Reliance Jio's Next 100 Million Subscribers Won't Come as Easy

Well done, Mukesh Ambani. In just 170 days, the richest Indian has signed up 100 million customers for his fourth-generation mobile service. That growth, bruising rivals and triggering a wave of industry consolidation, was explosive but predictable - Ambani's Reliance Industries Ltd. was offering Jio for free.

Time taken to reach 100 million Jio subscribers? 170 days. Progress will be harder now.

The existing median revenue per user of leading Indian telcos such as Bharti Airtel is about $4.50 a month, according to Credit Suisse Group AG, very close to the introductory price that Ambani announced. That median is bound to shift lower as rivals try to prevent their better-paying customers from switching to Jio.

If Ambani can double the number of subscribers, and get at least $4 from each of them, investors who endured seven lean years will get a decent harvest. Anything less, and Wednesday's market euphoria over Reliance may be short-lived.

Reliance Jio Prime Subscription Plan: Everything You Need to Know

Jio's cost has been a drag on Reliance's valuation. Five years after leaving the original mobile business to his younger brother as part of a family settlement, the oil tycoon re-entered the field in June 2010. At the time, analysts expected him to spend $5 billion. But the next generation, Internet-based data network he went on to build has cost five times as much, and Ambani isn't done yet.

By 2019, Jio may account for about $30 billion (roughly Rs. 2,00,464 crores), or 40 percent of the total capital employed at Reliance, with energy and petrochemicals making up the rest.

A dollar of capital at Indian telcos used to produce roughly half a dollar in sales, according to Saira Ansari at IDFC Securities in Mumbai. That may no longer be possible because of the price war. Assume that Jio aims to garner $10 billion in revenue from $30 billion in capital. With each subscriber bringing in $4 a month, or roughly $50 a year, it would take 200 million subscribers to hit that goal.

And that doubling of the subscriber base may still fail to delight investors. Ansari's note assumes a pretax margin (before interest) of 28 percent, higher than the industry average. This Ebit of $2.8 billion will translate into a 9 percent-plus return on $30 billion in capital, compared with the double-digit returns the company was chalking up before it embarked on the Jio investment.

Jio Prime Plan May Retain Users but It's the Wrong Strategy, Say Analysts

Still, as Ambani says, data is the new oil. Extending that analogy, the "refining margin" the tycoon can earn from a customer who uses the service to watch Facebook videos may be low, while it may be high for those who dip into their accounts at the soon-to-be-launched Jio Payments Bank to fill up their JioMoney mobile wallets to pay for Uber rides.

To win in fintech, Ambani may need to invest even beyond his current plans. However, that conversation with investors must wait. For now, shareholders are just happy the lean years are over - even if the fat ones aren't here yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

© 2017 Bloomberg L.P.