The Indian Matchmaker

In order to unpack the answers to these questions, we need to begin by examining Reliance Industries (RIL), the parent company of Jio Platforms. RIL is not only the largest and most profitable company in India, with a market cap of $160 BN and revenues of $88 BN, but it has its hands in multiple large scale industries: from retail and telecom, to oil and gas, and petrochemicals and media, you name it, if its large they have a stake in it.

In the past, the media has preached that Reliance is India’s answer to Exxon, Netflix, Amazon and AT&T all rolled into one… and by and large, that is true. They have established leadership across many verticals:

1. Jio is India’s largest telecom company (with 388 MM subscribers after launching 3.5 years ago vs. Airtel, who is in 2^nd place with 329 MM and has been around for 25 years)

2. Reliance Retail is India’s largest retailer (with 11,784 retail outlets, they are now 4x the 2^nd largest retailer, who, by the way, they are planning to buy…#NoFutureforFutureRetail)

3. RIL Oils to Chemicals business owns the largest and most complex single site refinery in the world.

… I could go on… but I think you get the point.

Although RIL is a powerhouse of Indian industry, it has built Jio Telecom infrastructure on the back of debt. As of earlier this year, RIL had $44 BN in gross debt, and a large annual interest burden (roughly $3BN). Although its newer business verticals – Retail and Jio – continue to grow considerably (see image below), they only contribute roughly 30% to overall revenue, while 66% of revenue still comes from their legacy oils to chemical businesses.

Despite its dominance, RIL was facing an increasingly difficult problem: paying down their interest burden in the face of declining margins in its legacy businesses. In fact, its refinery business suffered 7 consecutive quarters of margin shrinkage, and, according to Alliance Bernstein, a 35% contraction in petrochemicals margins is predicted to occur over the next year.

Revenue Growth Rates FY' 19 – 20

In order to combat this growing debt burden, Mukesh Ambani, CEO of RIL, opened up RIL to partnerships and proclaimed that RIL would be net debt free by 2021. To some this was a tall order, but clearly not for Mr. Ambani… Riding on this proclamation, the rising interest burden and Ambani’s open invite to potential partners, Jio Platforms announced 13 equity deals from international blue-chip investors. Every astute technology investor from Silver Lake, TPG, and Vista to Facebook (who was the first to bite, taking the largest chunk of 9.99% for $5.7 BN), Intel and Qualcomm, clamored to get a piece of the Jio franchise. And of course, the most recent announcement, the cherry on top, $4.5 BN from Google for a 7.73% stake.

Jio has raised an unprecedented $20 BN in the last few months, and it has become increasingly clear that these investments are not just mechanisms to de-lever but also a global trophy: a case of showmanship to the global economy where the best investors and companies, who have their pick of the litter when it comes to technology investments, have rushed to claim a stake in Jio. Not only do these investments prove to the world that Jio is a global technology leader, but it also illustrates that they are capable of taking on what RIL claims to be Jio’s global peers: Alphabet, Amazon, Tencent and the like. And guess what? All of these companies are debt-free.

 Global Big-Tech Financial Comparison

So, in a nutshell, RIL wanted to reposition Jio away from a debt-ridden telecom company to a global technology leader. Facebook’s motivations, on the other hand, were quite different. India is Facebook’s second largest market, with 300M+, 80M+ and 400M+ users on the Facebook app, Instagram, and WhatsApp, respectively. Facebook has skin in the game here. 

Unfortunately, Facebook’s past investment in India, Free Basics (which provided free but restricted access to the internet), was met with opposition because it violated the rules of net neutrality. More recently, Facebook’s endeavor to monetize WhatsApp has been a long and arduous journey. WhatsApp has been feeling the pressure to monetize its massive user base of 1.2 BN, of which India is its 2^nd largest market. However, it has taken WhatsApp over 2 years to get a payments license from the NPCI, and even now, they only have partial approval for a phased roll-out to 10 MM accounts. Luckily for Facebook, it is widely believed that a partnership with RIL will help smoothen out the regulatory hurdles, and many predict that we will see a nationwide rollout of WhatsApp Pay very soon.

You may have heard that the FB-Jio Investment came along with a partnership between WhatsApp and Jio Mart, an eCommerce destination with hopes to rival Amazon and Flipkart. Although Jio Mart is part of Reliance Retail, this agreement is key to understanding Facebook’s intentions in India.

If we take a look at Facebook’s financial performance over the last few years, there are a couple of things that stand out:

- 85% of its topline revenue comes from advertising

- Revenue and profit growth have been declining over time

Keeping 1 and 2 in mind, when Facebook turned its attention to India, it realized over time that advertising was not going to be the main driver of growth. The digital advertising market in India is roughly $1.5 BN, with the size of the overall ad market amounting to $11 BN. To put this into perspective, the digital advertising market in the US is over $100 BN. Additionally, Facebook’s ARPU for Asia Pacific (where India is the largest market) is 10x lower than that of the US. So, if advertising will not solve Facebook “slowing pains”, what will?

The commerce market in India is $850 BN, with eCommerce contributing 3.5% or $30 BN. Commerce presents an exciting (and large) market opportunity, but offline commerce is largely unorganized and fragmented, while eCommerce is currently dominated by Amazon and Walmart/Flipkart. Luckily for Facebook, RIL plans to move large, unorganized commerce online with the introduction of Jio Mart: an online marketplace looking to connect over 30 MM kirana store owners to customers across the nation. Bringing millions of merchants online is no small task, even for Reliance, but surprise surprise, a huge chunk of SMEs already uses WhatsApp to sell online. Clearly their birth charts have aligned: JioMart gets a zero-cost acquisition channel to bring kirana stores online, WhatsApp gets a processing and fulfillment arm to unlock the cycle of commerce (and payments)… paving the way for a (potentially) happy marriage. #WhatsUpJio #WhenWhatsWedMart

The Jio brigade did not just stop there. On July 15^th during its annual shareholders meeting, RIL announced a Google-Jio investment and partnership. I know what everyone is probably thinking…seriously, another one!? but this partnership is quite special – it has the potential to unlock smartphone access to millions of consumers in India. Similar to Facebook, Google had also tried to enter the lower end of the Indian digital market in the past and failed. In 2014, they launched Android One – a platform that aimed to offer Android based affordable smartphones made from Indian smartphone manufacturers like Micromax for below Rs 6,000. These phones never took for two reasons, 1) Google had restrictive specifications, and manufacturers felt backed into a corner when trying to balance affordability with Google’s expectations, so the result was sub-par and 2) there already were a number of smartphones available in the market at this price-point that simply worked better. The Android One program was effectively shut down in 2017.

Interestingly, Jio launched the JioPhone in 2017 – an affordable 4G feature phone with some smartphone elements (like unlimited 4G data) that was meant to lure Airtel and Vodafone’s 2G customers to the Jio network. Although over 100 million JioPhones have been sold since then, Jio has had difficulty moving feature phone users to smart phone users, and its share of the feature phone market dropped from 47% in 2018 to 28% in 2019 and has fallen even further since then, as the market became more and more saturated.

In one stroke, the Google-Jio partnership allows for Jio to re-strategize how to move 2G subscribers (around 400 million people) to 4G by building an affordable smartphone. It will also help get smartphones in the hands of consumers who still remain unconnected, which is roughly 50% of the population, effectively helping these consumers leapfrog over the feature phone. For Google, who has been chasing the bottom of the pyramid since the launch of their Next Billion Users Initiative in 2015, this means that Android OS (along with Google apps and the Google Play Appstore, which contributes $9BN to Google’s topline revenue) will become the default operating system for millions of consumers. Pretty solid deal.

We now see the full picture. Jio, with its Facebook and Google partnerships, captures the entire Digital India Consumption stack: connectivity, content, communication, payments, and commerce. Each layer of the stack plays a pivotal role in capturing consumption data. However, each layer is not created equal, and some are relatively more important to capture because of their monetization potential.

Jio now captures the entire digital India stack  

The Weightage Key in the figure above represents the monetization potential of each layer. I have also included extra weightage if Jio is currently a market leader in any of the segments. Content and communication alone are difficult to monetize because communication apps like WhatsApp, ShareChat and Hike are free to use, and can only monetize effectively once there is significant traction on the platform to create network effects that attract in-platform ads. Although content platforms are usually pay-to-watch, streaming services in India charge a fraction of the costs vs. those in the U.S. (Netflix ARPU in the U.S. and Canada in 2019 is $139, while that of India’s is estimated to be $31, and Hotstar India’s ARPU is estimated to be $7). Even though revenue for these platforms can increase with higher volumes of subscribers, the OTT industry is incredibly crowded, and without consolidation, we are unlikely to see a clear winner emerge, and therefore will continue to see marginal revenue generation in India for OTT platforms.

Payments, even though they are free for consumers to use (and free for merchants if your wallet is built on UPI), is an important part of the stack because not only is it the gateway to monetization but also it is one of the richest sources of consumer data a company can own. In fact, UPI transaction volume, despite launching only 3 years ago, is already roughly 10% of Indian GDP. With billions of transactions happening through UPI, capturing this data becomes essential to understanding the commerce and consumption patterns of users in India.

Lastly, the Connectivity layer is particularly important from both a consumer and enterprise perspective. With 500 MM+ people yet to be connected to the internet, a partnership with Telecom could place your apps on new subscriber phones, an incredibly valuable position to be in given how expensive phone screen real estate is. Google and Jio have clearly already figured this one out. On the enterprise side, big-tech now knows the fastest way to capture MSME spend is by bundling cloud services with internet connectivity. Jio was the first to provide this service to business owners with a Microsoft Azure partnership and soon after, we saw Google Cloud retaliate by partnering with Airtel to provide cloud services along with Airtel’s enterprise broadband connection.

According to Alliance Bernstein, the four layers of our Digital India Consumption stack represents a $2 TN market opportunity by 2025. With such a large opportunity head, there is no doubt that the other big-tech players, who have invested significantly in their India businesses, will make moves. However, when we line them up against Jio, it is clear that they are missing essential pieces in the stack.

Google and Facebook are relatively well-positioned to take on Jio

Amazon and Walmart / Flipkart have some catching up to do

This could really only mean one thing…big-tech is going to spend a lot to acquire consumers and double down on their current positions of strength. But they will not just stop there, hoping to grow in pockets where they may currently be weak, they are likely to acquire or partner with platforms to boost their product suite (see Figure 6). Going forward, we can expect to see flashbacks from a few years ago where 90% of our newspapers were sale ads from Flipkart and Amazon, and 10% was substantial content. All in all, it is (and will continue to be) a great time to be a consumer in India.

Market Positions Improve If Big-Tech Chooses To Acquire / Partner To Fill Gaps

Looking at the Jio deals from the lens of an investor, it is clear that there is a big opportunity ahead for us. Big-tech is funding changing consumer behavior, and all tech-enabled companies will benefit from it. Additionally, as more money comes into the Indian market, funding dollars are likely to remain stable going forward. Money will increasingly come into India as companies attempt to capture as much of the $2 TN TAM as possible.

Based on these companies’ investment history in India, and the industries they are investing into in their home market, we believe that big-tech will go after the largest market opportunities in the following sectors (companies in parenthesis are Lightbox portfolio companies):

- Healthcare (Generico)

- Education (Embibe sold to Jio in 2018, Flinto)

- Artificial Intelligence

- Brands & Marketplaces (Furlenco, Melorra, Bombay Shirt Company)

- Delivery & Logistics (Dunzo, WayCool)

Within these sectors, there is a lot of potential for tech-enabled brands that are providing a differentiated experience to hold ground vs. the marketplace plays that big-tech generally goes for, and Lightbox is committed to finding and funding these unique, India-centric solutions.

As we all await to see what these companies do next, the following question will remain in the back of our minds: is the Indian digital consumption market big enough for all five players or will RIL out-regulate them all and come out on top?