Indian operators handset bundling initiatives

Transcription

1 Viewpoint Indian operators handset bundling initiatives Sourabh Kaushal April 2011

2 Summary: Indian operators' handset bundling initiatives 2 In 2010, out of a total monthly sales of about 15 million handsets in India, 20% were sold through operator bundling. While CDMA operators were bundling since launch of their services, handset bundling among GSM operators gained momentum in India in 2007 primarily to acquire customers in the low-end user segment For most of the bundled handsets, operators generally charge the full price of the handset upfront, with no or minimal subsidy. However, they bundle few free services along with the handset Handset bundling initiatives by operators vary by device average selling price (ASP) segments Initially operators were aggressively bundling handsets in the low-end segment to drive customer acquisition. But with change in strategy of operators to revenue enhancement from customer acquisition, bundling in the low-end segment has been reducing In the mid-level device segment, operators have been primarily pushing their services through reverse bundling in partnership with handset OEMs In the high-end segment, the focus so far has been offering end-to-end services to enterprise & high-end user segments through bundled handsets With the launch of 3G services and mobile number portability (MNP) in India, and the shift in focus of operators from customer acquisition to revenue enhancement through data services, handset bundling is likely to gain traction, primarily in the mid and high-end user segment Few initiatives are being taken by operators to offer subsidized devices (such as MTS offering HTC Pulse in a bundled scheme). However, such offers are only profitable when operators remain successful in retaining the customers for a long period However, certain challenges such as accounting of handset sales revenue in adjusted gross revenue that attracts license fee, operator sales force and distributors / retailers not equipped to sell devices and no strong legal recourse in case of default, need to be addressed to drive handset bundling on a large scale

3 In 2010, out of a total monthly sales of about 15 million handsets in India, 20% were sold through operator bundling 3 Figure 1: Handset sales in India (March 2010) [Source: Analysys Mason, Industry Inputs] Monthly handset sales in India (15 million) 1 Operator bundled 1 (3 million) Retail sales (12 million) GSM (0.2 million) CDMA (2.8 million) Reverse bundling 2 (1.5 million) Direct (10.5 million) Out of the total monthly sales of handsets in India, 20% are sold through operator bundling and 10% through reverse bundling in partnership with handset OEMs. CDMA service providers such as Reliance Communications and Tata Indicom dominated the market in operator bundling segment For most of the bundled handsets, operators generally charge the full price of the handset upfront, with no or minimal subsidy. However, they bundle few free services along with the handset Note 1. Operator bundling means handsets sold along with the mobile connection through operator channel 2. Reverse bundling is handset vendor partnering with operator to sell handsets leveraging the latter s distribution network

4 Handset bundling initiatives by operators vary by device average selling price segments 4 Figure 2: Handset bundling initiatives across various end-user segments [Source: Analysys Mason] Low-end devices (price range less than USD50) The trend of handset bundling was initially started by CDMA operators due to technology constraints However, in order to acquire customers in the low-end user segment, GSM operators also started focusing on handset bundling, as it helps in reducing total cost of ownership (the biggest barrier for low-end users to access mobile services) Handset bundling across various end-user segments Mid-level devices (price range between USD50 to USD150) In the mid-level device segment, only few initiatives are being undertaken by operators with respect to handset bundling Instead, operators have been primarily focusing on reverse bundling, in partnership with handset OEMs to drive adoption of its services High-end devices (Price range more than USD150) In this segment, the operator focus so far has been bundling very high-end devices such as BlackBerry and iphone, targeted towards enterprise and high income individual users The strategy behind high-end handset bundling was to offer end-to-end services to increase stickiness and enhance revenue through bundled services

5 Handset Sales (million) Indian operators' handset bundling initiatives Bundling offers for the low-end segment are in decline now that operators are focusing on revenue enhancement 5 Figure 3: Handset sales by Vodafone after launch of Magic Box in 3Q 2007 (million) [Source: Analysys Mason, Industry Inputs, TRAI, News Articles] E Vodafone launched low-cost bundled handsets in 2007 to get a bigger pie of the rural Indian market. It launched Magic box along with a connection available at INR1199 (USD30) and INR1599 (USD40) In order to make the package attractive, it also offers added benefits such as free talk-time and cheap tariff plan along with the handset 2 1 Though CDMA operators have been bundling their services with handsets since inception, GSM operators such as Vodafone and Airtel started bundling only in 2007 primarily to drive customer acquisition in low-end users category Rural subscriber base has increased from 33.1 million by March 2007 to million by March 2011, a CAGR of 70% The concept was a success initially, however, handset bundling in the low-cost device segment has reduced due to shift in focus of operators from customer acquisition to revenue enhancement Low-end devices In addition, local vendors such as Micromax and Karbonn are selling basic phones with more features at price levels of handsets offered by operators CDMA operators are also now pushing towards open market handsets 1

6 6 In the mid-level segment, operators are pushing their services through reverse bundling in partnership with handset OEMs Table 1: Reverse bundling partnerships among operators and handset OEMs [Source: Analysys Mason, News Articles] Operator Airtel Handset OEMs Nokia Description In Oct 2010, Nokia launched its dual SIM phone Nokia C1 with an exclusive Double Talk Time offer from Airtel along with free Airtel SIM and 200 local and STD SMSs per day free for first 60 days of subscription Mid-level devices Currently, there are only few bundled mid level handset models that are being offered by GSM operators. In this segment, the primary focus is to drive service adoption through reverse bundling For bundling of its SIM along with handsets, operators generally pay INR25 (USD0.6) per activated SIM to the handset OEMs In addition, local vendors such as Micromax have been pushing for reverse bundling to increase sales of its devices 2 RCOM Idea BSNL Aircel MTS Micromax Sold 1% of its handsets through reverse bundling in FY 2010 Adopted a joint go to market approach which had benefits for Micromax as well as operators Olive Telecom has 15% of its handsets bundled with operators and plan to increase it to 50% With the launch of 3G services, it is expected that operators will start focusing on this segment through aggressive handset bundling initiatives to drive data service revenue as well as reduce churn

7 In the high-end segment, operators are offering end-to-end services to enterprise and high-end user segments 7 Table 2: High-end handset bundling by key India operators [Source: Analysys Mason, News Articles, Industry Inputs] Operator Airtel Vodafone Tata Docomo RCOM Handset OEM (NO. of devices) BlackBerry (5) iphone (4) Windows Mobile 6.5 (1) BlackBerry (5) iphone (3) BlackBerry (2) BlackBerry (4 CDMA + 3 GSM) Description Most of the devices sold through operator channel are network locked Operators prepare customised tariff plans based on the needs of enterprises to drive device sales 3 High-end devices Through high-end handset bundling, operators are primarily targeting enterprises and high ARPU individual subscribers to offer end-to-end bundled services Currently, operators are only offering limited highend bundled handset models In addition, to attract the high end user segment, operators tie-up with smartphone companies to sell bundled handsets Airtel and Vodafone sell bundled iphones at their stores Recently, Aircel entered into a partnership with Olive Telecom to sell its first Indian HSPA+ Android Gingerbread Smartphone called OliveSmart The main objectives behind bundling high-end devices are to drive data revenues as well as increase subscriber stickiness, especially with the launch of MNP

8 Following the launch of 3G services, operators have started taking initiatives to bundle devices to drive data usage 8 Figure 4: 3G device bundling initiatives by key Indian operators [Source: Analysys Mason] Airtel 3G Airtel is partnering with a few mobile handset manufacturers to offer sub USD100 bundled 3G handset Through this initiative, the company is planning to target the mid level subscribers aggressively to drive adoption of its 3G services Vodafone plans to sell bundled 3G handsets of its own make, as well as Nokia and Samsung handsets with price starting from INR3500 (USD78) Besides bundled handsets, Vodafone also plans to sell a MiFi device for sharing the 3G connection Vodafone 3G MTNL 3G MTNL has partnered with Micromax and Nokia to offer 3G handsets at cheaper rates to its customers In Feb 2010, Micromax and MTNL launched the new Micromax H360, the first operator branded 3G HSPA handset in India

9 Indian operators are launching bundled, subsidised devices to acquire mid- and high-end subscribers 9 Table 3: MTS HTC pulse bundling: per subscriber economics for an average usage (USD) [Source: Analysys Mason, Industry Inputs] Annual revenue Device cost Usage costs Description Total revenue from monthly installments HTC Pulse (20% discount on market price) Voice + Data + SMS Voice Average usage of 600 minutes per month Data SMS Average usage of 500 MB per month Average usage of 300 SMS per month Value (USD) Total cost Device + Usage cost 395 EBITDA Revenue Total Cost 5 EBITDA margin % of Revenue 1% Recently, MTS tied-up with HTC to provide a high-end Android smartphone called HTC Pulse under a subsidized scheme primarily to acquire mid and high end subscribers Under terms of agreement, subscriber only needs to pay INR1500 (USD34) for a period of 12 months. Other added benefits include free 1500 minutes of talk-time, free 1500 SMS, and free 1500 MB data usage every month within India However, such offers are only profitable when operators remain successful in retaining the customers for a long period The EBITDA margin for MTS-HTC tie-up is likely to be around 1% for the first year With 3G operators are now looking for ways to drive revenue through increased usage of data services, handset bundling is expected to play a key role in facilitating adoption of data services, especially in the mid user segment

10 10 But there are certain challenges that need to be addressed to successfully drive device/service bundling on a large scale Figure 5: Key challenges in device bundling by Indian operators [Source: Analysys Mason, Industry Inputs] Accounting of handset revenue as part of AGR As per the current regulations, revenue from handset sales is included in the adjusted gross revenue (AGR) of operators which attract license fee of 6% to 8% depending on the circle category This discourages operators to directly bundle handset to avoid license fee on sale of such bundled handsets Operator sales force not equipped to sell devices Most of the operator sales force and distributions / retailers are not equipped for selling handsets Operators will also have to invest in training of its sales force as well as distributions / retailers No strong legal recourse There is no strong legal framework in place for handsets sold through subsidized schemes or EMI options in case of a default This leads to frequent defaulting by subscribers who either fail to pay monthly installments or procure handset on the basis of false documents, thereby resulting in losses for operators