Why Ambani can afford to give free calls for life

At the 42nd annual general meeting of Reliance Industries on September 1, chairman Mukesh Ambani announced that voice calls would be free for lifetime on Jio, his much-awaited broadband service. Within minutes, stock prices of competing telecom firms Airtel and Idea Cellular went tumbling, losing a combined $2 billion in market capitalisation. After all, 70% of telecom revenues in India (and a third of the profits) come from voice calls.

So why is Ambani sacrificing the biggest chunk of revenues when he’s already burnt Rs 110,000 crore to setup Jio?

The answer lies in the huge bet that he is taking on data. By offering free voice calls, Ambani is not just luring existing customers to Jio, but also getting them to experience high-speed connectivity. He is banking on the fact that the speed that Jio is offering will convert the pure voice customer to a heavy user of data. Once consumers are hooked to data, they will only use more of it.

It is Jio’s technology that has allowed Ambani to enter the market with such an aggressive offer. Jio is the only operator in India that uses the 4G telecommunication protocol VoLTE (voice over long term evolution), which has the ability to transmit voice calls as data, instead of using radio. As a result, Jio has had to bear the cost of setting up a network for data only, compared with separate voice telephony and data networks that competitors such as Airtel and Vodafone have set up.

Because data can be compressed, VoLTE packs in a higher number of voice calls compared with 2G or 3G, making a more efficient use of spectrum. Moreover, the higher the consumption of data, the more efficient the cost structures for the operator on VoLTE. By offering free voice calls, Ambani is hoping to push up data consumption levels, bringing in cost efficiencies.

To do that, Jio has lined up a bouquet of content: A Jio subscription comes bundled with data-intensive apps to stream TV programmes, movies, and music, and to provide access newspapers and magazines. All free, of course.

What most seem to have missed in the freebies frenzy is that voice calls on a VoLTE consume very little data–4MB-6MB for a 15-minute good-quality call–compared with streaming videos or transmitting high-definition photos and movies. Here’s the math: Based on the Jio tariff plans, a 15-minute call would cost 0.25 paisa in the Ambani scheme of things, if he were to charge for it. The same call made on other networks would cost Rs 6 (at 0.40 paisa per minute), or 24 times the cost.

Because of the technology Jio uses, it’s costing next to nothing for Ambani to offer free voice calls and be heralded as the game changer for the telecom sector. What seems to be a huge sacrifice–not raking in revenues from voice calls–is ultimately, in true Ambani tradition, all about packaging it right.