Operators and the hand-set market

Wednesday, May 30, 2007

ABI research Mobile wireless industry analyst, Mr.Shailendra Pandey had a very interesting article on the operators eyeing the handset market seriously. The article can be found at the following URL though you have to register with the ABI web-site to have complete access to it.

http://www.abiresearch.com/products/insight/Handset_Vendors_to_Face_Increasing_Competition_from_Mobile_Operators

The author highlights the most important point I have been making about the wireless market. IT IS A RACE FOR CONTROL. I would, on the other hand, cautiously disagree with Mr.Pandey about the operators trying to poach into the handset market.

There are a few valid outward signs that may have led to that conclusion. A deeper look however suggests a long way to go before the operators can achieve their objective, if that's their intent. Firstly, I see the Reliance move as an isolated case. As I mentioned in my previous article, Reliance is good in identifying the pulse of the average Indian and this is yet another example. For Reliance, it is more an exercise to populate their network (though the phones are sim-card based). They have extablished a good network and as mentioned in Mr.Pandey's article, an unparalleled brand-name with the Indian consumer. Selling their phones would immediately start providing them returns on their infra-structure investment. The hand-set market is more a by-product of the move than the main intent itself.

Of course, it is definitely a cause of worry for Nokia or Motorola. They have failed to capitalize on their brand-names by exploiting the ultra-low cost phone market in India. On the other hand, with the paltry margins per phone in this segment, they may not have much to gain anyways even if they ship volumes of phones to these markets. That has again played well into Reliance's hands. Their margin does not only come from the phones but on the service provided as well. Let us attempt some crude mathematics. If 5 million handsets are sold at Rs100 profit and if 50% of these buyers opted for Reliance service at an average talktime for Rs.100 per month. This would cost Rs.250 for the user. Let us say that Reliance makes Rs.100 as profit per handset after accounting for maintenance and administration expenses. This, then amounts to an annual revenue of Rs.6000 million(around $150 million). Compare this to the profit they may be making out of selling handsets, say around Rs.100 that would give Rs.500 million. So even if the churn is once in 3 years, It is still an extra 3-4% extra revenue annually. Reliance would definitely welcome this but it is immediately apparent where their real sights are on. Infact, I am postulating that they would now be happy if Nokia, Motorola or anybody else also enters the ultra-low cost handset market in India. They would have succeeded in their ultimate objective: Lower the cost of the handset to make it accessible to the bulk of India thereby increasing subscription to their services. Their coffers would then over-flow even further.

As far as Vodafone goes, they would definitely like to assert themselves as the end-provider to the paying customer. But we should remind ourselves that they share an excellent rapport with the handset vendors like Motorola. Besides, as I have mentioned earlier, if they really plan to impact the handset market, they should insert themselves more actively into the standardization and even the R&D efforts. Though they have certain desirables, they are not all too assertive at the standard body meetings to impact the evolution of the standard and also the equipment specifications. With lack of expertise in handset manufacturing, one is left to think how good their phones will be performing when compared to all the original players. So even in their case, it appears to be more of posturing to pressurize the handset vendors. They perhaps have the luxury of capacity available to play the game. They have an expansive GSM/WCDMA network built out to have a relatively fewer poor-performance phones out there.

NTT Docomo of course, has traditionally been a different player exercising complete control in its space and is more of an exception currently. It would be difficult for other operators to get to that status.

As a wireless insider, I would like to see the prices of phones go down while performing better and better. Of course, added to this is the availability of multiple features. If we can get this along with cheap service, then the world will shrink even further. It is going to take time to get there, especially with the wierd industry dynamics. Also, with respect to the main premise of this article, I would personally like to see more trends especially from the U.S. and European operators to see a semblance of them taking control of the handset market. Mr.Pandey's insights are very valuable but I would not like to generalize a few isolated trends.

Posted by Vijay Nagarajan at 2:13 PM  

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