The Reliance Move

Thursday, May 17, 2007

I have always admired the Reliance Clan for their business acumen and for their ability to read the pulse of the Indian buyer while bringing the latest to them.

India is being modernized and there is a free-flow of money these days in urban India. But a closer look will point to the fact that the technology boom has played into the hands of a select few. This has definitely furthered the rift between the rural section of India (which is over 80% of the population) and the urban few. The suave floating population that has exploded in the metros no doubt hold a potential for high-end technology, but if one can bring these marvels at low-cost to the average and below-average Indian buyer, then the volume would be enough to offset the low margin. And that is precisely what Reliance had in mind when it launched the Ultra-low cost handsets under its own-brand "Classic". Widely believed to be from China, these handsets available under Rs 1000.00 (around $20) are a steal. Additionally and more importantly, the goal is to change the Indian mindset that cellular phones are a luxury. If this hits it big, they will have enough phones to populate their networks and the revenue flow from their infrastructure would be much higher that what it is now.

Like most of their ventures, this move has so far yielded more than what they can have imagined. A million hand-sets in a week. One may wonder that at this rate, Reliance will have a capacity issue very soon. But here is the catch. Indian users, especially the section of the population that is likely to have bought the phones would use the mobile scantily and for emergency purposes alone mostly. They are unlikely to spend hours on their cellphones like their urban counterparts. It is also likely to be a status symbol out there. So, it appears to be a calculated gamble from Reliance. Their hope is that they would have a lot of dormant users who are likely to buy the phone and a sim-card that would last them, say, three months. This would mostly translate to around 100-300 minutes of airtime. So, they are unlikely to run into capacity issues immediately. They would be making more optimal use of their infrastructure. In my mind, if they can pull this off, this is a master-stroke and should open the gates to what was always thought of about India and mobile phones: a big untapped market potential.

A puzzling thing however is the phone economics for Reliance. Do they have a margin at all on the phones or is it merely to get the population hooked to the cellphone culture thereby gettin returns on their investment in the infrastructure? It seems to be the latter. After dsicounting the 5% or so of royalty money to QualComm, Reliance has to build a phone under Rs 800 even to break even. And this has to include the RF chain,the protocol stack, base-band chip(which I presume would be nothing very great thereby eating into their capacity) and of course the address-book and other user features that come with it. This seems to be a hard target to pull off but if they squeeze out a Rs100 margin and sell 10 million phones, that is some attractive profit.

As an aside, of course, QualComm stands to gain as well with this move. Apart from the millions in royalty, this move is likely to help penetrate CDMA in the GSM dominated Indian mobile market.

Let us now wait and watch Reliance's bigger plans unfold. The commodatization of a perceived luxury is yet another step towards developing the bulk of India.

Posted by Vijay Nagarajan at 4:31 PM  


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