- Reliance should convert itself into a holding firm with investments in various businesses, with each one of them being separately listed. This is the Warren Buffett type of investing, with the promoter’s main job being capital allocation between competing businesses.
- In order to insulate itself from disruptive technologies, Reliance needs to become an investor in other start-ups so that it can buy into a future Whatsapp or Facebook or even a Micromax.
If a report by Bank of America Merrill Lynch is right, the
launch of Reliance Jio’s 4G services nationally may get delayed to December
2016. The fact that the public has not got even one whiff of the final product as
yet (Mukesh Ambani said the product was being intensively tested inside the
Reliance Group last December) lends credence to the suspicion that the Jio
product is yet to find its final form.
At the Reliance annual general meeting in June 2015, Ambani said
he was “glad to announce that the financial year 2016-17 will be the first full
year of commercial operations for Jio.” Well, financial 2016-17 is just a week
away, and we see no frenetic activity in opening up showrooms, purchase of
advertising billboards, or anything suggestive of an early launch. The earlier expectation
was that the service would at least be launched in a limited way by April.
So there is little reason to disbelieve the Bank of America
Merrill Lynch report about a postponement to December. The report noted: “Despite
completing an employee soft launch in December 2015, we do not yet have
visibility on the timeline on commercial launch by Jio. In our recent meetings
with industry participants, we found a consistent view coming out of risks of
Jio launch being pushed to December 2016.”
Meanwhile, Jio’s rivals have hit the ground running, with Airtel
rolling out 4G services in 350 cities, and Vodafone and Idea hitting the road
with ambitious launch plans recently.
Has Reliance Jio goofed up on its second coming into telecom,
after losing the first one to the group split, with brother Anil Ambani getting
Consider the negative cues.
#1: As far back as 2010, Reliance
bought all-India spectrum in the 2,300 Mhz band. It paid Rs 4,800 crore to buy 95
percent in Infotel Broadband, which itself had bid over Rs 12,848 crore for 22 circles. Since
2010, this spectrum has been lying idle -a phenomenal waste of such a huge
#2: Since the Infotel BWA
(broadband wireless access) spectrum was obviously not going to do the job of
Reliance Jio, which has huge ambitions in both voice and data, the company
spent another fortune buying spectrum in the 1,800 Mhz and 800 Mhz bands at
various telecom auctions. Ambani said last June at his AGM: “In addition to the
existing pan-India 2,300 Mhz spectrum and 1,800 Mhz in 14 circles, Jio invested
over Rs 10,000 crore during this year’s auction to acquire 800 Mhz spectrum in
10 circles and 1,800 Mhz spectrum in six circles. This brings our
cumulative investment in spectrum assets to nearly Rs 34,000 crore. Jio now has
the largest footprint of liberalised spectrum in the country, acquired in an
extremely cost-effective manner.” So much of idle spectrum for so many
years can hardly be called “cost-effective.”
#3: Even in its first coming,
when Ambani launched Reliance Infocomm (Anil Ambani changed the name to RCom
after he got it as part of the asset division among the brothers), he had made
the wrong call on technology. He chose the spectrum-efficient CDMA instead of
the universal GSM. Anil Ambani had to opt for a dual-tech licence, and his
growth has been in GSM.
#4: In the process of diversifying
away from its core oil-petroleum-petrochemicals-plastics business, Reliance has
converted itself from a zero-net-debt company to a relatively debt-financed
company. As at the end of December 2015, Reliance Industries had net debts of
Rs 86,341 crore, with overall debts of Rs 1,78,077 crore being partly balanced
a bit by cash and cash equivalent assets of Rs 91,736 crore. It is more than
likely that much of this debt is due to Reliance Jio, where the company plans
to spend nearly Rs 1,00,000 crore, with three-quarters of it already spent, an Economic Times report of July 2015 said.
Put another way, Ambani is taking a big gamble away in riskier
and low-margin businesses in retail and telecom, both consumer facing
businesses where success will not be easy. Big retail in India is being
threatened by online retail, which is growing like gangbusters, and telecom
already has extra-strong players like Bharti Airtel, Vodafone and Idea, who,
between-them, have more than 60 percent of India’s nearly one-billion telecom
users. They also have the best customers. Telecom users are not easy to lure
away because of the stickiness of the business.
The big question that will be answered only after Jio launches
is whether Reliance has grown too big to be nimble and entrepreneurial.
While the risk-taking spirit of the Ambanis is not in doubt, it
is worth asking if a group as big as Reliance can really be nimble. Especially
in a low-margin technology-driven business like mobile telephony. Remember,
even the Tatas are only a distant seventh in terms of mobile telephony
customers – and their partner Docomo is exiting the venture.
The world over, being big is no longer a guarantee of success.
Remember Nokia? Once a cellphone market leader, it is now
history. Blackberry is headed for the same fate. Think where Kodak, once synonymous
with photography, is now. Thanks to the advent of excellent mobile phone
cameras, everyday photography has not only turned digital but also moved away
from camera experts such as Nikon, Canon and Sony. The latter have now become
niche players with only professionals or hobbyists as their main customers. If
IBM under Lou Gerstner had not become a software and services company, it would
have met the same fate as a Digital Equipment Corporation or Sun Microsystems.
The difficult future awaits Tata Consultancy Services, or Infosys or Wipro if they think linear growth in manpower intensive lower-end software services will remain their main focus. This area is ripe for disruption. Any two-bit company in India can do what they are doing, and far more cheaply. In any case, many low-end software work is being automated.
Or take Vijay Mallya’s defunct Kingfisher airlines. Mallya thought size was the key to growth and bought Air Deccan for a high price. It sank him and, in the process of trying to rescue a flawed business model, he lost a key part of his profitable booze business as well.
Or take banks. If most of India’s bad-loan-burdened banks had
not been in the state sector, they would have been extinct by now. No public
sector bank is really small in scale, but they are leaden-footed – and that is
the problem. With payment banks and small banks about to eat a chunk of their
breakfast, banking too is ready for disruption. Telecom companies will be major
players in payment banking.
Today’s newspapers (25 March) have a story on Samsung, the world’s
largest mobile phone maker, telling us that the group is seriously worried
about its slow corporate culture. A Reuters report says Samsung wants to make
its stodgy, 3,00,000-employee-strong company more nimble by adopting a start-up
culture. “Samsung’s executives will sign a pledge to move away from a top-down
culture and towards a working environment that fosters open dialogue. The
flagship firm….. will also reduce the number of levels in its staff hierarchy
and hold more frequent online discussions between business division heads and
employees. ‘We aim to reform our internal culture, execute as quickly as a
start-up company and push towards open communication and continuously innovate’,
” Reuters said, quoting a company statement.
Reliance today is where some of the big multinational failures
of the recent past have been. It is too big and too dependent on the key
promoter for its entrepreneurship and growth. And the possible mis-steps and
delays in its second entry into telecom show that the company’s margin for
error is reducing as the size of its bets increases.
Is there a way out? Two specific routes suggest themselves.
One, which I have discussed
earlier, is to convert the company into a holding firm with investments in
various businesses, with each one of them being separately listed. This is the
Warren Buffett type of investing, with the promoter’s main job being capital
allocation between competing businesses.
Two, in order to insulate itself
from the kind of disruptive technologies and market developments that up-ended a
Nokia or Kodak, Reliance needs to become an investor in other start-ups. This
way it can buy itself some measure of insurance and real options to buy into a
future Whatsapp or Facebook or even a Micromax.
Every cash-rich successful business knows that the most disruptive
ideas do not come from armies of R&D staff inside a giant, but from
outside. This is why whether it is a Google, a Microsoft, an Amazon, an Alibaba
or a Samsung, businesses create venture funding arms to fund other related or
It’s not that Reliance has been asleep at the wheel on this
front. It has a subsidiary called GenNext Ventures to do precisely this, but
clearly the scale needs to be substantially increased.
Nimble companies know they can’t do it all. They have to invest
in others who can produce the next bit of disruption and hope they aren’t the
ones getting disrupted.
Despite a rash of failures, small is the future of big business. It is not the humble cockroach that is extinct, but T-Rex.
A final question worth asking: if the group is going to spend Rs 1 lakh crore on telecom, would it not have been simpler to buy an existing player? Has Jio got the make-or-buy balance wrong?
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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