Analyst firm, JP Morgan, commenting on TRAI’s order on Reliance Jio's "Summer Surprise” offer said that the latter has rehashed the offer − relaunching what it calls the “Dhan Dhana Dhan” plan.
“Essentially, the offer seems broadly similar as the ‘Summer Surprise’. Instead of explicitly calling its offer as being complimentary for 90 days, RJio has now extended the life of the new offer to three months. This new promotional offer is clearly far more aggressive than the high consumption data plans of its peers like Bharti, Idea and Vodafone offer”, J P Morgan said.
It said generating acceptable returns on investments in data on a sustainable basis necessitates a long-run pricing of Rs 50 per GB while fully-loaded costs of data production work out at Rs 25-30 per GB.
In that context, Reliance RJio’s one-year promotional monthly scheme of Rs 303 for FY18 embeds data pricing of Rs10 per GB – far below what data pricing should be to break-even – let alone generate cost of capital, as per peers.
If we allow for the fact that RJio’s all-4G network is superior; allowing it to price for competitive advantage, the question still remains – under the cloak of promotional pricing, how low can aggressive pricing be allowed to go to (Rs10/GB today) and more important, for how long? , it said.
“RJio does not recognize revenues yet, but it overwhelmingly leads on data consumption and 4G subscriber share. For instance, if Bharti were to assume RJio’s pricing posture, it’s probably easier to call this practice out as unfair given Bharti’s leading revenue market share (RMS) in the industry.”
“Sure, RJio does not recognize revenues, but given that it already accounts for a lion-share of data consumption and 4G data subs in the industry, the question arises as to whether TRAI can really regard RJio as an upstart. It isn’t, in our view”, it said.
To conclude, beyond free offers, TRAI has not spelt out its views on what constitutes aggressive & acceptable pricing strategy vs what constitutes aggressive but unfair pricing.
TRAI can determine what constitutes aggressive and acceptable pricing strategy vs what constitutes aggressive but unfair pricing – assessing the factors like cost structure of incumbents, permissible length of aggressive promotional schemes and of course, broader impact on industry growth from a player’s pricing strategy (in this case RJio), impact on the exchequer, rising amortization and interest expenses as percent of revenues, percent of revenues of industry in losses.
“We estimate that currently 60 percent plus of industry revenues now operate at PAT loss, nearly 25 percent of industry at EBITDA loss. All of these could be inputs among several others in helping TRAI distinguish unfair aggressive pricing from fair aggressive pricing. If criteria for the determination of unfair pricing aggression are not identified or enforced, RJio could probably continue to get away even as it desists from free offers in the future”, J P Morgan said.
While it appears that TRAI may not approve of explicit, free offers going forward, the broader question that we raise is how can/should TRAI distinguish aggressive pricing that is deemed fair/acceptable from what is deemed unfair/unacceptable, whether the structure of the entrant allowing it pricing advantage (RJio claims a fair more efficient all LTE network with economies of scale in data generation) or should it go by the cost structure and economics of data for the industry as a whole should be the criteria, the analyst firm questioned.
It also asked when does RJio transition from a stage of largely promotional schemes to one of steady-state, normalized pricing and for how long does TRAI entertain promotional schemes from RJio (even if not free)
If criteria for the determination of unfair pricing aggression are not identified or enforced, RJio could continue to get away even as it desists from free offers in the future, said JP Morgan.
Significantly lower pricing than incumbents may not by itself constitute unfair aggression. Questioning TRAI to determine that if RJio is offering data pricing below cost on a large scale for a longer-than-allowed period.
“We gather from our conversations with the larger incumbents that fully-loaded costs of data production (including spectrum capex) work out at Rs25-30/GB. Generating acceptable returns on investments in data (capex/opex) on a sustainable basis necessitates a long-run pricing of Rs50/GB. Interestingly, RJio’s presentation shared with us at the Analyst Meet also cites long-run data pricing of Rs50/GB.
RJio’s one-year promotional monthly scheme at Rs303 for FY18 embeds data pricing of Rs10 per GB – far below what data pricing should be to break-even, let alone generate cost of capital (as per peers), it said.