Facebook Inc. will invest $5.7 billion to pick up 9.99% stake in the digital business of RelianceIndustries Ltd. The investment from Facebook values the Jio Platform close to $60 billion. Whatsynergies the combined business will generate that propelled Facebook to pay this hefty amount?  

Connected Ecosystem of the Combined Business 

Jio Platform is the digital services entity that houses Reliance's telecoms arm Jio Infocomm, as wellas its news, movie and music apps, along with other businesses. The platform was launched to bringIndia’s No. 1 connectivity platform, leading digital app ecosystem, and the world’s best techcapabilities to create a digital society for each Indian.

The platform was growing through mergersand acquisition such as Saavn’s merger with Jio Music in 2018 and Haptick acquisition in 2019.  TheJio Platform includes leading digital apps, digital ecosystem and India’s No. 1 high speed connectivityplatform under one umbrella.  

With more than 300 million Facebook users and 400 million WhatsApp users in the country, India ishome to Facebook‘s largest user base on the planet. In 2017, it launched a commercial Wi-Fiprogram called Express Wifi, which allows mom-and-pop stores to provide internet access toshoppers via hotspots at a nominal rate. It currently has 500 local retailers signed up, and more than10,000 hotspots across India. In 2019, it has also invested in Indian startup Meesho, an e-commercecompany that leverages social media to connect customers with resellers. 

The focus of the deal is to come up with digital-based solutions for 60 million micro, small andmedium businesses, 120 million farmers, 30 million small merchants and millions of small andmedium enterprises in the informal sector. Given the reach and scale of the digital ecosystem,Facebook has invested in the platform to create and unlock meaningful value through NetworkSynergy. The deal will unlock a huge network effect with the combined power of Facebook and Jio’ssubscribers across plays in commerce and payments. On one hand, it gives Facebook a wideraudience with Jio’s 388 million client, on the other hand it helps Reliance Jio leverage the reach ofWhatsapp, Facebook Chat’s service.

Facebook can help Jio move to the next level as they have theexpertise, technology and global talent. The two companies could leverage each other’s strengths to build a Connected Ecosystemcomprising of digital payments, telecom and offline and online commerce. 

What is Network Effect?

Network effects are the incremental benefit gained by an existing user for each new user thatjoins the network. There are two types of network effects: direct and indirect network effects.

 Direct network effects are also known as same-side effects. The value of a service simply goes upas the number of users goes up. If we take the example of telephone, it is only useful if thepeople that we need to reach also have telephones. The more people there are who havephones, the more useful it is to have one yourself.

Indirect network effect, also known as cross-side effects. With indirect network effects, the valueof the service increases for one user group when a new user of a different user group joins thenetwork. Two or more user groups are needed to achieve indirect network effects.  Platformsbusiness have two or more user groups exchanging value with one another. In most platforms,there are two users groups: producers and consumers. The more consumers on the network, themore valuable that network is to producers, and vice versa. Taking e-commerce as an example,as more buyers (i.e. consumers) join the platform, the more useful and valuable it is to sellers(i.e. producers), because they have more business opportunities. The reverse is also true.

Network Synergy for the Connected Ecosystem 

The deal will jointly create an ecosystem that take advantage of Facebook's high daily active usersand engaged customer base and Jio's platform assets. For Facebook, this deal presents anopportunity to leverage the partner’s significant reach in India and explore the next-billion-userlandscape. It also means the social media giant has a better partner in India’s complex policy lobby,where Reliance has a strong hand. For Reliance Jio, the business will not be dependent solely on howsuccessful the next generation is, as it will continue to grow with the strategic partner. A partnerwith the ability to build capable and desirable technologies, like Facebook, could certainly help turnthe tide for the enterprising carrier. 

The various driver of the network synergies are:

1. Phygital (Physical + Digital) Commerce Strategy

At its core, the deal will create an ecosystem by combining both offline and online retail. WhatsApp will empower nearly 30 million small Indian kirana (grocery) shops to digitally transact with everycustomer in their neighborhood through JioMart, the e-commerce venture of Reliance's retail arm,which will offer customers free express grocery deliveries from neighborhood mum-and-pop stores.Facebook, through its investment in Meesho, is already evaluating the SME space for e-commerce inIndia. Shopping in India could transform into a giant, end-to-end network of services with buyersconnecting with retailers and placing orders through WhatsApp. The company can also create an ‘ecommerce monopoly’ and upturne commerce ecosystem.

2. 360 Degree Data Monetizing

Facebook constellation is sitting on a huge pile of data which they weren’t able to monetize. Thevast quantities of data generated by users of online services can now be processed into valuableinformation for commercial and strategic gains by leveraging Jio Mart’s reach. In reverse data sharing, WhatsApp, through its commercial agreement with JioMart, could end upproviding deeper and richer data to Facebook which will provide more intense and localized insightinto the consumption patterns of Indian customers. This new perspective on Indian consumers willadd to Facebook’s already formidable advertising revenue stream.

3. Digital Payment Reach

WhatsApp could leverage Jio’s Payments Bank as a sponsor bank to power its UPI-based payments.The deal will open up Whatsapp’s entire user base for Reliance Jio, including the customers on rivaltelecom partners. 
Jio’s plan to pull all Kirana stores and combine it with payments mechanism will be an amazingpartnership on the payment side. Between Whatsapp, Instagram and Facebook, all the commercecan be done through Whatsapp Pay. Having a local partner could help Whatsapp Pay in navigatingvarious regulatory issues, including those related to privacy and local storage.

The power of content, commerce, and community supported by the mobile network can beunleashed for these services at scale, making the impact widespread from e-commerce to telecomto mobile payments and potentially even healthcare and education. Through this deal, JioMart couldbecome a one stop shop for e-commerce, social media consumption, instant messaging and digitalpayments. The network effect also helps in creating an ecosystem that disincentives users fromleaving.

Financial Returns of the Network Effects (Synergies)  

The joint value created by a platform stems from its group based advantages. These advantagesdepends on the platform’s effectiveness in competing with rival platforms. Just as a firm’s competitive advantages are shaped by the strategy and resources of the firm, so itgoes with platform based advantages. When the platform yields synergy, each member can bethought of as adding something to the network based advantages. As a platform scales, its costs per unit sold decreases logarithmically in comparison to linearbusiness. A platform grows not by buying more assets, but by acquiring more users, which has anear-zero cost.  This costs the platform next to nothing.

Platforms boast higher profit margins and higher price-to-revenue multiples. Perhaps this explains some of the high valuations we see in platform businesses today including the recent Facebook –Reliance Jio deal.