Wireless Industry Analyst

• the CDMA infrastructure was already rolled out in a lot of places
• dual access to GSM and CDMA was unprecedented in India

Nokia (NOK) announced recently that India has surpassed U.S. as its second largest market next to China. This is largely due to its unique manufacturing plant set-up in Chennai. The investment, much against the common thinking (India is not for manufacturing), seems to have paid off with 50% of those phones (60 million in the last 18 months) being consumed internally.

Another staggering piece of statistics is that 46% of an estimated 118 million Indian mobile subscribers use Nokia phones. To cap it, the Telecom Regulatory Authority of India (TRAI) has annouced 7.3 million additional mobile subscribers in June alone. So, if Nokia can sustain this market share, which they hope to based on their infrastructure investment and their long-standing brand-name in India, it will be a happy story to the coffers.

On the other hand, I do want to signal some caution -
. The demographic of Indian mobile subscribers is slowly morphing. When the mobile revolution started, it was either the executive or the jazzy college-going kid. Later, it was in the hands of every other college kid, meaning that the middle-class Indian was coming around to the fact that the mobile is after all not a spoiling influence on the kid but more a utility. Now, more and more people are realizing this. Moreover, the introduction and popularization of the ultra-low cost phones has gotten more of the working class and the rural India, traditionally conservative and very utilitarian spenders, to start using mobile phones. This trend is likely to continue. My take is that while there will always be a market for the higher-segment phones, the ultra-low cost phone market will play a key role and that section of the paying public is likely to dominate the mobile subscribers in the near future.
. On the higher-end, the paying customer wants the latest. India is no longer two or three years behind in technology. People want and get the latest and are willing to pay up.

These two factors will be important in defining the future of Nokia or any company for that matter in India. Any company that wishes to break into this market will have to strike a nice balance. All it takes is a RAZR or iPhone type technology-hype to tilt the market balance. Nokia may be up to this challenge given that they have set-up local design centers to read the pulse of Indians and give them the phones they need. But the Finnish company better be on their toes or they could be left high and dry.

On the other hand, the growing ultra-low segment typically operates on low margins. I am not sure how Nokia wishes to address this segment considering that Indian manufacturing plants may not be able to compete with their Chinese counter-parts. The 'Classic' from Reliance is a classic example of cheap and good-looking phones.

Thus with pressure from even carriers such as Reliance, Nokia has its task cut out here and faces an uphill battle to sustain the market share. It may however be helped by its well-built brand image and its pioneer status.

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.

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.

In the prelude to this article, we talked about the players in the industry. This then should give us a good idea of how the industry works. Or would it?

One would imagine that the service provider should be the key mover and shaker in the industry, of course keeping in mind that they are "serving" you and me. This suggests that both the chip and the platform vendors pretty much dance to their tunes. But let us dissect the situation a little further to get a better insight.

The service provider in a lot of markets is the closest to the end user. For example, in the US, Sprint or Verizon pretty much provide a selection of mobile phones to choose from, they offer the service packs and more often than not, the only people you have to interact with for most of your mobile needs are the customer service representatives in the stores or over phone. Other markets like India are dominated by service providers that allow the customer to purchase his choice of phone from a third party vendor as long as it is compatible with the spectrum and the standard.

The first model gives us some insight into the power wielded by the service providers.They have a certain degree of control over the chip and the phone vendors. They can demand that phones have capacity-enhancing features and other "cool stuff". They can also potentially auction for phones they would feature. This can get cut-throat with phone vendors trying to eke the best value for their phone while trying to capture market. But the headaches include constant customer nags about poor service. As was mentioned in an earlier article, it is unlikely in this scenario that the phone would be blamed for poor reception. To a certain extent, this is a fair expectation from the customer because the service provider has to be diligent in choosing its phones. It has to necessarily strike a balance between reasonable performance in terms of not being a burden on capacity, add-on features like cameras and mp3 players, sleek looks and of course low cost. Now, this is too much to ask for and something has clearly got to give. A low cost phone is clunky while a sleek feature-filled phone has poor reception quality.

The service providers also have to give in to the demands of both chip and phone manufacturers. Since their reputation is at stake, they have to go for reasonably well performing chips. Besides, they need to make sure that they have continuous technical support for the phone. So the ball is not always the Service Provider's to score. At least it is not a slamdunk.

On the other hand, there have been instances of them leveraging their power to obtain sweet deals from chip and equipment manufacturers. There are instances when minnows in the industry were used as pawns to obtain cheaper chipsets from the giants. And then there is the case of Reliance Communications, India threatening to roll out a GSM network throwing away its CDMA infrastructure. This got QualComm on its toes and Paul Jacobs to India! Of course, it appears that Sprint is playing the trick again. It was committed to using some extra spectrum it had in Dallas. It has signed up to use this resource towards rolling a fully functional WiMax network. I am inclined to look at it more as a veiled threat to QualComm than their commitment to the success of WiMax and their move away from 3GPP2. Careful analysis of the situation would reveal that Sprint has nothing much to lose while a bunch of vendors have invested a lot of resource into this effort. At the end, Sprint is likely to be contended if QualComm comes out with competitive EV-DO chipsets for the data market. It may be a ray of hope for the WiMax proponents to demonstrate its capabilities, but is not a defining win over CDMA.

Thus the service providers do control the industry to a large extent. But then they are not all powerful. After all, the service providers are not the true engineers of the wireless industry, they are merely facilitators for the technology to reach the paying public. So they have to successfully co-exist with vendors to maintain the balance of power.

In the sequel, we will examine further, this interplay with the vendors. Until then...