<Jun 15, 20> The Pipes are Sentient: An Article by U. Sinha in Financial Express
Telcos, long derided as dumb pipes, represent the undifferentiated backbone of all the tech frenzy we experience. Today, we have barely scratched the surface of the total opportunity set that exists. Companies must look into Bharat.
Amidst the sound and fury that is 2020 so far, one lingering trail this year will leave in the skies is that of two massive fundraises in India: Jio’s nearly $13 billion (and counting) round and Bharti’s rumored (but not yet announced) raise that should rival Jio’s. If Bharti were to have anywhere near the success that Jio has had, together, they would have injected close to $20 billion in equity capital into an ecosystem that sees half that in total funding in an average year.
Common to both raises is the opportunity that Bharti and Jio get to de-lever their balance sheets. That gives them significant firepower down the line to raise more debt capital if needed to fund infrastructure and capex. Strategically too, both companies are signaling significant flex. Facebook’s participation in Jio’s round is a strong indicator that we will see a credible WhatsApp payments offering soon, and that it will power a much broader Jio e-commerce play. And if the grapevine is correct, Amazon will be entering the same arena through Bharti, creating a rival platform.
The implications of this are far reaching: not just for e-commerce, but for the entire supply chain and logistics framework that lies behind these offerings. One can expect significant VC interest in the space, with the promise of a strategic round or buyout down the line. Similar frenzy is likely in the fintech landscape as well, with a lot of early rounds and some consolidation foreseeable down the road.
But the real opportunity lies in the Bharat beyond India. Telcos, long derided as dumb pipes, represent the undifferentiated backbone of all the tech frenzy we experience. Today, we have barely scratched the surface of the total opportunity set that exists, whether we think of access, penetration or per-capital consumption. There is significant headroom for growth, and hence for returns. It is near impossible for a startup to justify the CAC to LTV ratio for targeting some of these Bharat customers. But happily – both Jio and Bharti are already there. And it is in their interest to get these customers to be more active, and hence consume more.
Their new investors are going to push for this as well. Except the strategics (Facebook, and possibly Amazon) all the other investors are highly exit focused. Which means they are counting on improvement in three parameters – top-lines, margins and multiples – to justify a reasonable IRR over the next 3 – 5 years . One can expect intense competition between the providers to differentiate their offering, to acquire more customers, and to get them to spend more while there. The services that telcos offer will hence be core to their value to customers. How that flies in the face of net neutrality is a very important discussion we will have to contend with, but there is no doubt that network bundling will be a key facet of our telco landscape. It will likely be core to their value perception, and hence their competitiveness.
Today, we are in a period of asymmetry, where the two players will lead and follow each other in various parameters (users, speeds, coverage, etc.) – but over time, their tendency would be towards becoming more similar, and hence, undifferentiated. As they morph into being the toll collectors in an increasingly digital lifestyle, the share of transactions on each network – and hence the partnerships both firms bag – will become even stronger determinants in who ultimately leads.
The good news is that with this push to monetize, coupled with the additional capital at hand, the digital lifestyle that now core to Tier 1 and Tier 2 India will extend to Tier 3 and beyond. Their digitization is going to be core to the ARPU of the telcos. Which means Digital Enabled Services (DES) are the Value Added Services (VAS) of this new era, and they are going to be delivered on networks that are no longer dumb. The pipes are sentient, and there are great fortunes to be made on their back. And as long as their firepower does not stifle competition, there are likely to be significant investments, acquisitions, and growth in the ecosystem, fueled in part by the massive capital injection of 2020.