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Jio – Building India’s Internet Firewall

How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

Warren Buffett


Introduction: Jio has received much attention over the last few months including ~US$19bn of investment into the platform by several blue-chip investors. The scramble to invest in Jio showcases the on-going shift of technology dominance away from Silicon Valley and towards India and China.

With this shift in technology dominance has come the emergence of large internet giants in China (Alibaba, Tencent) and India (Jio). These businesses are developing impressive networks spanning c.40% of the global population, and in the process are developing deep competitive advantages. The emergence of a concentrated set of internet giants in China and India is also largely supported by domestic government policies seeking to retain a measure of control on public access to the internet and provide greater support for homegrown companies over western competitors.

In this regard, Indian government policy, which supports increasing control over public access to the internet, implicitly supports Jio as the dominant local operator. In addition, blocking of western internet companies’ access to the local Indian market mirrors several aspects of how the Chinese government supports Alibaba and Tencent in the domestic China market. It appears as the government ‘internet firewall’ in India and China not only blocks the public’s outward access to the world wide web, but also western internet companies’ access and ability to compete in 40% of the global market represented by India & China. In my view, this level of government support provides a good basis to review emerging market technology companies as attractive long-term investments.

Figure 1. Jio has received US$ 19bn in funding since April 2020

Figure 1. Jio has received US$ 19bn in funding since April 2020

Jio’s Dominant Position: Jio, launched in 2007, is the dominant provider of telecom services throughout India, operating 4G / LTE services across all 22 telecom circles in the country. Jio is the third-largest mobile operator in the world with over 385m subscribers, representing 65% market share, followed by Bharti Airtel with 103m subs and 19% market share.

Mukesh Ambani, the owner of Reliance, spent approximately US $32bn to build the Jio platform, using only 4G technology. By leapfrogging traditional circuit-based 2G/3G technology, Jio was built as a data-only network enabling voice calls over the internet. Critically, as a data-only network, installation and usage costs were significantly lower than the existing 2G/3G networks. Commodity hardware could be used to build-out 4G infrastructure in even the most rural locations, and low-cost contracts could be offered to India’s rural and often most economically underserved population. The network effect of connecting millions of India’s population to the internet for the first time cannot be understated.

Jio’s Investment Moat: It is now clear, with the building of a homegrown 5G network, Jio’s ambitions span far beyond purely mobile telecommunications. Jio positioning as a home-grown Indian brand places it in the hearts and minds of the local population and national government. What’s interesting here is that Jio has beaten western competition (Facebook, Google, Intel) through the building of its hardware network (much of which has been developed in-house), despite western technology giants having a head start of several years to develop a foothold in the market. In addition, as the monopoly provider of telecom and internet services in India, Jio is now the single point of access for the Government to exert control over public access to the internet. The government is effectively supporting Jio’s investment moat (network effect), through its internet firewall policy and blocking of western internet firms (e.g. government blocking of Facebook’s initial Free Basic app in 2016). The same structure and incentives exist with Alibaba and Tencent in China.

Conclusion: The shift in internet and technology dominance from West to East, mirrors the geopolitical shift in global power that is currently taking place. With China and India representing c.40% of the global population, it would make sense for each country to have homegrown local technology champions. However, from an investor perspective what makes the Chinese and Indian technology sectors so interesting is the political support for monopoly businesses in these sectors. In order to control the public information flow, governments need to limit the number of access points such that supporting one or two dominant and importantly, local, internet businesses makes political sense. With these kinds of politically supported investment moats, it is no wonder western companies and investment funds are scrambling to invest in Jio, or risk being shut out from the second the largest market globally, by population.

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