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Facebook Prepares for Post-Pandemic World with 10% Stake in India's Jio

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While Wall Street analysts were lowering their estimates on Facebook (FB - Free Report) because of an uncertain outlook for advertising in the foreseeable future, the company was finalizing a deal for a 10% stake in India’s Reliance Jio.

The deal is extremely significant because it could place Facebook front and center of the Indian ecommerce revolution that is still in its early stages. Moreover, it can do so in a way that the government approves.

"The synergy between Jio and Facebook will help realize Prime Minister Shri Narendra Modi’s ‘Digital India’ Mission with its two ambitious goals — 'Ease of Living’ and ‘Ease of Doing Business’ – for every single category of Indian people without exception. In the post-Corona era, I am confident of India’s economic recovery and resurgence in the shortest period of time. The partnership will surely make an important contribution to this transformation,” Reliance owner Mukesh Ambani said in a statement.

Unlike the Amazon (AMZN - Free Report) and Walmart (WMT - Free Report) -controlled Flipkart models that centralize ecommerce operations, the government wanted to champion a network of small entrepreneurs (mom-n-pop outfits) that could keep retail operations localized as well as convenient for users. Jio is the company that sank billions of dollars into building a telecom network that today connects 370 million+ subscribers. That’s huge considering that the company launched in December 2015 (it added 90 million subscribers just last year). But the rapid expansion has come at the cost of aggressively undercutting existing players on price.

This meant that Jio amassed huge debt that the company has promised investors it will bring down to zero by March 2021. That set the stage for Facebook (and several others when those deals materialize).

While details of the deal weren’t available from media reports that announced it, it’s clear that Facebook’s WhatsApp platform will facilitate payments for local shop owners selling their wares on Jio’s ecommerce platform called JioMart. So they’ll likely get to register their stores on JioMart, where they’ll keep their logos, brands, customers, promos etc, just as they would in their physical stores. WhatsApp Payments would play a role by facilitating payments for small sellers. Moreover, the deal also helps both players tap into each other’s user bases, potentially expanding them.

Amazon has run into trouble with local sellers of late who allege that the ecommerce giant is squeezing them out of business with its deep discounts. There are also claims of other irregularities (exploitation of legal loopholes) by Amazon. To pacify regulators and sellers, Amazon sought to rope in small sellers for last-mile delivery, which has not really gone down as desired.

The market is certainly big enough for all these players with their different approaches and needs because you won’t find everything you need at the shop around the corner. And if you do, they may have a supply chain that includes Amazon/Flipkart/Snapdeal.

For Jio, the deal is really about debt reduction (and subscriber addition), while strengthening its position versus Amazon and Flipkart because the company has a payments platform as well.

Facebook’s vice president and managing director of Indian operations, Ajit Mohan has clarified that “the intent is not to build another app, the intent is really for the two companies to collaborate.” The company’s largest user base is in India.

 

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Facebook shares carry a Zacks Rank #3 (Hold). Stocks with better potential in the segment are 21Vianet (VNET - Free Report) or Sprout Social (SPT - Free Report) , both of which have a Zacks Rank #1 (Strong Buy). Akamai, Baidu and Etsy, with their Zacks Rank #2 (Buy) ratings are also worth considering.

 

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