Jio Platforms – The Bollysystem 2.0.

Google investment clarifies intentions.

• Jio Platforms now has both Facebook and Google as investors indicating that Jio’s strategy is not to create a digital ecosystem of its own, but instead to offer a series of India specific services to take advantage of the shift to digital.
• Google will invest $4.5bn for a 7.7% stake in Jio Platforms bringing the total raised to date to around $20bn representing a sale of approximately 33% of the company.
• The investor list now includes Google, Facebook, Qualcomm, Intel, Silverlake and a series of other financial investors all of whom have invested at a valuation of around $58bn.
• This price values each of Jio’s 400m subscribers at $145 which given that India is a low GDP/capita market will take some time to earn a return on.
• In the financial year to March 2020, Jio Platforms generated $9bn in revenues from 387.5m users ($1.96 per user per month) and around $1.9bn in EBIT or around $0.41 per user per month.
• These figures indicate that the new investors in Jio are counting on massive growth in new services in order to earn a return because at this rate they will be waiting for 350 years to break-even.
• This raises the question of the market’s capacity to pay more to Jio Platforms, given the low GDP per capita and I think the answer is to be found in what the Chinese refer to as O2O.
• These are offline services that move online and include things like commerce, health, agriculture, education, transport and so on.
• The example of Tencent and Alibaba demonstrates that emerging markets are far more fertile ground for these sorts of services than developed markets.
• This is due to the quality of the offline experience in emerging markets which is way below that which is on offer in the developed world.
• This means that a mediocre digital experience in emerging markets offers a vast improvement over offline (and will be very popular) which is not the case in developing markets.
• This is why QR codes have worked for payment in China but have been a total failure in the West.
• India with its 1.3bn population and 400m middle class offers a similar opportunity to China albeit at a smaller scale given that its GDP per capita is only just over 1/5^th the size of China’s.
• Given that Google and Facebook are now major shareholders and between them, they cover 90% of the Digital Life Pie, it is not Search, Media Consumption, Instant Messaging and so on that Jio Platforms will be going after.
• Instead, it will be focused on the other things that Indian users can do with their phones over and above the digital ecosystems that have driven them to adopt digital in the first place.
• This is not really about increasing economic activity but instead is focused on making exiting activities easier and more enjoyable creating a shift in value from the offline economy to online.
• Between them, Alibaba and Tencent have a market cap comfortably over $1tn and if Jio Platforms can create just 1/5^th of that, it will offer its shareholder a very nice return.
• Having Facebook and Google onboard will help Jio Platforms as the services will be optimised for the devices that Jio offers with its services making a better ecosystem experience all around.
• Services like WhatsApp and Google Pay will also be used to facilitate the transactional elements of the services that it offers.
• The trick now is to come up with the O2O services that Indians will adopt in droves and this is where the risk lies.
• I suspect that Jio Platforms will be taking most of its cues from China where this has succeeded far beyond anyone’s expectations.
• Jio is in pole position to dominate the O2O market in India, which is what the investors have paid for, but now it is all down to execution which is always the most difficult bit to get right.
• This is one to keep an eye on especially if there is a separate listing outside of the large Reliance Industries group.