Ambani brothers connect: RCom and Reliance Jio to share telecom infrastructure

Anil Ambani group company Reliance Communications’ stock price jumped by 10.9% after it announced a tie-up with the Mukesh Ambani group telecom company Reliance Jio Infocomm. Reliance Communications will open up its optic fibre network to Reliance Jio which has a license for nationwide 4G services. A recent government decision means that it can also provide voice services by paying a one-time fee. Reliance Industries owns a majority stake in Reliance Jio.

Still, the company would have to invest significant amounts in creating infrastructure to roll out its services. Not that Reliance Industries does not have the cash needed to set up this network but sharing infrastructure will allow it to follow an asset-light model. The current arrangement is only the first in an intended comprehensive business co-operation arrangement, according to a joint statement issued by Reliance Industries and RCom.

Under the current agreement, Reliance Jio will pay Rs 1,200 crore to RCom to get access to its inter-city fibre optic network infrastructure. This is a one-time fee. A joint statement issued by RCom and Reliance Industries said that Reliance Jio will use this 120,000km long network as a backbone to launch its 4G services. Apart from the payment, Reliance Jio will also provide reciprocal access to its own network.

Both companies appear to have decided to combine forces in the market in certain areas. Thus, they are planning to jointly upgrade RCom’s fibre optic network to “ensure seamless delivery of next generation services.”

And that is not all. The statement goes on to say: “This agreement is the first in an intended comprehensive framework of business co-operation between Reliance Jio Infocomm and Reliance Communications to provide for optimal utilization of the existing and future infrastructure of both companies on reciprocal basis, including inter-alia, inter-city fiber, intra-city fiber, towers and related assets.” That pretty much covers everything as far as the backbone required to provide telecom services is concerned.

There are a few ways to look at this development. It is also necessary to remember the historical context to this development, of the two brothers—Mukesh Ambani and Anil Ambani—deciding to go their separate ways, separating the business as well. The telecom business had gone to Anil Ambani in the split-up. Recent years have seen RCom go through a rough patch, partly because the industry itself is under pressure but RCom’s performance has been affected by a high debt burden as well.

View1: The current move could just be a business arrangement that helps both companies share a backbone and make joint investments in infrastructure in future. The Rs 1,200 crore one-time fee and any additional money for future infrastructure sharing that accrues to RCom can help it service debt; joint usage of infrastructure will improve returns on investments; and joint investments can lower individual outlays. Beyond this, both companies will operate their respective separate front-end operations and compete in the market as normal rivals.

View2: Apart from what is laid out in View1, the companies may eventually decide to collaborate on the front-end as well, and join hands to provide a common boquet of services to their subscribers, with some form of revenue sharing. They may be present jointly in all segments, but will avoid overlaps in their portfolio.

View3: Apart from View1 and View2, have both brothers decided it is better to have a single company in the telecom business, given that both may be competing for the same customer at several points? Thus, they may start by sharing the network backbone, offer a joint portfolio of services to subscribers, and then perhaps even move to a single corporate structure. That may be the logical conclusion to View3. What will be interesting is to see if such a development takes place, whether both brothers jointly own the resulting entity, or one is bought out by the other.

Only time can tell which of these scenarios will play out. But this development will certainly set off speculation that, if both brothers can sit across the table and hammer out a network sharing arrangement, there may be a patch-up in the works after all. That has been the stuff of speculation even earlier, but this arrangement lends some credibility to it. That may explain why the RCom stock jumped so much. It had a rub-off effect on Reliance Industries stock too which rose by a more sedate 2%.

Comments are closed.