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Game of Phones: Will JioPhone stir up the handset market?

September 01, 2017

Reliance Jio Infocomm Limited’s (RJIL) 4G-enabled feature phone is set to disrupt handset market dynamics. JioPhone, which the company claims will be available at an effective zero cost, will come with attractive bundled data and content offerings, and is likely to bring several new users into the data fold. For telecom operators, the phone launch will compel them to overhaul their pricing and service strategies. Industry experts discuss the ramifications of the JioPhone launch and the incumbents’ likely strategies... (From left to right: Inderpreet Kaur, Analyst, Ovum; Navkendar Singh, Senior Research Manager, Client Devices, International Data Corporation India; Nitin Soni, Director, Asia-Pacific Corporate Ratings, Fitch Ratings; B.K. Syngal, Senior Principal, Dua Consulting)

What will be the likely impact of the launch of JioPhone on handset market dynamics?

Inderpreet Kaur

Reliance is likely to make a similar impact with its JioPhone as it did with the launch of 4G services in 2016. Like the launch of RJIL’s free 4G long term evolution (LTE) data and voice services has deeply impacted the shipment and sales of 3G-enabled smartphones, the launch of JioPhone is likely to impact the 2G feature phone segment. Indian handset manufacturers such as Lava have already launched 4G feature phone models in the sub-$30 price range, and other vendors are expected to follow suit. The leading mobile operators are also working to launch voice over LTE (VoLTE) services by mid-2018, and are expected to make a comeback with competitive tariff plans to meet RJIL’s free voice proposition. These dynamics are expected to speed up technology migration to 4G.

Navkendar Singh

The launch of JioPhone is expected to be one of the most disruptive developments in the Indian feature phone market since the launch of “Monsoon Hungama” in 2003 by Reliance Infocomm. The feature phone market is currently dominated by 2G devices, ranging from Rs 500 to Rs 3,000. Traditionally, voice calling, listening to music (FM and side-loaded songs) and using the torch have been the primary use cases of feature phones. JioPhone, with its data and content bundling proposition, is expected to cultivate new habits in feature phone users and add new applications for them.

It is likely to attract feature phone users in the upper price range of Rs 1,000-Rs 2,000 since with the increase in expenditure, these users get many additional benefits such as unlimited access to music, movies, global positioning system and near field communication services. Moreover, with some data experience, it will be easier for these users to migrate to smartphones in the next few years. However, in the short term, the current offering would not provide the much-needed impetus for quick migration from feature phones to smartphones due to their high device and per month access cost.

Nitin Soni

RJIL’s 4G handset is likely to quickly replace 2G handsets in rural areas, where smartphones had previously been out of reach for many potential customers. It will be available for a $22 deposit, which will be refundable after three years, as compared to a price of at least $60 for existing 4G smartphones. The internet adoption rate in India is among the lowest in the Asia-Pacific region, mainly due to the unavailability of affordable smartphones and the lack of fixed broadband networks in rural areas. As per the Telecom Regulatory Authority of India, wireless users accounted for around 95 per cent of the country’s internet subscriber base of 422 million, as of end-March 2017, and the majority of these users access the internet through smartphones. However, the launch of JioPhone will not affect the migration to smartphones. The demand for smartphones will continue to grow primarily in big cities with an increase in consumers’ disposable income and the increasing availability of content such as movies, news and songs.

B.K. Syngal

The launch of JioPhone is focused on increasing addiction to multimedia and the internet. It will increase the pace of adoption in the feature phone segment and drive migration to smartphones. After the launch, feature phone players will have to add more features to keep the flock together and smartphone makers will have to drop prices to attract feature phone users.

How are local and foreign handset players in India likely to react to this?

Inderpreet Kaur

While the Indian feature phone market is still dominated by home-grown brands, there has been a sudden shift in the smartphone segment in favour of Chinese vendors as Indian smartphone brands failed to foresee the changing operator strategies to roll out 4G LTE. Learning from this, Indian vendors will be faster to react to retain their position in the feature phone segment. The launch of 4G VoLTE-enabled feature phones with lucrative service tariff plans will slow down the expected migration to smartphones, particularly in Tier II and Tier III cities, thereby giving a new lease of life to feature phone vendors.

Navkendar Singh

So far, feature phone vendors have been focusing on 2G phones, partly due to the high cost of manufacturing a 4G feature phone. With the launch of JioPhone, these vendors are expected to launch 4G-enabled feature phones at competitive prices to counter any impact the JioPhone is expected to have on their feature phone business at the higher price bands. These vendors will also try to stay relevant in the market by possibly restarting the marketing and distribution processes, and riding on the renewed focus on the feature phone segment. In addition, these vendors would need to work closely with the incumbent operators to offer a compelling data-centered customer proposition to users who do not use a smartphone, due to factors such as affordability and comfort, but would like to experience data on a device that doesn’t look and feel very different from their current feature phone.

Nitin Soni

We anticipate that local and foreign handset companies would launch their own cheaper 4G handsets in response to JioPhone. However, such companies could lose market share to RJIL’s handset in the near term as it offers compelling inbuilt features including a bouquet of Jio applications.

B.K. Syngal

They should accept the reality and the challenge, and undertake innovations at a much faster rate. A company cannot bask in the glory of a single product and must stay ahead with constant technology improvements and lucrative price points to attract more users.

What does such a move mean for the incumbents? What strategies are they likely to adopt to overcome competitive pressures?

Inderpreet Kaur

With JioPhone, RJIL is making its way to the price-sensitive consumer segment, which is wary of migrating to basic smartphone models as they find the Rs 3,000-plus smartphones expensive. While this price-sensitive segment is willing to avail of data services, the high device costs and low perceived benefits have kept these users away from adopting mobile data services. The absence of RJIL from the feature phone market helped many incumbents to grow their subscriptions in the rural and semi-urban pockets of India where 2G voice is still predominant. This segment is now accessible to RJIL through JioPhone. The operator’s free-for-lifetime voice offer is likely to attract subscribers as they can now spend the monthly amount, which was earlier used for voice recharges, on data services. The move places the incumbents’ voice revenues under increased threat, the magnitude of which will be determined by the quality of RJIL’s VoLTE services and its ability to offer seamless voice calls. While mobile teledensity in India has increased multifold over the past few years, regional trends point to a stark digital divide. The Delhi and Mumbai circles have a teledensity of over 200 per cent, while regional markets including Bihar, Assam, Madhya Pradesh and Odisha have seen mobile technologies reach just 55 per cent of their total population. RJIL, with its capacity to infuse fresh investments in the telecom industry, will become instrumental in offering communication services to these non-urban and rural pockets of the country.

Navkendar Singh

The move is likely to have a significant impact on the large feature phone and voice-only user base of incumbent operators. They are expected to work very closely with feature phone vendors to bring out compelling customer propositions in the next few months. They would need to develop a data-and content-centric proposition bundled with affordable feature phone devices to retain their higher-ARPU feature phone customer base.

Nitin Soni

The high monthly tariffs that RJIL is charging with JioPhone are likely to limit the impact of the handset on the revenue market share of incumbents such as Bharti Airtel. In fact, the incumbents may see some benefits as RJIL’s strategy will increase the adoption of 4G and help develop India’s smartphone culture, thus increasing data usage and average spending across the market. The monthly tariff of $2.3 with JioPhone is more than 50 per cent above the current average revenue per rural user. The majority of rural users are on 2G phones and consume minimal data.

B.K. Syngal

The incumbents need to pick up the gauntlet thrown by RJIL and use this as an opportunity to evolve and innovate in tariffs and services. They need to be proactive rather than reactive. For example, operators can offer packages to carry forward unused data allowances. In a price-sensitive market, the key differentiators would be tariffs and the catalogue of services. Migration to an LTE regime can also be explored.

How is RJIL likely to benefit from this move?

Inderpreet Kaur

With its entry into the feature phone segment, RJIL can offer differentiated services targeting high- and low-value customers. While JioPhone will primarily serve voice customers with basic internet needs, RJIL can provide a differentiated proposition for heavy data users where it can leverage its large ecosystem of digital services, including the expected IPTV services and home broadband services. For example, Indonesia’s XL Axiata, following its merger with Axis, has retained the XL brand to position itself as a leading digital services provider, while embracing the Axis brand to service low-value customers.

Navkendar Singh

By the end of 2017, India is expected to overtake the US as the second largest smartphone user market in the world, behind only China. However, considering factors such as infrastructure, income distribution and digital literacy challenges, the feature phone segment will remain relevant to a large mobile phone user base. RJIL’s long-term plan is to extend the experience and benefits of data to the hitherto unconnected population of 500 million and another 500 million feature phone users. These 1 billion potential smartphone users are not data users at present because they are not comfortable using a smartphone, or cannot afford one or are not aware of the benefits of data. With JioPhone, RJIL is trying to ease the migration to smartphones and drive 4G data uptake. It will then start monetising its data and content services.

Nitin Soni

The move is likely to increase RJIL’s revenue market share from 3-4 per cent to more than 10 per cent in 2018. It would also lead to a growth in RJIL’s subscriber base, which was earlier limited to the availability of 4G smartphones. JioPhone will also help RJIL add subscribers in rural areas. The operator already has 89 million active subscribers as of end-May 2017, giving it an 8.7 per cent share in the total active subscriber base. However, its revenue market share is much lower, as it has so far competed on an aggressive pricing strategy.

B.K. Syngal

RJIL has set the cat among the pigeons. However, the move has created only a flurry, not a tsunami. It has created new benchmarks in tariffs and in the data domain, benefiting from some regulatory advantages in spectrum acquisition. Although RJIL can initially use the benefit of less expensive spectrum and low spectrum usage charge, the incumbents are no sitting ducks and will strike back soon. The inequality of deep pockets no longer exists. RJIL should focus on attracting high-end users rather than on creating addiction. The gimmickry cannot last forever. The refundable Rs 1,500 deposit is a sham to avoid taxes and build a war chest. The operator should get down to serious market-determined professional competition. After all, free calling and unlimited data can only take it so far.

How will the uptake of JioPhone impact the data segment?

Inderpreet Kaur

JioPhone will drive the growth of mobile internet connections in the country. While India leads the global market in mobile net additions, it lags behind in internet penetration. RJIL’s device-data bundling will attract subscribers to more advanced technologies. On the service provider side, the changes will allow operators to refarm existing GSM spectrum for the provision of more efficient mobile broadband services.

Navkendar Singh

India already has one of the lowest data access costs in the world and with the launch of JioPhone, the battle over acquiring data users will intensify further. Telecom operators and incumbent feature phone players are expected to introduce interesting bundled offers, thus pushing data access costs even lower. With JioPhone and other 4G feature phones, the number of data users will go up significantly, similar to the multifold growth in mobile data users and usage since the launch of RJIL’s operations in 2016. This will definitely have a positive impact on data realisation for operators, the content ecosystem (development of specific vernacular and relevant content) for this user base and overall connectivity.

Nitin Soni

The cheap handset would add 3-4 per cent (or $950 million) to the annual industry revenue if adopted by at least 100 million subscribers, which appears quite likely. Industry-adjusted gross revenue is likely to increase in 2018, after the quarterly industry revenue declined by 15.6 per cent year on year to $6.1 billion during the quarter ended March 2017. The growth will be driven by increased data consumption and a rise in the average spending per user.

B.K. Syngal

Data is the future and the adoption that we are witnessing today is just the tip of the iceberg. Data usage will only grow as programmes such as Digital India and the Smart Cities Mission progress. Further, there will be several opportunities arising from e-applications and internet of things/machine to machine technology. Going forward, data pipes will grow as India grows.

 
 

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