Unpacking Facebook’s Deal with Reliance Jio Platforms
The day opened with the news of Facebook’s mega-investment into Jio Platforms, a wholly-owned subsidiary of Reliance Industries Limited (RIL). For the princely sum of $5.7 billion, or roughly INR 43,000 crores, Facebook will acquire a 9.9% stake in Jio Platforms at an enterprise valuation (EV) of roughly $65 billion. Out of these funds, roughly 65% will reportedly be used to redeem optionally convertible preference shares (OCPS) of Jio’s parent company, Reliance Industries Ltd (RIL), as well as pare down debt. Jio Platforms is an umbrella entity created in October 2019 by RIL with an equity infusion, after much corporate “restructuring” that was designed to effectively demerge Reliance Jio and several digital businesses from the core business. RIL went further in ensuring that Reliance Jio, the telecom entity, was separately incorporated from the digital businesses to ensure that revenues from the digital business would not come under the purview of its license fee obligations to Government. The digital businesses include JioSaavn (music), JioCinema (movies), JioPay (payments), and others.
The deal brings together two companies that are desperate to tap into and corner the opportunities emanating from India’s “digital transformation”. Jio, through its mobile network operation, had 370 million subscribers at the end of 2019. Facebook has a large number of users in India across its platforms but of these, the largest number is on the wildly popular WhatsApp, with over 400 million users. India, with its half a billion Internet users, represents the last major #NextBillion market after China, with a relatively open attitude to foreign companies, not only in terms of technology adoption but investments. Also, unlike China, India offers significant amounts of untapped potential, with much of the population still either approaching the digital on-ramp or at the early stages of their digital journeys. Moreover, the business models that will succeed in India could be argued to be broadly similar to China and other markets but there are striking differences on the ground.
Facebook’s India 2.0 strategy focuses on commerce, not on social
With the deal, Facebook gets a board seat, an observer seat, and a high profile “reboot” into India’s Internet scene. Facebook has had quite the path in India, meandering between widespread usage of its platforms (including the aforementioned WhatsApp, Facebook, and Instagram) and a series of scandals and controversies like the ill-conceived and ill-fated Free Basics program. The deal is also a way to solve, at least temporarily, an existential problem – how to continually feed the data-hungry beast at the heart of the company. Facebook already has a lot of data about India but things are about to get interesting. In addition to its social graph, Facebook will now have access to a “location graph” thanks to Jio as well as a payment graph. What could go wrong? We will soon need a Truecaller equivalent that helps us screen WhatsApp “marketing” messages and calls. The deal is also retaining relevance in a market where they were blindsided by the success of ByteDance’s wildly popular TikTok application. Even at the height of the lockdown, TikTok is still clinging to #10 in the AppAnnie rankings, beaten back by AarogyaSetu, Zoom, and other collaboration tools. Facebook’s highest ranking is Instagram at #19!!! As engagement in its core apps declines, Facebook needs another avenue for growth in India.
Jio needs Facebook to pare down debt but also to reboot its digital strategy
For its part, Jio could arguably have gotten the better of this deal. It was pointed out by another observer on a Telegram chat group that $5.7 billion for 9.9% is a fantastic deal when compared to the roughly $4 billion invested by Chinese companies in Indian startups, many of whom are now established unicorns. But it goes well beyond the owners of Jio burnishing their legacy by driving a hard bargain. The big upshot from this deal is that Jio gets a lot of buzz for an otherwise stagnating brand. Like many telcos that have previously attempted to parlay big investments into digital content and services into a grand monetization strategy, Jio’s digital platforms have not exactly taken India by storm despite the scale afforded by Jio’s market-leading mobile customer base and massive investments by RIL. Verizon and AOL? Singtel and HOOQ? Not exactly a rollcall of honor! It’s quite simple, Jio has not been able to monetize its nearly 400 million user base, despite changing their behavior and getting them hooked onto mobile data. Jio also gets to pare down debt, with tens of billions of dollars spent on building their “state of the art” 4G LTE network and then rolling out JioFiber, their FTTH play. Jio’s strategy has been to deflect attention to the gaping hole where there should be ROI by demerging the Jio business from the parent company and “moving” the debt into an infrastructure subsidiary. Paring down the debt at this time will also honor commitments made to investors made last year that Jio would become a “zero debt” company. The deal is great news for RIL, especially at a time when the impact of Covid19 on their core business is putting them under serious pressure.
Both players have zeroed in on “commerce” for their mutual second acts
The messaging by both companies on the deal has been relatively restrained but also pretty consistent. Mark Zuckerberg spoke of working with Jio on “some major projects that will open up commerce.” Mukesh Ambani spoke of a shared passion for the “all-round digital transformation of India.” Both sides are clearly focused on commerce for their second acts. One of the possible projects that were touted was the combination of the #JioMart hyperlocal delivery service plus #WhatsApp. The theory is that if Reliance can bring its typical scale to the highly unorganized retail and SME segments, they can then use WhatsApp to connect consumers to these businesses. Today, these relationships are hyperlocal and have been cultivated through direct contact over the years, if not decades. For example, many neighborhood stores will deliver supplies to the consumer’s doorstep and also offer them a credit line, anywhere from a week to a month typically. While several of these interactions have already switched to tools like WhatsApp for ordering if not payments, the scope for enhancing this experience to an organized, immersive, and secure experience has great potential.
Unlike China, India has not been taken with the “superapp," despite several attempts by the likes of Paytm and others to move into this stratosphere. The Government of India, for their part, have not overtly favored any individual player, preferring to create horizontal digital platforms to create innovation. The Unified Payments Interface (UPI) is the biggest and best example of this principle. So is it still possible to build a superapp along the lines of Tencent’s WeChat? It is likely too steep a hill to climb for Facebook and Jio. That said, “major projects to open up commerce” sure sounds like a hopeful mashup of Jio’s connectivity reach, Facebook’s messaging platforms, and an offline strategy built around local delivery, payments and digital content. A small merchant, offered a solution that combines affordable mobile data connectivity, the WhatsApp messaging interface,5 and a payment solution, may be tempted to part with a “small fee” for each transaction made, provided that the pie gets bigger. For both Facebook and Jio, a “WhatsApp for Business” strategy might be their best shot at jointly monetizing their sizable but lethargic user bases. Such a proposition, though in its infancy, poses serious questions to the market leaders in Flipkart (with PhonePe for payments) and Amazon (with AmazonPay) and the e-commerce also-rans like Paytm. But which payments platform will be pushed – WhatsApp Payments or JioPay?
A looming privacy nightmare for India
Beyond the buzzwords and hyperbole, the deal is poised to become a privacy nightmare for India. The combo of Reliance’s penchant for big bang dominance, Facebook’s frequent equivocation on privacy and the possibility of the Govt of India lending a sympathetic ear, could all combine for a somewhat unholy trinity. In theory, this deal would be scrutinized by the Competition Commission of India (CCI), India’s antitrust body. In practice, nothing about the way that the CCI has performed over the years inspires any confidence that they will ask the hard questions, let alone have the stomach to veto the deal.
Mobile operators and telecoms service providers the world over, have always shared data with interested third parties. However, this has always been “anonymized” data, concealing all sensitive demographic, gender, age and other data. This has almost always been a result of strict regulations placed on these service providers by the relevant countries’ regulators. In recent times, there have been instances of service providers testing the limits of these rules. For example, in the US, all three major telcos, Verizon, AT&T and the combined T-Mobile/Sprint, are looking at fines up to $200 million in total for sharing customers’ real-time location data with third-party distributors. In the US, this seems to have acted as a suitable deterrent to such behavior, with all the telcos repentant. However, India’s increasingly pliant and effete regulators are unlikely to put much resistance to anyone testing the limits of the existing paradigm.
In addition to its sophisticated social graph, Facebook will now presumably have access to a treasure trove of data from Jio. On top of the social graph, they will be able to overlay a payments graph as well as a location graph. What could possibly go wrong? A number of scenarios come to mind but for now, I am tempted, though not inclined, to give the two players the benefit of the doubt. At present, the merchant’s knowledge of an individual or household was fairly analog, for lack of a better word. Now, your phone number, home address, number of residents, shopping preferences, mode and quantum of payment, all of these and more glued together by linking to the nearly universal Aadhaar ID numbers, can throw up a number of undesirable scenarios. Several will be tempted to ask how this is this different from any other e-commerce or digital solution offering similar services? Please think back to the previous comments on the potentially unholy trinity and the implications of giving them a detailed graph of your hyperlocal activity. If nothing else, the daily “annoying telemarketer” calls will now be upgraded to WhatsApp messages, calls, and video calls (?!) nudging and exhorting you to pay attention to the latest deals. We will soon need a Truecaller equivalent that helps us screen these WhatsApp calls and messages.
The cat amongst the pigeons will prompt realignment for some and survival angst for others
This deal will set the “cat amongst the pigeons” within the technology, media, and telecom (TMT) sector, many of whom have spent years trying to crack the enigma that is profitable last-mile e-commerce in India. This is not meant to be a ringing endorsement of the deal and that everyone else should simply throw in the towel. Far from it. That said, both Facebook and Jio do have one thing going for them. They seem to have understood that any 5ecommerce policy that undercuts or potentially sidesteps India’s massive merchant community will simply not fly with the current administration. This is something that Amazon failed quite spectacularly at grasping, culminating in the rather embarrassing sight of Jeff Bezos announcing a $1 billion investment in India and India’s Commerce Minister saying “they are not doing India a favor…”.
This deal will cause significant ripples across the TMT sector. In the telecom space, the incumbents like Airtel and Vodafone-IDEA, already hobbled by high leverage and a tone-deaf Telecom Department that has ensured that they need to pay exorbitant retroactive license fees, are in no position to keep up with the new, recharged and aggressive Jio that is sure to emerge from this. Airtel is the better placed of the two but who will they turn to? Will it be Walmart, with whom the Bharti Group has previous dealings in the cash and carry business and who have a massive stake in India’s e-commerce sector through their Flipkart investment? Or will it be Amazon? How will the likes of Swiggy and Zomato fare? Now that direct Chinese investments have effectively been blocked by India’s Government in the wake of the Covid19 lockdown and Softbank continues to hemorrhage, who will India’s unicorns turn to for funding? Whether they are ultimately successful or not, the Facebook and Jio deal will have a lasting impact on the sector, causing realignments for some and survival battles for others.