BWA at Rs 10 per GB is an invitation to ruin RIL

Medianama recently posted their analysis on the reported plans by Reliance Industries to roll out their BWA-based product at a bundled cost of Rs 10 per GB with their Rs 3500 tablet.

Since this is a topic that has been of some interest to me, I thought it was worth taking a deeper bite into the pricing and other factors of this offering.

As far as per-GB pricing goes, even the cheapest cost, even for fixed lines, is not to be found under Rs 30 per GB. Data on wireless (2G or 3G) is considerably more expensive, other than the sole exception of Airtel’s Rs 99 for 2GB plan on 2G. RIL could tap into RCom’s FLAG and also leverage RCom’s their ‘preferred’ status with YouTube to mitigate a bit of their costs, but that will hardly be enough to start making a dent on the pretty penny already spent in acquiring spectrum through the Infotel acquisition.

The comparison with fixed line broadband or Wimax is not entirely fair when in it comes to BWA. They have different cost structures. Traditionally, fixed line broadband is used by an entire household and is shared over multiple devices. A tablet, on the other hand, will mostly be used by one person. For this to work out, RIL has to sell aggressively to the demographic that currently contributes to Rs 200 ARPU on voice. You can see how the pricing makes sense if you compare it to a mobile phone.

The only problem is that online services in India don’t yet have the utility status that mobile phones enjoy, thus requiring an entire layer of content and services to be added for the users. It won’t work if you just give people cheap bandwidth and a cheap device. It is not that we have not had reasonably priced broadband in India for a while (BSNL’s DSL services now reach a lot of remote places in the country), we just have not had enough India-specific products and services for people to use in those places so far.

Anyway, let us work some more numbers to see how much money RIL can make out of the current plans.

To establish a base (reasonably flawed) benchmark, we will take Airtel’s assertion that their 3GB plan is one of the most popular ones and assume that a user on the new service will use 3 GB per month. For the sake of convenience, we will spread the cost of the tablet over the course of a year. This will mean that for the first year the user will bring in revenues of Rs 291 per month and the cost of data used on the service.

This gives us an ARPU of Rs. 321 for the first year.

Total first year revenue per user = Rs. 3852

Second year revenue  per user = Rs. 360

Total revenue for 2-years  per user = Rs. 4212

Even on a subscriber base of 100000 users in the first year, this will only bring in revenues under Rs 50 crore in the first two years. Considering that the spectrum alone cost Infotel well over Rs 12,000 crores, the outlook is horrible for the company. At a million users, the company has a shot at a marginally more realistic runway (if you can call two decades that), but I am not sure if those users are there for the taking and we are not yet taking into account the Rs 18,000 crore – Rs 20,000 crore that the company plans to invest in setting up the services.

As a thought exercise, let us bump up baseline usage a bit to 30GB per month. This will bring up the data costs in a month to Rs. 300. Add the device cost of Rs. 219 per month to it and you get an ARPU of Rs. 519 for the first year.

Total first year revenue per user = Rs. 6228.

Second year revenue per user = Rs. 3600

Total revenue for 2-years per user = Rs. 9828

This bumps up total revenue estimates for two years to around Rs 98 crores. On a one million user base it will recover the spectrum costs in a bit over ten-years.

The main takeaway from these numbers is that RIL really needs to get users to use a lot of data or/and get a lot of users from the word go. What stands in their way is that in reaching out to the people who are not already online, they will be dealing with the ceiling of the Rs 200 ARPU on voice segment. They won’t easily move up at all on this curve. Another data point that will be a cause for concern is the ARPU on wire line broadband. These have always been around Rs 600 – Rs 700 level, from information that is not easily available. That more or less keeps the ceiling a bit too low for RIL to succeed with this offering.

There is, though, an alternative way to go about this, which is to not  directly charge for the device. Instead, you get a Rs 350 flat rate per month, on a 2-year commitment from the user. It will come bundled with 3GB of usage per month. You can buy more GBs like talktime for phones.

First year ARPU at 3GB data per month = 350 PM

Total first year revenue per user =  Rs 4200

Total second year revenue per user =  Rs 4200

Total revenue for 2-years per user = 8400

This should get them a much healthier Rs 84 crore in revenue with a better certainty that the users will continue with you.

If you bump up the data usage, the picture gets a lot more healthier.

First year ARPU at 30 GB data per month  = 350 + (27*10) = Rs. 620 PM

Total first year revenue per user =  Rs. 7440

Total second year revenue per user =  Rs. 7440

Total revenue for 2-years per user =Rs. 14,880

In theory, this is the sweetest deal RIL can hope for. Around Rs 150 crore in two years is not a bad number to have in revenue, but it also requires users to consume data at a rate which is comparable to a more than moderate wire line data user at the moment. I also think that Rs. 500 is a major point of resistance for the average household to spend on anything beyond bare necessities on monthly basis.

There are a lot of factors that can change the equation for RIL, but knowing what we know now, it is very unlikely that the offering is a sustainable one in the long term for the company.

  • Shashikant


    Few points.

    I suppose, Rs 10/GB will be effective price on a slightly at the higher end of tariff plans. The base price could be say Rs 50 for 1 GB, Rs 100 for 3 GB and at the top end it could be Rs 1000 for 100 GB.

    When 4G becomes available widely on mobile phones, the effective market will grow by couple of orders of magnitude.

    Small businesses are still not as well connected as they should be. That could be another big  market.

    They may have paid substantial amount for BWA, but it is still lower than 3G auction.

    The state of data connectivity right now is so bad that a disruptive idea like this has a real chance, better than 3G, of succeeding. Also, availability of cheap and fat pipe will bring on a host of innovations from ecosystem which will further fuel growth of the network.

    • So many of those factors were almost equally applicable to 3G. I, actually, don’t blame the operators for this. Through the greed of various governments, the revolutionary changes that connectivity could bring has been lost. I don’t expect 4G to be any different. These networks cost money to build, then a bit more to run.

      I’m split on this. On the one hand I want connectivity to be dirt cheap, but I also want an environment in which operators can survive and thrive in a healthy manner in the market.

      • Shashikant

        Telcos acquired 3G spectrum at big multiple of what BWA cost. Plus telcos were hurt badly due to unnecessary tariff war. Compared to them, RIL comes to the battle with no baggage and more importantly a hefty war chest. With pretty much no competition, RIL will have ample time to find the sweet spot in the market. 

        If RIL’s this unit was a listed entity, I would have taken a small bet on their success.

        Let’s see how it goes.