a reliable interface for foreign companies to invest in the Indian market; yes, they will have to share revenue with Jio, but Jio will smooth over the regulatory and infrastructure hurdles that have stymied so many (emphasis added)

https://stratechery.com/2020/india-jio-and-the-four-internets/

Remember the Heimdall analogy? The emphasized part above is the Heimdall play at work. You can enter Asgard India, sure, but only at Heimdall’s Jio’s pleasure, and Facebook and Google, among others, already have agreed, and backed up their agreement with cold hard cash.

Could I be completely wrong about all this?

Yes, and in two ways. Here’s the first, via Benedict Evans:

Every five years or so, a big telco thinks it can move up the stack and compete with the internet. This is a little like a municipal water company trying to get into the soft drinks business. Jio may be different: it has a more captive, less sophisticated base, a retail arm to leverage, and maybe more ability to innovate and understand the market. Or maybe not.

Benedict Evans’ Newsletter from the 21st of July

He elaborates on this further (read the entire conversation on Twitter):

Essentially, Evans’ point seems to be that other companies in other countries have tried what Jio is trying to do now, and maybe it won’t work out here because it hasn’t worked out there.

Maybe. The thing that makes me want to bet against Evans’ contention is how close Mukesh Ambani is to the government, and how involved the government in India has always been when it comes to regulation. In other words, I’m not betting just on how good Jio is (and it is good, but Evans has a been there done that gut feel – and he could be right). I’m also betting on how not laissez-faire our regulation is in practice. And that, weirdly, is the ace up Mukesh Ambani’s sleeve.

And the second way I could be wrong? Two words:

Jeff Bezos.

What a battle this is going to be.

Airtel, Amazon, and Untangling Some Thoughts

Capital Mind, one of my favorite blogs to read, recently posted an excellent write-up on how Bharti Airtel is faring over the last three to four years. You might have to sign up in order to read it, but happily, Capital Mind allows you a free trial, so you should still be able to access it.

Why do I think you should read it, and why am I talking about this today? Because we need to think about telecommunications, technology, monopolies, scale, regulations, FDI in order to understand why Amazon may well be interested in buying Airtel, or at least in owning a stake.

Airtel has issued a boilerplate disclaimer since, but, well. Come on.

But hang on a second. We first need to get a basic framework in place, before we start thinking about everything else.

Our framework will consist of three things (or actions) that we tend to do on the internet, three international behemoths that are very, very interested in India, and three telecommunications firms that are very heavily invested in India.

First, the three things that all of us tend to do on the Internet. We create content, we consume content and we engage in commerce.

Let’s begin with the one in the middle. When you’re lying on your sofa at three in the morning, flicking through Netflix’s endless library of content, you are very much a consumer. When you roll your eyes at the latest dripping-with-insanity forward you receive on your family Whatsapp group, you are a consumer of content online. When you run a search for a PDF that will help you finish an assignment in college: consumer. For most of us, the internet enables us to consume stuff at levels that have never before been possible. Music, videos, podcasts, the written word: all consumption.

Now let’s move on to the one on the left: creation. You weren’t around when I wrote these words that you are reading, but I was creating stuff. Your latest Instagram story? Creation of content. The latest GIF that you created before sharing it? Creation of content. Do you upload videos on Insta/YouTube/Vimeo? Do you blog? Do you create podcasts? All content creation.

And finally, the reason Jeff and Mukesh are as rich as they are: commerce. Online shopping is literally blowing up in front of our eyes in terms of value. Amazon, Flipkart, Nykaa, all of Jio’s online shopping, MakeMyTrip, Oyo, Airbnb, Uber, Zomato… the list is endless, and exhausting. That’s the third thing you do online. Commerce.

Ah, you might say. What about a Whatsapp call with friends, or a Skype call with family, or a Zoom online seminar (god help us all)? That’s arguably consumption and creation at the same time, no?

Well yes. Or call it communication.

Creation and consumption of content are really two sides of the same coin, and when they happen simultaneously, they are all of what we spoke about in the last paragraph.

There is a world of thinking to be done about the blue rectangle on the left. About how Google cornered the consumption of stuff online using Gmail, Google Maps etc, by piggybacking on it’s search monopoly, and about how Facebook took away the search monopoly by creating its own walled garden and making Google search irrelevant within it, and how Google tried to respond with Google Buzz-no-Wave-no-Plus-no-WhateverNext and failed… and this can go on. But here’s the quick takeaway:

When it comes to content creation, or content consumption, or communication, Google and Facebook have the market pretty much tied up between them. The battle for who wins between them will continue for a while, and it will be a fascinating story, but for our purposes, it is enough to realize for today that Google and Facebook are mostly on the left. That’s not entirely true (Google Play Store, Froogle, Facebook Marketplace being just some examples), but it’s good enough for now.

Google and Facebook are mostly communication based firms who dabble in commerce.

And Amazon, of course, is the easiest example to think of when it comes to online commerce. The Amazon app, sure, but also its delivery and logistics arm, and, of course, AWS. If I want to buy stuff online, Amazon is literally the first – and more often than not, the only – thing that comes to mind. Zomato and Swiggy for food, Uber and Ola for travel, OYO and Airbnb for hotels/lodging, MakeMyTrip/Cleartrip/Yatra for travel are also very valid examples. But we’re, as consumers, not passively consuming content over here in this space: it is a very specific transactional approach.

But then things began to get complicated.

Consider Amazon. Commerce company, very much so. But what about Amazon Prime Video? What about Amazon Prime Music? What about Amazon Photos? What about Alexa and the Echo family?

Or consider Google. What about, as we have already mentioned, the Google Play Store? What about Froogle? What about Play Movies, Play Books?

Our neat little framework now has overlaps, and there are insurgencies along this virtual boundary. But we can add to our framework to help us keep it relatively simple:

Google, which is a firm that started life as a software firm, then started to make hardware as well (Nexus, Pixel, Chromebooks, Pixel tablets, Google Glass etc). Of course people could create and consume content on these devices. Of course these devices would help Google learn more about the people who owned these devices. But wouldn’t it be great (Google thought) if we could make moaarrrrr money by using this gleaned information ourselves? Hey, let’s get into commerce.

Facebook tried to say the same thing, but with rather more limited success.

And Amazon, a firm that started life as an online seller, started to make hardware as well, precisely so as to learn more about people’s consumption habits online and offline. That’s the Echo devices, the Kindle, the Firestick and so on.

And don’t forget Apple! They no longer can rely on selling hardware alone for growth, mostly because they have already sold all the devices they possibly can to as many people as they possibly can (at least in the USA, but they’re coming for you too). And so, services! Apple Music, Apple TV, iCloud – all of these are not hardware related, they’re all about consumption of content.

So even our latest attempt at simplifying the framework fails, because none of these blue rectangles are neat and delineated: firms from every blue rectangle want to be present in the creation, consumption and commerce space.

They want to do this for a variety of reasons, but the most important reason is simply the following: they’d much rather get a “360 degree” view of their consumer, without having to rely on some other firm to share information.

If, for example, Jio manufactures the device I use to go online (JioPhone), and I log on to that device to watch JioTV, and visit Ajio to buy clothes using that device, and post about the sneakers I just bought on a social media platform owned by Jio (or well, something like that), then I’ve obviated the need for Google! Neither the device, nor the steaming platform, nor the shopping platform, nor the social media has anything to do with Google. How then, does Google know me enough to advertise effectively to me?

But, if I use a Pixel phone to stream content on my Chromecast device, and buy a pair of sneakers on Flipkart (well, in a parallel universe…) and post about it on whatever is Google’s next attempt to build a social media platform, I’m living entirely in the Google Universe.

It’s no longer about companies living in one blue rectangle, you see. It is about one company dominating all blue rectangles, and so knowing everything there is to know about the consumer. That’s the end game here.

And speaking of all blue rectangles…

And that, my friends, is why Amazon wants to be friends with Airtel, Google wants to be friends with Vodafone.

Because Mukesh has his finger in each of these pies, and Mark has acknowledged as much.

Homework: as a consumer, and as an investor, which of the three are you betting on? Amazon, Google or Jio? Why?