Mukesh Ambani's big balancing act

In the 2006 thriller Don, Shah Rukh Khan’s titular character reflects: “A few things in life are beyond profit-and-loss calculations. You just have to do them.” Khan, the brand ambassador of Reliance Jio, Mukesh Ambani’s big telecom bet, may well have foretold the billionaire’s current state of mind. Jio’s fourth-generation (4G) mobile network, hailed as a potential game changer in India’s telecom sector, has cost Ambani Rs 1.5 lakh crore and is yet to bring in a rupee in revenue. It has missed several launch deadlines since Ambani acquired spectrum six years ago.

There are serious questions about its viability given competitors like Airtel and Vodafone are entrenched deep in the market. But none of that has stopped Ambani from throwing his might behind the venture with the urgency of a make-or-break personal mission.

Although Jio has been at the heart of intense speculation, because, well, it’s an Ambani project, little is known about its inner workings. Reliance Industries (RIL) remains as reticent as ever. No RIL executive, past or present, will discuss Jio on record because of non-disclosure agreements or simply for fear of the boss. But based on the accounts of several insiders who spoke on the condition of anonymity, Fortune India pieced together a picture of just how high the stakes are for the country’s richest man.

For starters, since the beginning of the year, Ambani has been spending a lot more time in RIL’s sprawling digs in Navi Mumbai. Three days a week, he helicopters from his 27-storey home overlooking south Mumbai to the 100-acre Reliance Corporate Park, the company’s headquarters since 2009. Earlier, he only visited on Wednesdays. After touching down, he heads straight to the 7th floor of block TC22, Jio’s base of operations. He doesn’t have a private cabin in the new open office designed by his twin children Akash and Isha, who are being eased into the family business. Typically, he flits between glass-walled meeting rooms, where passels of executives spend hours dissecting feedback from Jio’s much-hyped beta launch on RIL founder Dhirubhai Ambani’s 83rd birth anniversary in December—when Khan unveiled the service exclusively for RIL’s employees. He leaves office late at night in an armoured brown S-Class Mercedes, as choppers are not allowed to land in Mumbai after 5 p.m.

The gruelling regime, and the decision to test the service internally, even if it meant yet again deferring a full-blown launch, indicate that Ambani isn’t leaving anything to chance. “Most telecom companies would have launched a half-baked product and improved it on the go. Ambani, however, wants to hit the market with something stupendous on day one,” says a senior RIL executive.

That doesn’t mean Ambani is happy for Jio to amble on. Colleagues who have known him for over a decade say he seems edgier. A few months ago, he lambasted executives from a top global consultancy because he felt their revenue projections for Jio were unacceptably low, according to a person who works at the firm. A veteran executive at RIL’s flagship refinery recently received a rollicking for failing to implement some suggestions. His lips quiver when he gets angry, say those who have witnessed a bout of Ambani’s rage.

Jio occupies a delicate place in the Ambani family. The group’s original telco, Reliance Infocomm (now Reliance Communications or RCom), went to Mukesh’s younger brother Anil in a bitter split nearly a decade ago. But Jio reunited the two with one common goal: ruling Indian telecom. In 2013, the brothers got together to share optical fibre networks and tower infrastructure. Then this January, they agreed to share 4G spectrum. (A more prosaic version: Anil’s Rs 37,150 crore debt load made him pliant to the handshake, while Mukesh realised access to RCom’s assets would beef up Jio.)

With enormous headroom for growth in mobile Internet—research firm Strategy Analytics says India is poised to become the world’s largest smartphone market after China by 2017—4G is the next big thing. “Data usage will continue to surge as smartphone uptake increases,” says Hemant Joshi, Deloitte India’s technology, media, and telecom practice leader. “There is huge opportunity for data revenues, which over the medium-to-long term will equal voice revenues,” he adds.

But Jio is more than just a new revenue stream and fraternal bonhomie for Ambani. It is a chance for him to prove himself as an institution builder—he called Jio a “startup” at an event organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) days before we went to press. RIL derives its heft predominantly from the old economy; a slick telecom business could change that.

Also at stake is Ambani’s reputation as the torchbearer of his father’s legacy. It was Dhirubhai Ambani who first outlined a vision for cheap and widely available mobile and data services. “Make the tools of information and communication available to people at an affordable cost. They will overcome the handicaps of illiteracy and lack of mobility,” Dhirubhai had said in 1999 according to RCom’s website. But he passed away months before the company started operations in 2002, and RCom never really attained the heights he would have wanted. With Jio, Ambani has the opportunity to rectify this. If all goes to plan, Jio can also make Ambani the face of the government’s Digital India juggernaut, which echoes Dhirubhai’s vision. “[Jio] is one of the largest transformational greenfield digital initiatives anywhere in the world,” Ambani said almost on cue at the FICCI event.

With a pan-India 4G licence, Ambani says Jio will cover 70% of India from the day it goes live. It has quietly installed more than 90,000 towers and over 150,000 km of optic fibre cable. In some cities, such as Mumbai, the company took care to complete all due diligence. It has more than 21,000 files logged with the local municipal body. But in other places, it set up towers before all permissions came through. Says an executive involved with the process: “We may end up paying a small penalty, but at least it won’t hold up the network.”

Industry observers say the sense of desperation hasn’t come a day too soon. “China is putting nearly 120 million km of optic fibre on the ground every year, we are far behind,” says Anand Agarwal, CEO of Sterlite Technologies, a global provider of transmission solutions for the telecom and power sectors. India is starved of data capacity, Agarwal adds. The success of Jio could help India catch up.

“Jio has ingredients which can make its telecom venture ... profitable, hence surprise positively. Its spectrum portfolio and fibre reach is formidable compared to existing incumbents. Its infra sharing deals with RCom, coupled with lower network costs, can help it deliver better margins of over 40%,” says Morgan Stanley.

The problem: Ambani’s recent underwhelming track record. While his father built India’s largest private company from scratch, most of Ambani’s new projects over the past decade have stuttered. RIL’s oil exploration and gas field development business has bled money, after talks with the government to resolve a longstanding dispute on gas pricing hit an impasse. It also faces a penalty of more than Rs 11,000 crore for pumping out gas from a field belonging to state-run Oil and Natural Gas Corporation (ONGC) in the KG-D6 basin in Andhra Pradesh, though the company has challenged this.

Ambani’s retail venture too ran into unexpected opposition from state governments. While Reliance Retail turned in a profit last year, upstart e-retailer Flipkart is on course to overtake its revenue after merely four years in business. His other ambitious initiatives, like farm-to-fork and building SEZs, have faded into oblivion. Success with Jio will mean the first successful consumer-facing Ambani venture.

As recently as October, RIL’s stock threatened to mimic the slide in the aftermath of the 2008 financial crisis. For a brief period last year, Ambani lost his long-held No. 1 position on India’s billionaire list to Sun Pharmaceuticals founder and managing director Dilip Shanghvi.

Meanwhile, RIL’s refining and petrochem businesses have stood tall. Improved efficiency and capacities are helping boost profitability—analysts expect RIL’s profits to increase by 18% to $4.7 billion by April 2017. Ambani has pumped in another Rs 1 lakh crore in the businesses, taking the total outlay to Rs 2 lakh crore in five years. Barclays pegs additional cash flow from the ongoing expansions in refining and petrochem at $4 billion a year.

In an earlier interview, Ambani had told me Dhirubhai always wanted to commit five years’ earnings before interest, taxes, depreciation, and amortisation in a new business. The current spending fits this model. However, there’s another possible explanation for the massive investment: Ambani knows his cash cow has to be kept in good health to offset the soaring tab of Jio. “It’s almost as if RIL has balanced investments in two businesses—one to generate cash and the other to burn it,” says an analyst.

THE INDIAN TELECOM INDUSTRY is unrecognisable from the time the Ambanis first ventured into it. Airtel, India’s largest telco, had less than 10 million customers; it is now closing in on 250 million. Calls were expensive at more than Rs 2 per minute, while data usage was almost non-existent. In a marketing blitz, Ambani slashed call prices and offered colour handsets at throwaway rates. The move rattled competition. “A lot of things have changed since then. Competitors have got the ability to scale. When Sunil Mittal could afford only one or two road-cutting machines, RIL bought 200. Now Airtel is no pushover,” says an RIL executive, who earlier held senior positions in telcos across the world.

Airtel has a sizeable lead, having launched 4G way before the others, in 2012. But with Ambani as the challenger, it cannot get complacent. In November, it unveiled Project Leap, a Rs 60,000 crore bluperint for upgrading networks in the next three years. Last month, it acquired Videocon’s telecom assets for Rs 4,428 crore. Vodafone also plans to spend Rs 20,000 crore in the next three years. In February, it launched 4G services in Mumbai, its fifth circle, in the presence of Maharashtra’s chief minister Devendra Fadnavis, who said he was a satisfied customer. “In the next six months, we will have most of our large markets covered,” says CEO Sunil Sood. “We have already made 4G available in circles which account for 30% of industry revenues and 50% of [our] data revenues.” The No. 3 player Idea Cellular fell behind and its stock slumped some 40%, but it recently unveiled capex plans of Rs 7, 500 crore for this year to expand 4G services, which currently cover 10 circles.

Says a telecom analyst with a foreign bank, who downgraded Idea: “It looks like the big players had written off Jio and then suddenly realised that a lot was happening on the ground.”

Central to all this is a scramble for dominance over lucrative data revenues. TRAI reports that the average revenue per user (ARPU) from a wireless telecom user was Rs 122 per month last September. In contrast, Airtel, Vodafone, and Idea generated data ARPU ranging from about Rs 140 to Rs 190.

The stage is set for a brutal price war. In January, Airtel reportedly cut 4G tariffs by 40% in some circles, offering 10 GB of 4G data for Rs 847 from Rs 1,347 earlier. Vodafone is more expensive: In a circle like Kerala, Vodafone customers pay Rs 849 for 5 GB of 4G data. People in the know of Jio’s data plans say it is likely to woo customers with 80 GB of data for Rs 800 per month; this would include unlimited voice calls and text messages, meaning that customers wouldn’t have to worry about separate tariffs for calls or messages. Ambani also claims that Jio’s speeds will be 40 to 80 times the current average. The company has completed several pilots, including in Lucknow, Indore, Mussourie, and Ahmedabad.

Not everyone is convinced. “It will be tough for players, old or new, to cut each other’s revenues and survive,” says Prashant Singhal, head of EY’s telecom practice. “In other words, players cannot push prices further down for either voice or data as there will be no business case left [if they do so].”

According to estimates, Jio will need revenue of at least $4 billion to $5 billion to cover operating and interest costs once it is launched nationally. This translates to 100 million customers spending an average of Rs 4,000 per year—which is exactly Ambani’s initial target. However, attracting new customers in hordes will be a challenge. To join the Jio network, customers would need smartphones compatible with Voice over Long Term Evolution (VoLTE) technology. Indians buy about 8 million smartphones a month, per Bengaluru-based research and consultancy firm Convergence Catalyst, but the bulk of them are not 4G-ready. Since Jio cannot push customers to change handsets right away, it plans to offer broadband dongles with cheap data packages. The idea is to give customers a taste of the superior Jio network, priming them to eventually switch allegiance from existing mobile service providers.

But top-end postpaid customers tend to be loyal and may not be swayed by slimmer bills. (Airtel and Vodafone together control the bulk of 100 million such customers.) The chronic delays in Jio’s launch could make it even tougher for it to lure away customers. “In our recent meetings with industry participants, a consistent view coming out is (of) risks of Jio’s commercial launch being pushed to December 2016,” says Bank of America-Merrill Lynch.

Business historian Gita Piramal adds that Ambani would also need to reckon with the nascent regulatory climate in telecom. “Ambani is a courageous man because he is willing to take risks in a field that is changing globally almost by the week,” she says. However, the jury is out as regulators and customers are still grappling with disruptive trends, such as the coming together of banking and telecom.

Ambani’s reading of the evolution of telecom in India will be vital. When Reliance Infocomm was launched, Ambani plumped for CDMA, even though GSM was more prevalent around the world. GSM was cheaper, but CDMA was more efficient in carrying data as well as calls. Ambani reckoned this would give the company the upper hand as data consumption expanded. However, Anil did not pursue the plan aggressively after taking over.

With Jio too, Ambani is thinking very differently. Most telecom networks in the world have technology that has evolved from 2G to 3G to 4G. The rollout of 4G has been gradual, depending on how willing customers are to pay for higher-speed data. In contrast, Ambani has plunged directly into 4G. This may not have been the initial plan, but it makes perfect sense given that infrastructure to accommodate 2G and 3G would have cost between $1 billion and $2 billon. Moreover, that would have taken away a chunk of scarce and expensive spectrum. By focussing on 4G, the most advanced technology today (though the industry is already abuzz with speculation on 5G), Ambani has taken out such distractions.

During the course of this story, Fortune India spoke to several Reliance employees across the country using their Jio mobiles. The calls connected fine. Some users report patches of poor connectivity, which is unavoidable even with established networks like Airtel or Vodafone.

But ensuring a reliable network is hygiene. The larger game plan in 4G is to build a closed ecosystem of products and services that can help the service provider control the entire gamut of a smartphone user’s activities—from making phone calls and watching movies to social media and shopping. Jio, for instance, has built half-a-dozen data centres and developed apps like Jio Chat and Jio Money, a tie-up with a payment bank. It also has Jio Drive, a cloud storage platform, Jio Beats for music, and Jio Play for television content. There are also myriad complementary devices: set-top boxes that can be connected to its network to broadcast television channels, 4G-enabled handsets, and so on.

These offerings are not unique. Airtel for instance has a payments bank licence and has been running an aggressive campaign to promote Wynk, its music and movie-streaming service. But this is where Ambani’s years of heavy investments in acquiring media properties—and his sheer staying power—could make the difference. Consider the controlling stake he bought in Network18 for Rs 4,500 crore in 2014. “The Network18 buy gives Ambani the flexibility to beam content directly to mobile devices when Jio launches. It provides him direct access to the network’s several million captive viewers,” says a telecom and media consultant with a Delhi-based consultancy firm.

IN ANY OTHER COMPANY, an endeavour of this scale would involve a platoon of senior managers with clearly defined roles. Ambani has put together a crack team—but he can be a trying boss. Many seasoned execs have found it hard to adapt to his style. He is known to read and absorb even the most technical and jargon-heavy material. Sometimes he does this overnight, making snappy presentations the next day.

Then there are murmurs about micro-management. Nikhil Rungta, hired from Google to head Jio’s marketing, left after Ambani’s wife Nita and daughter Isha provided most of the ideas. It is difficult to implement any strategy because Ambani keeps fine-tuning it, says a senior executive who is now in-charge of a large part of Jio’s business. Another senior hand, who quit after two years as his role was changed to accommodate others, says: “No one clearly knows what the blueprint is for Jio. It is all in the minds of Ambani and [key aide] Manoj Modi. There are disjointed teams working on every single aspect you can imagine.”

Perhaps as a result, there is something of a revolving door at Jio. The company has hired hundreds of top professionals from overseas companies. However, several quit after discovering that others had also been allocated the same project. A senior human resources executive at RIL says Ambani isn’t particularly bothered by the churn as he views these professionals as short-term consultants. The HR executive strings together an analogy to describe the way Jio works:
“At first, a decorated elephant is brought in. He is displayed for a few months, until another such elephant is captured. The elephant soon becomes a pig. Then, the pig turns into a mouse, scurrying away from all the noise. If (the once-proud elephant) has some self-respect left, he just quits. There is no more use for him.”

It’s a colourful insight, but it is unlikely to startle RIL watchers. The company has long drawn flack, especially in the western media—for instance, in a 2014 article in The Economist titled ‘An Unloved Billionaire’—for its anachronistic policies, at odds with Ambani’s efforts to modernise. Others may have been flustered by such criticism, but they have made no difference to Ambani. It is this immunity from the noise around him that allows him to go after daunting pursuits, no matter the outcome. When you are Mukesh Ambani, sometimes you don’t think about profit or loss. You just do stuff.