Cash-rich Western companies seize COVID-19 induced bargains to turbocharge their EM opportunities
Facebook’s $5.7bn investment in Jio, India’s maverick mobile operator, could be the start of a trend of cash rich Developed Market companies seizing opportunities in Emerging Markets due to depressed valuations brought about by COVID-19. Heightened uncertainty is pushing buyers and sellers to meet in the middle, and we expect more deals to happen in the coming months.
The Facebook-Jio link is an interesting one to us, and may be a response to the perennial dilemma faced by infrastructure providers: how to create value-added products. Despite owning ubiquitous infrastructure and theoretically having privileged access to eyeballs through their customers’ beloved screens, mobile operators have proven to be uncannily abysmal. Jio, perhaps uniquely, is apparently attempting to break the mould. We think that the coming together of WhatsApp and Jio’s ecommerce platform has the potential to be a game changer.
Only 15 or 20 years ago, one might reasonably have imagined that mobile operators were well placed to be key providers of a raft of forthcoming digital services. In entertainment they’d have been obvious hubs – some might remember some of the spawning in the tech bubble era of “portals” like Vodafone’s Vizzavi, or Sonera’s Zed that were valued at billions and came to nothing.
It’s true that many have moved into broadband, or found themselves in an integrated fixed-mobile operator, like most ex-state-owned telcos, leading them inevitably to TV services, often effectively as resellers, sometimes as expensive investors in sports content.
In payments, the record looks slightly better. In Kenya, mPesa is the exception that proves the rule. Developed by Safaricom, a Vodafone subsidiary, it started as an SMS-based payment service provider that moved into consumer banking. Some other countries’ banks lobbied successfully for regulatory barriers to prevent a repetition of what happened in Kenya.
mobile operators were once seen by some as well placed to capitalise on digital banking and payments
In developed markets, mobile operators were once seen by some as well placed to capitalise on digital banking and payments, not least because they already operate accounts and pre-paid balances. Oddly, few tried to enter this market. The CFO of a large AsiaPac operator once told us that banks were among his biggest customers, so he didn’t want to compete with them. Whatever the reason, few have tried, albeit Orange in France, Spain and in some African countries may be another exception.
In China, the flourishing mobile payments ecosystems were born out of horizontal movements, from e-commerce (AliPay) and from social media (WeChat Pay), and despite mobile phones, smartphones in fact, being integral to the process, the mobile operators are almost inconsequential in the process.
mobile operators have an awful record of creating new business segments
So the picture we’re trying to paint is that mobile operators have an awful record of creating new business segments. Perhaps as infrastructure builders and managers, they haven’t been good at innovation beyond their core competences.
That’s what makes Facebook’s Jio investment so interesting. Jio has a very distinct, possibly unique model that lends itself trying new things, to innovating. It was built with massive capacity to upend the Indian cellular market, causing major problems for the incumbents, who lost customers and were forced to cut prices.
for Jio, the mobile operation is evidently a loss-leader, a sort of gateway service to other services
But for Jio, the mobile operation is evidently a loss-leader, a sort of gateway service to other services. With 370 million customers, scale can lead to some interesting horizontal moves. JioCinema is a Netflix-like service, and JioSavaan focuses on Bollywood content. There’s also music, gaming, cloud, health, and fixed/fibre broadband.
Jio is forced to seek adjacent opportunities where it can leverage the scale of its customer base
Put differently, because of the low profitability of the core mobile business, Jio is forced to seek adjacent opportunities where it can leverage the scale of its customer base to create new areas of value. And that’s what it’s doing.
The most ambitious of these, and the part that attracted Facebook’s investment, is the e-commerce platform, JioMart, central to what Mukesh Ambani, Reliance Industries’ Chairman, describes as the “digital transformation of India” which can “empower, enable and enrich” to make “India the world’s leading digital society.”
Rather than replacing India’s estimated 15 million kiranas, small, hyperlocal grocery stores, Mr Ambani is seeking to get inside them. As well as the expected point of sale (PoS) terminals that facilitate digital payments and manage stock, he wants to help them source that stock, to deal with logistics, both for stock and for deliveries to customers – an offline-to-online transformation at the grass roots level.
The combination could be akin to a merger of Tencent and Alibaba – now that would be interesting
So what’s in it for Facebook? We think that JioMart and Whatsapp together assemble a ready-made 2-sided market, putting together what they’ll both be hoping are JioMart’s many kirana store customers with WhatsApp's 400 million users, regardless of which mobile network they use. WhatsApp may be seeking to emulate Weixin or WeChat, Tencent’s social network behemoth. The combination could be akin to a merger of Tencent and Alibaba – now that would be interesting.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.