In a price-sensitive market like India, the high cost of mobile handsets is one of the main deterrents for entry-level users. In an effort to capture this large market segment, handset manufacturers are increasingly shifting their focus on developing ultra-low-cost handsets (ULCHs).
Their interest has been fuelled by forecasts of large handset unit sales and impressive compounded annual growth rates for mass-market mobile handsets. ULCHs have also been a huge success in emerging markets with significant growth witnessed in the Asia-Pacific region. In fact, ULCHs are increasingly forming a part of the basic phone segment.
Potential of ULCHs
According to research by the GSM Association, only 25 per cent of the world population under wireless coverage actually uses it. This translates into an untapped market of 3 billion people (half the world’s population). Cost has been identified as the biggest barrier.
In developing markets, affordability is the most vital element in future subscriber growth. Affordability is determined by the instrument cost (including distribution), service offering, the regulatory environment and tax structure.
Industry studies have thus converged upon the current ULCH definition as offering dual-band GSM voice and SMS service with no packet data capability and minimal features for a retail price of under $30.
“ULC is not a specific technology; it is a roadmap to enable ongoing handset cost reductions and at the same time, improve usability and features,” says Ashok Chandak, director, sales and marketing, Philips Semiconductors.
The GSM sector has successfully addressed this market and there are many ultra-low-cost GSM handsets already in place, some costing even less than $20.
“CDMA, on the other hand, is still not quite there and is in the process of developing ULCHs. Currently, these sell at a little over $40,” says G. Byrne, research analyst, Informa.
GSM Association research indicates that the potential net subscriber growth per year could increase from 181 million to 321 million between 2007 and 2009. US market research company Strategy Analytics estimates that over 150 million ULCHs, with wholesale costs of less than $50, will be sold throughout the world by 2010.
ULCHs are estimated to account for 12 per cent of worldwide mobile phone sales by 2010 compared to 1 per cent in 2005. Therefore, additions in this market could significantly affect the profile of the entire handset business.
Informa’s Byrne estimates that if the industry selects the right combination of ex-works cost levels and feature sets, ULCH shipping prices will reduce from $40 in 2005 to $28 by 2010. That would equate to sales of over 36 million of new ULCH models in 2007 and almost 48 million by 2010, representing 5.3 per cent of the total new device sales by 2010. Africa and India will account for about 10 per cent of the new shipments.
Design parameters
In terms of handset affordability, it makes sense to select a radio with the lowest bill of materials (BOM), highest integration and lowest external component count. An affordability analysis also occurs at the systems level where sensitivity is a critical ULCH parameter directly related to the transceiver’s performance. This is because system sensitivity directly affects the network infrastructure and efficiency. It also impacts the actual user experience and handset design, including radio front-end component selection and cost. Both network operators and handset manufacturers focus on sensitivity, which directly impacts the handset call quality.
With better sensitivity, operators have the opportunity to lower the infrastructure equipment expenditure within a targeted coverage footprint. This is especially important as network operators in ULCH markets may choose to offset the potentially modest ULCH average revenue per user (ARPU) by minimising their capital investment in base stations and related infrastructure equipment.
At the product level, the handset manufacturer is focused on sensitivity performance as it relates to manufacturing design and production margins as well as handset call quality. Within this emerging ULCH paradigm, the RF transceiver performance, radio solution BOM and reliability can accelerate opportunities for growth and provide economic advantages for both suppliers and end-customers.
The handset should have a long battery life as power is not always easily accessible in most developing countries. It should have features like FM radio, loud ringtones and voice. It should have a general purpose chipset/low-cost chipset adaptable to multiple software protocols, OS and other application frameworks. It should consume less power. Ideally, the chipset should allow 65 per cent reduction in the PCB area through superior integration.
“Manufacturers can cover more market segments at a lower cost using modular product platforms. These provide several benefits including maximum usage, greater flexibility leading to faster turnaround, easy integration with other systems and upgradation, reduced product complexity and customised products,” says R.K. Dutt, managing director, Quasar Innovations.
However, the biggest challenge will be to find a business model for service providers delivering voice, data and multimedia to this massive new base of users with low budgets. Just like free access for poorer citizens in advanced economies, the technology choice is not the problem even in developing countries. The issue is how providers can make any money from the network, and if they cannot, whether governments or development agencies will prioritise funds to bridge the gap.
The Indian market
India currently has over 110 million mobile subscribers, with over 75 per cent in the prepaid segment. When Indian telcos launched mobile services in 1995, the user tariff was Rs 16 per minute (incoming and outgoing) and handset costs were in excess of Rs 20,000.
This changed dramatically when the telecom sector, particularly the wireless segment, witnessed phenomenal growth, bringing down both tariffs and handset costs. Tariffs today are less than Re 1 per minute and handsets are available for less than Rs 1,500. However, there is a large market segment that cannot still afford all this.
With a population of 1.1 billion and only a little over 150 million phone connections, the Indian telecom market still has a long way to go. This market is estimated to grow at about 60 per cent for the next three years. The next 200 million subscribers will be acquired predominantly from the suburban/rural markets, as the rural teledensity is only about 2 per cent.
In the past two years, service providers have been able to cover hundreds of smaller towns and villages. Rural markets are fuelling the growth while urban centres are moving up the value chain as replacement markets. According to Milesh Ruparel, chief officer, supply chain, Tata Teleservices: “One cannot ignore the bottom of the pyramid, which represents 75 per cent of the total population. It is this lower-end segment that will be of critical importance to carriers when the next round of telecom growth happens. Can you get someone who rides a bicycle today to move to a RollsRoyce without interim options?”
Given the impetus that the government is giving to rural teledensity, the prospects for ULCHs are very bright. The rural customer typically prefers a sturdy handset in bright colours with basic functionality. If the handset costs are low, it has less impact on the disposable income and at the same time enables the user to become part of the mobile telephony population.
The carriers are aggressively promoting low-cost handsets by offering attractive schemes. Idea Cellular and Reliance have offered subsidies on handsets. Some service providers have introduced a shared-phone concept in rural areas, which functions like a mobile PCO. Most fishermen in Pondicherry are using mobile phones to determine weather conditions. However, the rural Indian customer is yet to discover the benefits of a livelihood connection through mobile usage. Typically, the rural population has more important basic needs and money spent on purchasing an LCH has other uses.
Non-voice services, particularly SMS, are a key link to bridge this gap. SMS is perceived to be the cheapest, quickest and easiest form of peer-to-peer mobile communication ever known. According to a report by TRAI, the number of SMSs in India stood at 12.3 billion in 2004, and is projected to grow to 180 billion by 2010. The growth of SMS will be driven by vernacular languages through predictive SMS software. On the whole, 65 per cent people want to type text messages in their native language (not English). Already, SMS is the biggest contributor to the overall revenues of the non-voice market and is expected to remain so in the near future.
According to Ray Tsuchiyama, Emerging Markets Group, Tegic Communications, “Handset manufacturers harbour misconceptions that ULCH users will use mobiles for voice calls only. They think SMS will not be popular due to low literacy rates, lack of local languages for predictive text software and lack of awareness. This impacts the carriers as lower SMS revenues will result in lower ARPUs.” Clearly, ULC phones are critical to “connect the unconnected”.
Dayanidhi Maran, minister for IT and communications, emphasises this point: “Our dream of entry-level phones of goodinternational standard below Rs 1,000 ($20) is a reality today. LCHs go well with the government’s focus on rural areas ?? where the teledensity is about 2.2 as against 14 in the cities ?? and the goal of reaching 500 million mobile connections by 2010.”
