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August - 2008 - issue > Cover Feature
Why iPhone 3G will be a Dud in India?
Jayakishore Bayadi
Thursday, November 13, 2008
When Apple CEO Steve Jobs took the wraps off the latest iPhone 3G recently, a dream was born in every gadget savvy chap to own one. This time it was not only in the U.S. but also across the globe. This is the first time a touch screen phone mania took the world by storm. The voguish Apple gizmo, which packs a phone, audio and video player, a 2 mega pixel camera, faster Internet capabilities, and intelligent touch screen operation onto a single device in an "Apple way", is now available in the U.S for just $199 for 8GB, at half the $399 price of its predecessor; and at $299 for the 16GB version, down from $499.

In fact, this is the key reason for such a hype and hoopla around a gizmo that has been ever created in the electronics gadgets arena. Leave the Apple crazy U.S., even in the Asian countries, where only unauthorized, "Unlocked" iPhones ruled till date, the Apple fever has touched its high as thousands of excited and sleep deprived geeks besieged the Apple stores across the continent. This time the latest iPhone 3G is available in more than 70 countries including India, where the gizmo will be launched in the fall of 2008.

Bharti Airtel and Vodafone announced a tie-up with Apple last month to bring the iPhone 3G to India. The companies have already started pre-registering customers for the iPhone 3G, and since then, offices and blogs have been abuzz with discussions on what Apple’s much awaited iPhone 3G will cost and whether it will be a hit in India.

But sadly, Apple fans who dreamt of singing romantic tunes with their Apple thingamabob feel ditched as their dreams are virtually shattered as the new Apple iPhone is going to be a costliest affair in India than any other countries where the iPhone is being sold. Industry pundits anticipate that the two versions will cost any where between Rs. 20,000 and 35,000 in India. As a reverberating effect, Apple will also receive its round of jolt when iPhone 3G will turn as a dud in India, not only for cost reasons, but also for business complexities it involves, when it releases iPhone 3G here.

The U.S. model Vs. Indian Scenario

Many thought it would be just a shade over Rs 8,000 - the rupee equivalent of the price in the U.S., which is $199 for the 8GB version. But they never thought how the iPhone 3G is sold in the U.S. for such a stumpy price. This lower price for the 3G iPhone is driven largely by the change in Apple’s iPhone business model. As part of a revised agreement, service providers will no longer be sharing recurring revenues with Apple. Instead, they will subsidize the purchase price of the phone and service providers will earn this subsidized portion of amount by implementing higher monthly charges. Under the new arrangement, AT&T, the service provider for Apple iPhone in the U.S., for example, would offer the 3G iPhone at a retail price of $199 for the 8 GB model and $299 for the 16 GB model. And buyers have to sign a service contract for two years with AT&T and the phone has to be activated before leaving the Apple store. Apple will not allow customers to buy an iPhone online. And those who do not activate their iPhone within 30 days will face an unspecified penalty.

Simply canceling the contract with AT&T after the purchase of the iPhone would also not work. To terminate the contract, a customer has to pay $175 as a fee and AT&T will require the iPhone to be returned before the contract is cancelled.

Hence, AT&T introduced additional data plan price (Other than existing $39.99 minimum monthly plan) for the 3G iPhone for $30 per month compared to $20 for the 2G versions. The new $30 plan does not include any text messaging, whereas the previous $20 plans included 200 messages per month. If a customer wants a text message plan with at least 200 messages, he has to pay about $5 more. Then the average revenue per user (ARPU) would increase by $5. In this scenario, the monthly recurring costs to the consumer for the new iPhone will be $15 more than the 2G versions. AT&T would also gain ARPU, as it does not have to pay a recurring revenue stream to Apple. AT&T was paying earlier about 10percent of total iPhone ARPU, or $10 per month, to Apple for the 2G iPhone. Now, under the new business model AT&T will essentially get an additional $25 in ARPU per month per subscriber.

How will AT&T recover its phone subsidy then? We know AT&T is selling the 8 GB iPhone at $199 and the 16 GB iPhone at $299. According to the U.S. telecom research by Credit Suisse, AT&T buys an iPhone at $549 for 8 GB and $649 for 16 GB from Apple. Hence, based on an announced minimum monthly plan of $69.99 (minimum monthly plan of $39.99 plus unlimited data plan of $30.00), AT&T will cover its $350 subsidy in five months.

Will this kind of model work in India? Certainly, it will not."There is no question of subsidizing the handset in India. The U.S. service providers are able to subsidize handsets because they can make up for that with their call charges. Their charge rates are like 25 cents a minute. India being a low tariff nation, the charges here are only 1.5 to 2 cents a minute," said Manoj Kohli, CEO, Bharti Airtel recently. If service providers in India are burdened with such a handset subsidy of $350 for the iPhone, it will be a tough situation for them to successfully launch iPhone 3G, given their lower level of ARPU, which is, according to IDC India, stands at a measly $6.24 per month.

The success of the launch of the iPhone in India will be largely measured by the growth of subscriber base and ARPU. However, the impact on marketing costs will depend on each operator‘s strategy to build momentum and grab high ARPU subscribers while offering the iPhone. Also, since in India the value added services (VAS) market is still in burgeoning stage, and it’s contributing only about 10 percent to the service providers’ revenue, it will be a highly challenging task for service providers to draw larger subscriber base growth for iPhone 3G. Hence, unlike AT&T in the U.S., service providers in India cannot profit from the heavy subsidy of $350. Hence, service providers in India, like Bharti, will face difficulty selling the iPhone beyond a limited high-end market existing in the country. In fact, only 17 out of 1,000 people go for high-end devices in India. Industry pundits believe that many service providers would not want to go with such a pro-Apple model despite its huge anticipation in the Indian markets. Both Airtel and Vodafone declined to comment on bowing to Apple’s stringent instructions in this regard.

In addition to this, the Indian mobile market is a huge prepaid market where three out of four users are prepaid customers who prefer chota recharge. Less than five percent of the subscribers have more than $3 balance, while 33 percent of them use lifetime plans. Prepaid connections accounted for more than 89 percent of all mobile connections in 2007, and it will grow to 92 percent by 2012. Plus, they enjoy the option to switch operators at the expiry of each of their cards and some do exercise this option. "And this is happening most of the time at the bottom of the pyramid which essentially is not the target audience for Apple’s iPhone," says Madhusudan Gupta, Senior Research Analyst, Gartner.

With regard to tariff plans, even if service providers charge the same amount as in the U.S., i.e., a minimum monthly plan of $69.99 in India, it will be around Rs 2,850 per month, which certainly is not affordable for many. "In this case, Airtel and Vodafone will lose huge chunks of the market who are dying to buy iPhones," notes Kiruba Shankar, CEO of Business Blogging, a social media consultancy. Hence, Apple and its partners in India have to make iPhone a cost effective gizmo to buy and the services affordable to grab a share of Indian mass market. "Otherwise it will be positioned as a botique service meant for the elite or have to target corporate sponsoring of the gadget for its top management," says YLR Moorthi, Professor (Marketing) at Indian Institute of Management (IIM), Bangalore.

Also, India has a history that shows the ‘service provider push’ a failure in the market here. Airtel faced the difficulties while launching RIM Blackberry in the country. But even after lowering tariffs, Blackberry hasn’t been able to penetrate the mass market yet. "Now Apple is seen to be catering to the demand created from its prelaunch hype. That novelty would have worn off when it comes to India," says an IDC Analyst.

Another important aspect to be considered is Subscriber Acquisition Cost (SAC). For example, according to Credit Suisse, Singtel, a service provider in Singapore, has one of the highest levels of SAC in Asia, at $227, which it recovers within seven months, with a monthly ARPU of $33.40. But the case is different in India as SAC here is dismally low. So, despite being one of the largest mobile markets in Asia, India will have a hard time bracing for iPhone, due to the lower number of post-paid subscribers and the paltry SACs. Thus, service providers in India may not dare to subsidize the phone in anticipation that they can recover handset cost from increased monthly tariffs due to lower ARPU.

Other Challenges

To experience the iPhone 3G to its maximum, it needs 3G infrastructure. But in India, even though the country is yet to settle on 3G spectrum auction rules, the service providers Vodafone and Bharti have committed to carrying it on their 2G networks until the things get worked out. So, the supposed official owners of the iPhone 3G would not be enjoying the "Real iPhone 3G experience" as of now.

However, recently the issues were sorted out and the Telecom Regulatory Authority of India (TRAI) has agreed for open global auction for 3G. But 3G can become cost effective only if operators do not have to pay exorbitant prices for 3G spectrum. An auction of 3G spectrum could lead to irresponsible bidding resulting in high costs and tariffs, which would completely negate the tremendous capacity advantage of 3G. But this is what is happening in India, with the TRAI setting a higher base price for operators participating in the auction. This will be a huge dent for 3G growth in India, which in turn obviously will affect the fortune of iPhone 3G. Therefore, the key to the success of iPhone will be dependent on 3G services made available, which have to be cost effective to cater to a larger market base. In many western countries 3G was a failure due to high costs and as it was catering to only a niche ‘rich’ market. This segment has a very low market share in India.

In addition to this, Internet usage is pretty costlier on mobile when compared to broadband usage on PC, at least for the mass segment. The unlimited connection of GPRS is costlier when compared to other wired and wireless plans offered by the same providers, including the installation of the connection. The iPhone Web Apps is a totally new area in India and mobile Internet is the backbone for these iPhone3G handsets that are heavily data driven.

Will Apple Sacrifice for India?

A strategy that Apple can adopt at least for India is to sell contract free, unlocked iPhone 3G for a nominal price. According to the market researcher iSuppli, Apple spends about $170 for producing each iPhone and it sells it to AT&T for $549 for 8GB and $649 for 16GB. So, it can sell the contract free, unlocked iPhone 3G at the same price in India just as an exciting gizmo. "But they won’t sell contract free iPhones any time soon in India," feels Shankar. Even if they do, they have to face the stiff competition from Nokia and others who offer more facilities than iPhone 3G in their offerings (like N92) at the same or little lower prices. iPhone doesn’t support Bluetooth and every one falls for its interface and the big screen.

While Nokia is planning to launch one more model of its music-enabled phones before the official launch of iPhone in India, the potential rival models for iPhone, like Sony Ericsson W950i, Samsung S700, HTC Tilt, LG Voyager, LG Dare, Samsung Glyde, HTC Touch, Blackberry Curve, and Palm Centro are on the queue for the Indian buyers indulgence who is, by now, used to prices dropping every month. Therefore unless Steve Jobs chooses to offer the iPhone at lower margins to countries like India, iPhone won’t be a winner here. "It might become a fad if prices are not brought down. Apple’s Macintosh lost its market share just for the same reason," remembers Moorthi.

All these facts and figures collectively chuck the message loud and clear. One need not have to wait any longer to tell the fortune of iPhone 3G in India. Undoubtedly, at least for now, unless Apple tweaks its modus operandi to suit the pulse of Indian mobile market, its iPhone 3G will be a dud in India. On the contrary, by hook or crook, even if it does well, it will be the eighth wonder of the world!

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