Why did Facebook invest $5.7 Billion in an Indian Telecom Company
Diversify, Monopolise, and a Network of 1.3 Billion People
In April 2020, when the rest of the world is grappling with how best to tackle the pandemic and run their day to day lives, Facebook and Reliance Jio got into one of the best business deals of the decade.
Facebook decided to invest USD 5.7 Billion for 9.99% in Reliance Jio, thus becoming the largest minority shareholder in the company and get access to a country of 1.3 Billion people.
What is Reliance Jio?
Reliance Industries is owned and operated by India’s Richest Man, Mukesh Ambani who in 2016 introduced his telecom network called Jio. His goal was simple and decisive. Penetrate the Indian telecom market by providing free internet service and voice calls to its users. Until this point, data services offered by existing telecom operators in India were similar to the standard global rates.
Here is what Mukesh Ambani’s Jio accomplished with providing free data and voice calls to its customers for almost one year:
Jio was able to go on to add 300 million new users to their network, and most of whom were new users. Apart from it being a great value add for their business, having a large number of first-time users on the internet in the country also pushed the digital transformation initiative of the country as a whole.
Jio is part of Reliance Industries which owns the largest oil refinery in the world. Thus, the parent company’s financial position allowed them to raise a great deal of debt to cover for these services that were provided free of cost to its customers in their new telecom venture. The most significant advantage here was that an Oil Conglomerate was able to use its financial position to access debt to diversify the business towards the future of the 21st Century, i.e. Telecom and Data.
Finally, obliteration of the competition. While competitors in the country were charging almost USD 5 for 1 GB of Data, the new guy comes in and gives you the same quality of 4G data for free. Apart from the data, if you use the Jio network, you also get access to free calling within the country. This service was provided for a full one year. All you need to do is use their network. This forced the competition to slash their prices by up to 80% to retain their customers and restructured the entire industry within a year.
Facebook’s Failed Attempts in the Past to Enter India
As a social media platform, Facebook is doing reasonably well in India, with over 300 million users and now adding another 400 million after the acquisition of WhatsApp¹. However, they had bigger plans to capitalise on the opportunity to connect with 1.3 Billion people. Mark Zuckerberg has in the past tried on two occasions to get more involved in India but was shunned by the Regulators on concerns related to a foreign company having a monopoly in India with access to data and security issues of all its citizens.
Therefore, what Facebook needed was an Indian strategic partner who could help them find a way around the regulatory issues and gain greater access to the country’s user base.
Facebook & Jio: A Marriage Made in Heaven
So what made Facebook plunge into this business deal?
Within three years, Jio was the largest network operator in the country with over 300 million users, and they planned to leverage that database with its new E-Commerce Venture called Jio Mart.
The business model of Jio Mart works on the medium of connecting the small Retail Stores or Mom & Pop shops to the consumer. Currently, India has over 30 million of those with no access to an online business platform. This means they don’t come under the Amazon or Flipkart umbrella, which are the country’s two largest E-Commerce giants, thus eliminating competition from them.
All Jio needed was a medium to connect these two parties, i.e. the Consumer and the Shop. This is where Facebook’s company WhatsApp will play a crucial role. One of the ways in which Facebook tried to solidify its position in India was by introducing WhatsApp Payments. However, that never took off due to regulatory issues.
This time around, things were different. By investing in Jio, Facebook will have the following advantages:
They now have the strategic Indian Partner they were looking for and can tackle the regulatory issues as they would have a minority stake of 10% in an Indian Company.
WhatsApp being the most popular messaging app in India, is the perfect platform for Jio to establish their E-Commerce venture. This one app can be used between the consumer and the shop to interact with each other in the near future, facilitate payments as well. This is a win-win situation for both as WhatsApp will be able to generate an additional 300 million users of the Jio network, and Jio will benefit from 400 million WhatsApp users that will now use their E-Commerce platform.
Now let us look at how this E-Commerce venture will not be affected by the likes of Amazon and Flipkart. None of these two E-Commerce giants has been actively chasing the grocery space in the country. This is because most of the groceries in the country are bought from the small shops near the house due to convenience, no waiting period of even one day or simply because they are habituated to buy them from places they know off for an extended period. Familiarity and relationships in the Indian business environment is the most pivotal aspect of the culture, and this is something logistical companies cannot yet replace.
This venture of Jio and Facebook will, therefore, tap into this market segment which is yet virgin. Here, the consumer can still buy the goods from the same shop they usually go to, receive the products on the same day as the shop owners will arrange for the delivery while having the same sense of familiarity which is quite essential for the Indian consumer.
4. The final reason that any tech company does any business is to collect data to understand the customer and their needs to capitalise on it eventually. Now picture this, between these two companies they will have access to the data of over 75% of the people of this country, i.e. almost 1 Billion people. The possibilities are endless in terms of how great this partnership can be, and the level of synergy it will create over some time.
Here is the kicker to this deal. Soon after Facebook took such a convincing position in the company, the level of confidence in this partnership reached new heights where Private Equity companies and Venture Capitalists such as General Atlantic, Silver Lake, KKR, Abu Dhabi Sovereign Wealth Fund and a few others picked up a total stake of 12%².
As of today, Jio has closed its fundraising by selling 22.2% of its stake, and this sale was completed and closed in a matter of fewer than 60 days, i.e. from April’20 — June’20 by raising over USD 10 Billion while giving Facebook monopolizing access to a new line of business and 1.3 Billion people of the country.
See you next time…