FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART III

PART 3

How the dynamics will work?

This acquisition benefits both companies. For Reliance, the equation is simple. The money is vital for fulfilling Mukesh Ambani’s goal of making Reliance Industries debt free by 2021 and For Facebook, the deal comes close on the heels of the nod from the Reserve Bank affiliated National Payments Corporation of India (NPCI) to allow WhatsApp Pay to operate in India, and its decision to comply with the data localization guidelines.

WhatsApp could leverage Jio’s Payments Bank as a sponsor bank to power its UPI-based payments. The deal will open up WhatsApp’s entire user base for Reliance Jio, including the customers on rival telecom partners. The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. Through this deal, JioMart could become a one stop shop for e-commerce, social media consumption, instant messaging and digital payments. The network effect also helps in creating an ecosystem that disincentivises users from leaving.

The cryptocurrency community in India is upbeat about the deal between Facebook and Reliance Jio. Last year, Reliance Jio announced its plan to build the largest blockchain network in India. The Indian cryptocurrency space recently got a boost when the supreme court quashed the banking ban by the central bank, the Reserve Bank of India (RBI). Since then, the crypto sector has been growing and attracting investments from abroad despite the global coronavirus pandemic and the nationwide lockdown. Meanwhile, Facebook’s Libra project has undergone a major change.

Notwithstanding its minority share, the fact that Facebook now has a seat on the board of Jio Platforms might mean that its voice will be given greater importance in policy deliberations. This could mark a shift away from Chinese investments and prove to be a boost for Indo-U.S. trade and investment relations. This deal comes on the heels of a change to India’s Foreign Direct Investment (FDI) norms that make it more difficult for Chinese companies to continue investing in India. These norms certainly act as fetters to the Alibaba-Paytm alliance to compete with Jio Mart.

Facebook constellation is sitting on a huge pile of data which they were not able to monetize. The vast quantities of data generated by users of online services can now be processed into valuable information for commercial and strategic gains by leveraging Jio Mart’s reach. In reverse data sharing, WhatsApp, through its commercial agreement with JioMart, could end up providing deeper and richer data to Facebook which will provide more intense, localized insight into the consumption patterns of Indian customers. This new perspective on Indian consumers will add to Facebook’s already formidable advertising revenue stream.

Just as a firm’s competitive advantages are shaped by the strategy and resources of the firm, so it goes with platform-based advantages. When the platform yields synergy, each member can be thought of as adding something to the network-based advantages. As a platform scales, its costs per unit sold decreases logarithmically in comparison to linear business. A platform grows not by buying more assets, but by acquiring more users, which has a near-zero cost. This costs the platform next to nothing.

Credits: Ravi Agarwal, Sam Shead, Akshat Kashyab, Debasish Sarkar, Casey Newton, Arindrajit Basu, Amber Sinha, Kevin Helms, Nick Wood, Ruchi Gupta 

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 2

What is Jio Platforms?

 Jio Platforms is a technology subsidiary of Reliance Industries that came to light in 2010 when Infotel Broadband Services Limited (ISBL) spent $2.7 billion to win pan-India license during broadband spectrum auction. Shortly after the auction, Reliance Industries took a 95 percent stake in ISBL. In 2013, Mukesh Ambani renamed ISBL as Jio Platforms, which operates Reliance Jio Infocomm Limited as a wholly owned subsidiary. Jio platforms is described as a next-generation technology platform focused on delivering digital services across India. Jio Platforms claims to build a digital society powered by Reliance Jio‘s network technology. Jio platform was growing through mergers and acquisitions such as Saavn’s merger with Jio Music in 2018 and Haptick acquisition in 2019.

 

The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. To put it another way, Jio was a bet on zero marginal costs — or, at a minimum, drastically lower marginal costs than its competitors. This meant that the optimal strategy was — you know what is coming! — to spend a massive amount of money up front and then seek to serve the greatest number of consumers in order to get maximum leverage on that up-front investment.

What is the synergy between Facebook and Jio Platform?

 Facebook has invested in the Jio platform to create and unlock meaningful value through Network Synergy. The two companies could leverage each other’s strengths to build a Connected Ecosystem comprising of digital payments, telecom, and offline/online commerce. The deal will unlock a huge network effect with the combined power of Facebook and Jio’s subscribers across plays in commerce and payments.

 

What is Network Effect?

 Network effects are the incremental benefit gained by an existing user for each new user that joins the network. There are two types of network effects:

 ·    Direct network effects - Also known as the same-side effects. The value of service simply goes up as the number of users goes up. 

 ·   Indirect network effects - Also known as cross-side effects. With indirect network effects, the value of the service increases for one user group when a new user of a different user group joins the network

 

Platform Business Cost Model

Platforms boast higher profit margins and higher price-to-revenue multiples. Perhaps this explains some of the high valuations we see in platform businesses today including the recent Facebook – Reliance Jio deal.

 

Platforms business have two or more user groups exchanging value with one another. The more consumers on the network, the more valuable that network is to producers, and vice versa. The deal will jointly create an ecosystem that take advantage of Facebook’s high daily active users and Jio’s platform assets. For Facebook, this deal presents an opportunity to leverage the partner’s significant reach in India and explore the next-billion-user landscape. For Reliance Jio, the business will not be dependent solely on how successful the next generation is, as it will continue to grow with the strategic partner.

 

TO BE CONTINUED…

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 1

     

Facebook has spent $5.7 billion for a 9.99 percent stake in Jio Platforms, the tech subsidiary of India’s Reliance Industries. It was the classic Silicon Valley bet: spend money up front, then make it up on volume because of a superior cost structure enabled by the zero-margin nature of technology. Reserve Bank of India’s 2018 directive, which mandated the local storage of all payments data, various entities in the Indian government have introduced a slew of data localization policies mandating some form of data localization. Facebook, desperate to avoid the onerous compliance costs of data localization, left no stones unturned in getting the Indian government to renege on their data localization mandate. 

The investment—One of the single largest in Facebook’s history—is a giant bet on India’s online growth. India has long been a major growth market for Facebook, one that it has yet to successfully monetize. 400 million WhatsApp users—platform owned by Facebook that has more users in India than in any other country. The investment increases Facebook's exposure to India's massive SME market, and potentially opens a major new opportunity for those companies involved in the Telecom Infra Project (TIP), in which Facebook plays a pivotal role.

What is TIP??

Telecom Infra Project (TIP) was formed in 2016 as an engineering-focused, collaborative methodology for building and deploying global telecom network infrastructure, with the goal of enabling global access for all. One of Jio Platforms' strategic objectives is to use its network, cloud, and software assets to improve access to cutting-edge connectivity and online services for Indian consumers and businesses – particularly SMEs, so-called micro-businesses, and farmers. There are more than 60 million SMEs, 30 million small merchants, and 120 million farmers across India.  They account for the majority of jobs in the country and form the heart and soul of rural and urban communities. Their collaboration with Jio will be creating new ways for people and businesses to operate more effectively in the growing digital economy.

 

TIP could also be a significant beneficiary of this deal.  Jio provides for an aggressive, 4G-only deployment with disruptive pricing while forging swiftly on fibre deployment across the nation, in parallel. Jio Platforms encompasses not just fixed and mobile networks, but everything that goes with them including services, apps, content, AI, devices, and cloud. Jio offers mobile Internet for nearly free and tries to make money by up-selling subscriptions to their own versions of Spotify and Netflix. 

Is there still room for Facebook to grow?? The answer is a BIG YES and here is how… 

 

At least half a billion Indians remain offline. Partnering with Jio and its influential owners may help the company navigate an increasingly protectionist Indian market. Facebook has previously been rebuffed by Indian regulators—when it tried to launch a free, gated version of the internet in 2016. Jio, now the biggest cellular internet provider in India, is a valuable friend for Facebook to have in its corner. Jio’s success in India has raised a lot of eyebrows but the biggest moment came when Mukesh Ambani invested $33 billion to construct a nationwide 4G broadband service network. This allowed Jio to offer cheaper data services and free domestic calling to its subscribers. Reliance Jio has the highest ARPU (Average Revenue Per User) in the industry.

TO BE CONTINUED….

Interest Rates: Why is it so important ?

Interest rates or coupons attached to a fixed debt is a significant component to ensure a rewarding portfolio. But the market interest rate has now been manipulated, as can be seen from psychological terms noted below. 

Interest rates are determined by the subjective decision of individuals to spend money now or in the future. In other words, interest rates are determined by the preference of borrowers and lenders. The market forces help in creating a natural Interest rate regime. 

Typically, the higher (or lower) the interest rate is, the more (or less) people will save. Likewise, the higher (or lower) the interest rate is, the smaller (or greater) will be investment. Because investment rather than savings is seen nowadays as being conducive for growth, the lowering of the interest rate is perceived as advancing economic prosperity.

The artificial lowering of the market interest rate induces additional investment. At the same time, savings decline and consumption increases. As a result, the economy starts living beyond its means. The boom is economically unsustainable because the policy-induced deviation of the market interest rate from the neutral interest rate causes malinvestment.

In today's fiat-money regime, money is produced through bank circulation credit: when they lend to private households, firms, and public-sector entities, banks increase the money supply. Money creation through bank circulation credit is onone hand money creation out of thin air- a rise in the money supply that is not backed by real savings while on the other hand, bank circulation credit wreaks havoc with the essential function of the interest rate.

The rise in bank circulation credit necessarily lowers the market interest rate to below the natural interest rate. The natural interest rate is the interest rate that would prevail had there been no expansion of bank circulation credit.

Discrepancy between the market interest rate and the natural interest rate sets into motion the boom-bust cycle in an unhampered market. The market interest rate (adjusted for risk and inflation premiums) is expressive of peoples' time preference, and it corresponds with the natural interest rate. It allows for people allocating current income to consumption, savings, and investment in accordance with their true preferences.

This downward manipulation of the interest rate provokes an economically unsustainable boom, which must be followed by bust.

Note: This blog has been inspired from previous International publication.

Guidebook for Simple Investments Part II

What Investors Must Do To Get it Right? 

1) There is a huge disconnect between markets and the economic reality. Global investors should look for opportunities to find a good investment relative to their currency, as there is a huge shortage of US dollars in the financial system and shortage is  likely to inflate further. 

2) The cost of money was cheap in the last 10 years mainly because of the Central Bankers QE window. Dollar denominated debt in emerging and developed economies has exploded in the last decade. This year has been different because of suspension of global trade and fall in demand. This is likely to persist  and has led to Investors’ risk appetite  reduction forcing them to look for safety and recession proof business. 

3) Investors must use an efficient way that meets their asset scale and channel  them into long-term planning as well as asset allocation. 

4) Investors should evaluate to ensure the cost of services provided by companies are not way too high in the next 5 years as reduction in variable and fixed cost will be in play immediately before pricing improves. Investors will have to sharpen their focus on operating fundamentals

5)  Investors will have to ensure the borrowing costs and tenure of the money at disposal are proportionate to the investment time horizon as most of the problems erupt not because of borrowing costs but from the redemption pressure during extraordinary events/circumstances.

6) Investors with a really long term horizon should also look at assets which may not produce results immediately but are yet viable as well as sustainable  in the longer duration. 

7) The geography of the investment should be the priority as US , Europe and Asia Pacific offer varied opportunities to Investors. 

8) Internet and Tech related assets are not cheap in any geography. Investors need special skills and capabilities to figure out the winners herein from 2020 onwards

9)  Geopolitics, Climate and Fiscal Policy are going to play important roles in the next 2 - 3 years . Investors still don’t have many options beyond Tech and software business. Investors love the stable recurring revenue streams and the ability to rapidly scale businesses to serve a wide range of customers in multiple industries. At the same time, the fixed costs for SaaS companies are  lower than for traditional software firms.

10) Investors should align with top performers and not risk with potential losers. Winners will stand out doing things differently and have the ability to scale up the value and pricing. Losers may compromise too much in value and eventually will not be able to gain in pricing. 

Guidebook for simple Investment Part I

GUIDEBOOK FOR SIMPLE INVESTMENT - PART I

Why Investors Don’t Get It Right Most Of The Times

• Data, discounted cashflow, and EBITDA, have failed the analysis of investment and business since 2008. 
•  Early stage investment based upon future projections, multiple rounds of fundraising at higher valuation, fancy numbers and complicated figures have all failed the test of time especially in the last 10 years. 
• Multiple rounds of capital were thrown in as investments into business where no meaningful growth and revenue was visible. 
• Too much money was chasing the same stories in the hope that they would turn out to be the next Google, Facebook, or Instagram…
• Investors were rather gambling to identify the next Mark Zuckerberg or Larry Page…
• Many founders simply imitate an idea hoping that they are holding the “Next Big Thing” after a Google or a Facebook. These entrepreneurs have failed themselves and their Investors.
• Big money was spent to increase the customer database. But the money spent per customer acquisition was seldom worth the returns earned. ROCE (Return on Capital Employed) was neglected formula for years and Investors have suffered because of this ignorance.
• Many Investors have funded businesses to acquire customers aggressively and have demanded more value for the same customer in multiple funding rounds. Owners have forgotten to leverage product to gain customers. A successful product helps to find true price value of each customer in the long run. It’s the success of the product which is more valuable than the value of customer in initial phase of the business.
• ROA and ROE compounded with ROCE is fail proof, fool-proof and must be widely used to measure the business.
• The key is in the quality of the business operation measured by Capital allocation, Management Ability, Corporate, Disruption, and Product Performance. All these are core competencies and extremely difficult to imitate.
• Higher valuation boosts Investor wealth and helps increase confidence for future rounds of funding. In most cases, the investment value is in the mind which rules rather the true value of the business.
• In a Bullish scenario, performance and competition are the name of the investment game. Investors have bet on multiple vehicles and called it a diversified portfolio. In reality, it was a gamble to spread the risks and hope that at least one or two turn out to be the multi-bagger.
• Large Investors have typically only imitated contemporaries. Why not, when low Interest rate fund is available at disposal?  Historically, it is a proven fact that low Interest rates lead to higher prices in risk assets and fuel competition for ownership at multiple levels, further inflating prices. 
• Asset allocation becomes key with potentially negative interest rates in the US, slowing of global trade and thus reduced supply, increasing the risk of surprise inflation markedly. 

To be Continued….

DUE DILIGENCE 2020

PRIVATE EQUITY DUE DILIGENCE  - New Era 2020

• The era of EV/EBITDA has long been favoured instead of revenue growth or margins . The macros are affected and hence PE’s will now be lower. This makes the current environment even more challenging for VC’s , as they have to search for potential winners in a worsening economy.
• Due Diligence which was a forgotten art in the last 10 years or so will now come back in favour. Remember it’s the hard work that pays and not cheap imitations. It takes blood  , sweat and tears to find the real diamonds. The miner always holds the key.
• Technology itself will now be questioned for delivery. VC’s will realise that true value behind business is not just another technology but a valuable Enterprise Software product.
• Cyber security and Payment modulation platforms  are in demand. 
• Advanced due diligence with data and analytics will be key to identify new winners. Hence companies will need expert counsel to help them sell well to VC’s. 
• Disrupters will be favoured. Sources of disruption will be analysed.
• Companies will be forced to evaluate the ratio of profits -  Is it the product or the customers that are  bringing in the bulk of profits?
• It’s impossible to chase both growth and price. Growth will win the battle and must be prioritized. Growth can be monetised in a great manner in the long term for pricing, if short term greed is overlooked. 
• Too much competition between Investors in the last 10 years led to unreasonable price valuations. The same will now be reversed from 2020, as Due Diligence will take the driver seat and a more realistic approach will be worked in paper. 
• Investors are not immortals to identify the next big disrupters. Sound due diligence will help to understand the value of the product in the foreseeable future. Owners are good at doing the business, but lack art to sell themselves to VC’s.
• Companies have to come to the street and study the necessity of the bottom of the pyramid . There is no point in competing with the established businesses.  Always build a business around the bottom of the pyramid. 
• Investors know they are not lucky with all investments. Hence a deep analysis of Due Diligence will help the evaluate the risks and disruptions.
• Same goes for companies who don’t understand the needs of the investors and lack expertise to project the future of their own business. An expert analytical Due Diligence will help to create a biography of the business and present it to the Investors. It also means that the medium between the Investors and Companies are far more important, as they have the expertise to do ground level reality research and capture the facts in the Due Diligence report.
• There is competition between companies to attract capital. Dearth of experts will undermine the case of raising funds. Consultants that specialize in performing proper Due diligence should be considered by owners to build and  present a case for investment in a more formal way to Investors.                                                                                                                                                Due Diligence report  is more than numbers and graphs. It is a  realistic and practical look into the future of the Company and a roadmap to bring it to the market.

We at CAPITAISE take pride in conducting Due Diligence with our wealth of research, identify the hot spots, advise the owners, dig deep to find the disruption of the business and help companies come to the street to raise capital.