In today's newsletter we talk about the Zuckerburg-Ambani deal that shook parts of the internet.


Business

The Story

So yesterday, Facebook shelled out $5.7 Billion to acquire a 9.99% stake in Reliance Jio. And this investment knocked up the value of Mukesh Ambani’s star-child to almost $66 Billion!

But before we get into the story, a note on Facebook.

For starters, the company is no slouch. It already has 300 million users on the Facebook app and a whopping 400 million on Whatsapp. But that's not good enough.

Oh no!!!  They want to monopolize the internet.

In fact, in a quest to capture India’s burgeoning potential, Facebook launched Free Basics back in 2015. The idea was to make Facebook a gateway to the internet for first-time users, by providing certain apps for free. And obviously, this created a lot of interest.

I mean who wouldn’t want free internet right? (Even if it means just having a bunch of basic apps like Facebook)

But despite the considerable hype this news item generated back in the day, Facebook couldn’t get Free Basics off the ground.

Because, Net Neutrality- the idea that internet service providers have to treat all websites fairly and provide equal access to anyone who wants to communicate on the internet. You can’t just have Facebook and Whatsapp on it. You'll have to have the whole lot. So after public outrage, the India Telecom regulator banned Free Basics (in 2016). And Facebook has been plotting to reenter the Indian markets in a big way ever since.

The very same year, Reliance Jio made a splash by barging into the Indian telecom industry with tariffs so low—they made competitors cry. There were data plans so cheap that most people thought it was some elaborate hoax. But at the end of it all, Jio shook the very fundamentals of India’s telecom industry and added a cool 388 million subscribers on top — most of whom were first-time users.

Unfortunately, the blitzkrieg also meant, Jio had to borrow exorbitant sums of money to build the infrastructure needed to facilitate the company’s massive endeavour. In fact, only last year, Jio had close to 1.5 lakh crore worth of debt on its books.

And considering Mukesh Ambani had promised shareholders to make Jio debt-free by March 2020, this was bit of a problem.

However, do note that he never said the company would be debt-free. The promise was to make RJIO net debt-free i.e. the company would still have some debt, but they’d have more than enough cash to cover for it. A subtle but important distinction.

Nonetheless, Jio still had to do away with a lot of their borrowings.

So Reliance Industries (Jio’s parent company) did what was necessary. They carved Jio into three parts. The tower infrastructure and all the debt that came with it was spun off into one entity. The fibre business was spun into another entity. And Jio was left with a debt burden of about 40,000 crores. Something that’s very palatable for most outsiders considering the scale of Jio’s operations.

Something that’s palatable to the likes of Facebook, even.

And this brings us to the second half of the story — the deal itself.

As we have already noted, Facebook wants a piece of the Indian action — this consumption story everybody’s raving about. But they know for a fact they can’t do business in India unless they have a strategic partner. Consider for instance all the pain they had to go through when they tried to launch Whatsapp Pay. They simply couldn’t get past the regulatory hurdles. But if they partner with Jio, maybe they can get around these pesky problems rather easily.

And Jio has a lot riding on this deal as well. Obviously, they are getting a ton of money, part of which will now be used to pay off the parent's (Reliance Industries) debt. And perhaps  Facebook can even play a pivotal role in furthering Jio’s ambition of bridging the rural-urban divide.

Especially with their latest experiment-Jio Mart, something that we covered in one of our earliest issues here at Finshots

Right across our apartment sits Radha Store. Radha Store currently places its order with the local supplier, fills out the order using the old worn out notepads the suppliers provide and then makes payment in cash. Customers cant find Radha store online. And they sure as hell can’t ask for home delivery.

Reliance Jio wants to change all that. It wants to enable Kirana stores to be able to leverage the power of the Internet. Fill orders online, fulfill them, and be able to cater to a much large audience than it currently does.

Now imagine doing this to 30 million stores across India.

Hell, imagine what they could do if they could leverage the power of something like Whatsapp Pay. The possibilities are endless.

And no matter how you look at it, you can’t fault both parties for doing this deal. In fact, we’d go as far as saying this is the closest thing you could get to a perfect match.

Until next time…

Correction: In the previous version of the article, we noted Free Basics violated India's Net Neutrality Laws, when in fact the rules favouring net neutrality came into effect in 2018. We also updated the definition of net neutrality to more accurately reflect its meaning. The error is regretted. (Correction made at 12:18 PM, 23rd Apr 2020)

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