Tech Brew Ride Home - (Bonus) The Reliance Jio Story With The Diff Newsletter

Episode Date: August 15, 2020

The whole story of Reliance and Reliance Jio with Bryne Hobart, author of the excellent newsletter The Diff. Subscribe at: diff.substack.com Also, the book about Dhirubhai Ambani we discuss at the beginning is this one: The Polyester Prince. Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the Tech Meme Ride Home. I'm Brian McCullough. Well, as often happens on the show, you've been listening along with me, as I've learned about something.

I was completely unfamiliar with Reliance and the Reliance Geo story. So when every A-list pool of capital in the world suddenly lined up to invest in Reliance Geo, I didn't know what the story was, but I knew that this was definitely one of the most important stories of the moment in tech. So after a few weeks of reading around the internet, this episode is sort of my debriefing for you on what I think the Reliance Geo story actually is. And I've chosen to give you this data dump with the able assistance of Byrne Hobart, because he was mainly able to read the book that I have not yet been able to read about the whole reliance story. And so Byrne helps us tackle not just the Reliance Geo story at the moment, but also the deeper reliance story going back to the 1950s and the whole Ambani. clan writ large. But also, I chose to do this with Byrne because if you're unfamiliar with his work, I encourage you to subscribe to his excellent newsletter, The Diff. You can find it at

diff, d-I-F-F-F dot substack.com. I've also got a link in the show notes. I subscribe to upwards of 50 different newsletters, but as I say towards the end of this episode, somehow, I end up reading the diff more than most, because darn it, if Byrne doesn't find some new angle every week on something that I had never considered before. And Byrne knows his business history back to front, which you know I love. And he's an excellent business analyst, which I deeply respect, so he can help me sound smarter than I am when I crib some idea that his newsletter turned me onto. Anyway, please enjoy finally getting to the bottom of Reliance Geo. First of all, I'm a huge fan of your newsletter, but I also, I've been dying as listeners of the show know, to talk to anybody about the whole Reliance and Reliance Geo story.

And your newsletter was one of the first to lead me down a path of research because you actually, did you read the book about Reliance in general? You actually found the book because it's hard to get, right? It is somewhat hard to get. You can buy used copies. They're fairly pricey. There are PDFs floating around somewhere. But yeah, the polyester prints, a really interesting book. It only covers the story of Reliance under its founder,

and now Reliance is run by the founder's son, Keshambani. So it is a different company in some ways, but in some ways it is the same company that it's been for a long time. just it's adapted to circumstances as successful large companies have to do. Well, listen, I, even if this isn't the right thing to do, we might end up doing half the episode on the whole Reliance story because I'm just such a fan of business history. So, and then, you know, you wrote that like to understand geo, you need to understand Reliance. So let's just start there.

Indian listeners made fun of me for not being more familiar with the Ambani family in the story. And rightfully so, you know, my ignorance is only my. my fault. But it turns out that the reliance story doesn't begin with Mukesh Ambani. It begins with his father. It actually doesn't begin in India. Durabai Ambani was in Yemen or something. Give us the background of the father first. Yeah. So he was born in India. He moved to Yemen sort of to make his fortune. There was a trading port that was controlled by the British at the time. And it was just a a major refueling port. It's actually one of the more important ports in the world for a while. And he was there buying and selling goods as a young clerk, just, you know, working in the

marketplace, buying and selling spices and things like that. And his first real score, the first time he became somewhat famous was when the Treasury Department of Financial Regulators in Yemen started to notice that there was a coin shortage. So we have one of those now. There's one of those then. At the time, they noticed that the silver coins that were the most common currency in circulation there, it was getting harder and harder to find them. And so they asked around and asked around and asked around. And they traced the whole shortage to a young clerk, Derrubim Bonnie, who was buying all of the silver coins and he could get his hands on. And it turned out he had figured out that if you bought the coins, melt them down, ship them to England,

sold them for pounds, brought the pounds back, exchanged the pounds for more coins, that at the official exchange rates and at the then current value of silver, you'd actually make a profit. So one of the first ways that he made money was spotting a case where there was a regulation. It made sense at the time it was written. Circumstances changed. Law didn't change. And there was this gap between reality as the law saw it and reality as the market saw it. And he was there to close that gap. Well, and as you identify, that's sort of his business model, his entire life. He moves to India after that, and Reliance was founded in 1957.

And you wrote, and I think you were referring to later things he did, but Ambani identified a discrepancy between the model of reality implied by a government and the actual state of the world. He turned it into an arbitrage and he exploited it. And so essentially what Reliance does for years is sort of exploit. Like India is famously traditionally a very heavily regulated, very protectionist economy. And so he just makes his fortune by constantly finding arbitrage opportunities inside that regulatory regime. Exactly. So one of the early things he did was a lot of the raw materials for clothing. The Indian government wanted to encourage domestic production.

so they had high tariffs on different kinds of imported yarn and synthetic fibers and things. And he just had a real talent for, originally his skill was getting import permits. So the rule was basically if you were a clothing manufacturer and you exported clothes, you'd get a permit to import raw materials. And if you didn't, he didn't. So he bought up these permits from the manufacturers because they didn't really want to be in the business of managing their entire supply chain. they just wanted to manufacture goods and sell them.

So he'd buy the import permits and then he would do the importing or he would sell those permits to somebody else who needed to import raw materials and turn a profit that way. But he would also do things like buy up all the import permits and then buy up all the supply of raw materials. So suddenly the factories have no way to make clothes. And then they have to pay whatever price he asks to get access to those raw materials again. But he would also do things like he would parse the letter of the law really carefully and find cases where there might be two different tariff schedules applying to two different categories of imports. And he might find something where everyone thinks it's at the high tariff rate, but he can argue it's at the low tariff rate. So he imports it and pays the low tariff and then is able to sell it at the market price that reflects the high tariff.

So that kind of arbitrage was also a pretty common thing. At one point, as he made more money in the import and export business, he decided to get into the more capital-intensive part, which is actually manufacturing. But India also had some restrictions on the import of manufacturing equipment. At one point, allegedly, he smuggled an entire factory into India to avoid paying the tariff on the equipment. That seems implausible.

There have been a couple of places where people have moved entire factories. In World War II, Russia basically moved their entire industrial base. behind the world. Yeah. Yeah. And then China sort of did something similar because they were paranoid about Russia, where they located all of their factories in valleys surrounded by mountains and really defensible places, which was great if you're worried about an invasion, but really

annoying if you have to actually get trucks to and from the factories. So countries have done this. They've relocated their industrial base at times. But usually that's a wholesale thing that a country does because they are panicked about a war, not just something one guy did because he ran the numbers and realized that's actually a better way to make a profit. Well, he is a bit of a cowboy. I mean, there's other stories like doing things like cornering the market, Reliance corners the market in its own stock at one point. Let me quote actually from your piece, because I love this bit. Perhaps the high point

of Reliance's financial engineering was in 1986 when the company publicly stated that earnings would rise, then found that earnings weren't rising after all. So the solution was, they They just change their fiscal year to an 18-month fiscal year and record profits were secured. So it's sort of a thing where it's like, India is this market that's highly regulated. It's also famously got issues with graft and corruption. So you have to play ball with the government to a certain extent. But what Reliance seems to do is not just play ball, but play the regulation and the market as it is like a fiddle. Yeah, and one way to look at it is that he was sort of a politician himself.

So the reason that Reliance couldn't afford to report an earnings miss, and the reason that they were talking up their earnings was that he was raising money, he was selling stock to fund the company's growth. And Reliance had sold a lot of stock in the past. They had an enormous shareholder base. It was something like 1 million people by the mid-80s, and it's still extraordinarily why they Let me interrupt you because that's something that I didn't know too that is very important. Like I was unaware of the fact of how powerful reliance was in India in the sense that, you know, it's been around, I think it goes public in the early 80s.

And so it becomes the most important company as Indians as a nation develop an investor class. So by I think you're right, the statistic I found was by 1985, a million Indians own shares. in Reliance. So in essence, they have a constituency. And so that helps them play the government because what's good for Reliance is good for all of these millions of Indians. And so the government wants to also keep these millions of Indians happy as well. Yeah, exactly. It's kind of like the game that Uber and Lyft and Airbnb play where there are just a lot of people who rely on those companies for their income. And if the service gets shut down, those people, A, have no income. And be something have a lot more free time. So Uber has done this really aggressively where they

had Diplasia mode on their app for a while. But Airbnb has done this too where they sort of organize their power users as a grassroots lobbying organization. In Reliance's case, it's unclear how much they directly leverage that, but it is really clear that it's just an incredibly important company to a lot of people in India. I read the economic times regularly. it's the main English language business paper in India. And there is extremely regular and thorough and detailed coverage of reliance. Like basically every day there is a story about there's another interview with a fund manager on whether you should be buying more reliance because of course you own some or selling some of the reliance that you own because of course you own some, but you never sell all of it. It's just a really important, well-loved stock.

I found a 2004 New York Times article where the headline was a giant so big, it's a proxy for India's economy. They did 87 billion in revenue last year, and that represents 2.6% of India's overall GDP. Reliance is the number two energy company in the world. It has 12,000 retail outlets in India, which that's important. We're going to come back to that because that's going to get us into this story. I also wasn't aware that there are, are you aware of this? There's the two feuding sons and Bonnie's sons, and so there's two different reliances. There were.

Okay. Mikesh did very well. The other one, his name escapes me at the moment, did not do so well. So, yeah, there was. Anil Abani. Aneal, yeah. So there was a dispute over who would inherit the fortune, who would inherit the institution. They had to split it up.

and reliance has always run with a lot of leverage. It's always been trying to grow very quickly. It's always been taking risks and trying to transform itself. And if you do that enough times, eventually something will go very wrong. So it happened to go wrong for Anil's side rather than Mekesh's side. And now there's basically one reliance left. So, and that reliance is the one run now by Mekesh.

and essentially is Geo, which let's go ahead and skip to the Geo story now, geo is 100% his vision, correct? That's right, yeah. It's a really incredible story that they basically, they went to a market where data was so expensive that there was a piece in the information a while ago that said that the normal behavior for people in India who had a data plan was turn off data. when you leave the house or just turn it on only when you need to use it because otherwise

you're just going to get eaten alive by these data charges and geo charges substantially less for data and they were basically able to completely crush the pricing model that the other carriers had and were able to grow the business to just under 400 million subscribers as if their last quarterly update in just a couple of years and they've also tried to expand the suite services that are available on geo. So they launched GeoMeet, which is a pixel for pixel clone of some parts of Zoom. Yeah, yeah, yeah. Wait, let's get to that in a second.

So I just want to clarify, so geo is the mobile arm of Reliance. So that's why it's Reliance Geo. I didn't realize how recently this happened. Geo only launched in 2016. And so it's launched into this market with entrenched players, but it takes off because, I mean, were they essentially just subsidizing this? were they running it as a loss to butt their way into the market because they have, you know, they have the oil money and all that other stuff to lean on?

Yeah, pretty much. Like, it certainly was not a model that would work just independently if you didn't have to raise outside money. They did raise a lot of money. They borrowed a lot of money actually to fund the initial growth of geo. And so now, like, this has been the wedge to do everything. Like, so now, you know, you can buy a geo phone for a couple of, dollars. The data plan is like 26 cents per gigabyte, so it's affordable. And so geo-platforms,

when I talk about on the show, they're investing in geo-platforms, that was established only in October of last year. And the idea is, it's consolidating everything. Like, if you get a geo-phone, you can have all of these geo-apps on it. As you you're describing, there's a Zoom clone, there's a geo-music streaming service, a geo-web browser, geo-messaging app, geo-streaming TV app. And so all of these apps come pre-installed on the phones. Most of them are free. And then that doesn't even get into the tying it into the marketplaces and things like that.

That's right. And the marketplace is probably where their biggest ambitions lie that a communications app, money is usually the most valuable bit of communications that you can transfer. Like if you look at where communications networks develop, typically when there's a new way to communicate with lower latency over longer distance, the first thing it's used for is transactions. Like the first transatlantic cable was used just to transmit the exchange rate between the dollar and the pound rapidly between London and New York.

And currency traders still refer to the dollar-pound exchange rate as the cable. know it's been a century and a half. There are all sorts of low latency record that gets set by high-frequency traders who want to know as quickly as possible what the price of S&P futures in Chicago should be based on the last millisecond of action on the New York Stock Exchange. So, yeah, anytime you have a communications medium, and it works, it's going to get used for financial transactions. And the great thing about mobile is that it is,

It is both the communications medium and an identity service. So typically people will have a mobile device. It's connected to all of their social media, their email, or other identity services. It has a unique number. So you actually have a numerical ID for everyone. And as long as you're not super worried about sim hacking, you can use someone's ability to receive a text on their mobile number to verify their identity. So it basically builds in a lot of what you would need for a mobile payment system. And that's a really good reason to subsidize it, especially if your reliance and you also have

12,000 retail stores. So you can build a mobile payment system that immediately has a footprint of 12,000 retailers who accept it. Presumably, they accept it and give you some kind of cashback for using their payment service once that gets swilling. This is a bit of an aside, but I just learned about this recently, is that geo, well, first of all, I'm getting ahead of myself. So first of all, that brings us up to today where they've basically flung the door open to investors and they've raised $20 billion from just about anyone who's anyone.

And the opportunity that they're offering here is number one. Everyone's wanted to crack the Indian market, be you Amazon, be you Google, be you, whoever. I mean, be you forward. I don't know. But also, it is, I guess the model is, is these super apps, as we've talked about in China and other places in Asia, where basically the entire society can run inside an app, and Geo is essentially cobbling that together?

Yeah, I think that's fair. They are a big enough chunk of the economy that a lot of the things that you would do, a lot of the economic things you would do in India are ultimately going to touch something that Reliance owns anyway. So they may as well actually formalize that by having some kind of everything app. And what is the, one thing that confuse me, and I'm curious to know if you have any thoughts on this, is why does Reliance want everyone as a partner? You know what I mean? Like there doesn't seem to be any strategy.

I mean, there's obvious strategy to it because everyone can contribute something to this sort of utility belt that they're creating, if they're creating a super app and a super platform. But why Facebook and Google? Like, it seems like there could be a too many cooks in the kitchen sort of thing. Do you have any thoughts on that on why they're basically taking all comers right now? Yeah. So there's one theory is the very narrow balance sheet theory where Reliance borrowed a ton of money to actually build this platform. And so they had a lot of debt.

And they said we're going to pay on our debt. And that was a much more plausible thing to say pre-COVID. But they did have this one hot asset that they could sell off chunks of the equity at a very favorable valuation. So one reading is just it's opportunistic. there were investors with cash on hand. There's reliance needs cash to pay down debt. And so they need the middle and sell a stake.

And then there is the other possibility that they're trying to import some of the talent, some of the strategic ideas from these outside investors. And that could have mixed benefits. Like clearly Facebook and Google have done very well in the India market. But it's also, it's an idiosyncratic market. It's a huge, huge country, a lot of different languages spoken, a lot of different norms. Getting payments right in India has been very tough for U.S.-based technology multinationals for a while. So it may be that Reliance actually has a lot of the local knowledge.

So the semi-synical view that is basically they're going back to their roots is Facebook and Google realize that in the long run, owning any kind of communications platform, the way you monetize that is through some kind of payments system and that if Reliance wants to do payments in India and Facebook and Google also want to do mobile payments in India, Reliance probably wins. So if you don't want to compete head-to-head with both Reliance and the Indian government, then probably the best thing to do is cooperate with them. Okay, that's an important point that I want to come back to at the end. But that continues to be my confusion. So clearly we know why Facebook wants in because Facebook wants to basically turn WhatsApp, which is already hugely popular in India, into the Facebook-owned version of

WeChat, right? And own the payments and things like that. But why doesn't Geo just want to do that for itself? Like, I feel like this is what, this is sort of my confusion is why are they giving away, okay, they're clearing out the debt, but I feel like, I feel like, you know, yeah, I don't know. They seem to be this company that wants to do everything. And so why bring all the cooks into the kitchen when you can just cook it up yourself? Yeah, it is somewhat tough to parse their strategy. Like when the Facebook deal was announced, it looked like, and the narrative was, this is the Facebook deal.

Facebook is working with Reliance Geo and together they're probably going to own mobile payments in India. Isn't that wonderful? And then every new deal made it a little bit more complicated. And every new deal also tilts things a little bit more towards they would rather have the cash. And it is something that you could plausibly invest a lot of cash in if you are a sovereign wealth fund or private equity fund. And you're just looking for places to put a large sum of money. And maybe there is some view on their part that it is such a big company. It's doing so many things.

And some parts of the business are just getting destroyed by COVID, probably temporarily. but in some cases there could be some permanent problems. They may be feeling very risk-averse. So they sort of have this, you could think of them as this portfolio of different businesses where they have the huge refining business, they have the retail business, and then they have this telco business that if each of those parts were publicly traded, retail stock would be down, refining stock would be way down, and telco stock would be way up. So in some ways, they're just rebalancing their portfolio.

They're saying, we don't want to have all of our family's dynastic wealth just betting on this one company and making a very levered bet on a tech growth company that we'd rather have things a little bit more even. And the way to do that is to sell some of the winner. Right, because the other one that's obviously obvious to us here in the States is the deal with Google. So Google will help them make Android-based phones, but they've already been doing their own phones. and but then so this gets to the reliance in geo being so close to the Indian government. I was reading pieces that said, you know, it's no, it's no accident that this is happening now at the same time that there's been this sort of nationalistic back and forth between India and

China. And like, so even the thing that I just learned recently was that reliance is saying that they're going to build out a complete full-stack 5G network for India with all Indian technology, all Indian homegrown stuff and everything. And so then you can see down the road, the play is, is like, all right, if everyone doesn't want to do business with Huawei, if their 5G network proves out, then suddenly they're the one global alternative to Huawei to building out telecoms networks. Yeah, some of it is this fairly nationalist digital sovereignty kind of story where you have a limited number of, there are limited number of countries that can produce 5G equipment and basically because Huawei has been so aggressive

and because there's so much uncertainty around who controls them, what their end game is, how many of the security holes were accidental and how many were intentional and how many we haven't found yet. It has turned into this national security issue. And if you are a nationalist politician and you're in a country that actually does have a large tech sector domestically, it does feel like a failure to say, we're not going to totally surrender to China. We're going to totally surrender to the U.S. or we're going to totally surrender to Japan or something like that. Like there is a good nationalist case from a political standpoint for doing it yourself. They have been spinning things a little bit when they say it's home grown. They bought a company when they

were starting to do this a couple about two years ago and it was an Oregon based company that was doing a lot of 5G related research so maybe maybe they bought it and throughout everything that company did and rebuild it from scratch but I think some of the technology that they are using now they did they did acquire elsewhere but it is it is still true that they're trying to build a full stack system they're trying to offer an alternative to to Huawei an alternative to some of the other major 5G players. And it's plausible that they'll be able to do this.

Like if nothing else, they have a really good anchor customer in geo itself. So they actually have the economies of scale necessary to justify this. And then they, the market that they're operating in is protected when it needs to be from competition from other countries. So they, they would potentially be able to capture market share among other, other carriers in India. And then it becomes a question of a price. There's India, I don't think a lot of, I think a lot of people are suspicious of U.S.-based companies, like outside of the U.S. you can be suspicious of U.S.-based companies as potentially an indirect arm of American foreign policy. You can

certainly feel that way about hardware companies in China. But with India, it just doesn't feel like there are a lot of, a lot of reasons to be really worried about this incredible ambition to control other countries far away, whereas the U.S. has definitely had that, and had that for so long that Americans are sort of blind to the extent to which the U.S. very deliberately tries to call the shots globally, and China has that in a much more visible way. So India is, it's kind of, it is nationalist, but it's actually the most neutral of the nationalist options you can choose. Yeah, going back to the 50s, but when they straddled the fence in the Cold War. So to bring it back and put it in a bow, the other reason, I mean,

the obvious reason that everyone wants to invest is, you know, a market of a billion people, of which 600 million of them still don't have smartphones or access to the internet. But famously, India has been this hard market to crack. People have been like, well, you know, after China comes India for more than a decade now. And no one in the West has really been able to be super successful. It's not like it's been all. failure. But essentially what geo and reliance offers all these partners is a concierge that gets around all of that stuff that has this close relationship with the Indian government that can spare them from bureaucracy and red tape and all that good stuff. Yeah, that's exactly right. And that's,

that's a model that has worked in other countries. And like, I think in a lot of cases, if you're, if you're in the U.S. and you're talking about a country, or you're talking about a company where they may pay prize, we don't know, they have this really tight relationship with the government. Sometimes their competitors all mysteriously have to pay giant fines and no one really knows why or their international competitors get kicked up the country and no one has a great explanation for why that is other than reliance wanted to be so. So it's really easy to say that this is just totally damaging and pathological. But I go back to this quote from Samuel Huntington, who's writing about corruption, and he had

this line, I'll paraphrase, which is the only thing worse than a corrupt and incompetent government is an incompetent government that is scrupulously honest because the corrupt government, they'll have bad rules and then you find a way to rape those rules. And as the country gets richer, it gets more state capacity and is actually able to write better rules. And that has been a factor in India for a long time. There's one of the hypotheses is that because India has a lot of English speakers that a lot of the Indian elite is educated in in Western countries. And so a lot of, a lot of India's norms around regulation come from fairly rich countries that actually have the budget to enforce them. So a lot of Indian regulation, it's, it's a good idea in theory. It's a good

idea for a country with a rich country's GDP per capita, but it's just not something you can implement if your GDP per capita is $2,000 a year. And a lot of people just are not directly connected to the government. That said, India has actually done some really impressive work on things like having a national ID system. So they're actually, in some cases, able to show a lot of state capacity. So we might be reaching this point where reliance is able to raise a ton of money. It's able to exert a lot of influence. But we're getting to peak reliance where you don't have to rely on these really sharp private sector arbitrageurs to find ways around rules, that the rules are actually slowly converging on reality.

But even then, I mean, the overarching thing is still there's 600 million people. There's an entire North America and Europe that still haven't gotten on the internet yet. So, I mean, if nothing else, that's an amazing opportunity that no one can pass up either. Byrne, the diff is your newsletter that is one of my favorite newsletters. Tell people about that. Sure. The diff, diff, d-I-F-F dot substack.com. It's a newsletter on inflections and finance and technology.

So I'll write about anything from digging into prospectuses when tech companies go public, talking about deals like Microsoft and the TikTok negotiations, to talking about things like why are Mexican, Why are remittances to Mexico rising despite a serious recession or what is the theory behind a reserve currency? How is the investment business changing as investors get access to more data, but their fees get lower? It's pretty broad-based.

It's really looking at anything that is changing fundamentally and really the two parts of the economy that change the fastest are technology. It changes the fastest because it does. something goes from totally impossible to ubiquitous and it changes everything. And finance changes really fast just because everything always gets pushed to whatever its reasonable limit is. So if you find a trade that works, you borrow money and do that trade in larger and larger size and so does everyone else. And then there's too much borrowed money. Something goes wrong and that whole trade collapses quite viciously. So finance is also

full of these rapid inflection points. And that's what I'm interested in. Interested in the ways that the world changes not on some really linear, straightforward path, but where the chart has these crazy whooshes in it. Well, listen, I have to subscribe to a million newsletters for my job, and I'm not exaggerating. Yours happens to be one that just, for whatever reason, bubbles up above the scrum every week for me. So thank you, Byrne, for coming on.

Again, the newsletter is the diff on substack. And thank you, sir. Thank you.