Nalini Muppala

Analysis, observations, perspectives on mobile space

Bharti Enters Handset Business: Will it change the dynamics of low cost phones?

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In a recent post on Near Field Communication (NFC), I wondered if Nokia and Bharti Airtel could have been working together on adding NFC to phones and enabling mobile payments and other services. Bharti seems to have other plans and all signs indicate that it wants to go alone.

Beetel, which is part of Bharti Enterprises, wants a piece of the fast growing Indian handset market. According to Gartner, 117 million handsets were sold in 2009. Bharti Airtel is the country’s largest mobile network operator (MNO) – It had 140 million customers as of July 2010. Courtesy of its parent company, Beetel will bring to table a deep understanding of the Indian consumer and a well entrenched distribution network.

Beetel has set itself a goal of entering the top 5 vendors in India within 3 years. It is not a lofty goal, even for a new entrant. Outside of the major vendors, handset market in India is highly fragmented. There are more than 50 local and Chinese vendors vying for the bottom 20% of the market.

Nokia, Samsung and LG lead in India just as they do world wide. In India however, Nokia dominates with a disproportionately large share. Major name-brands have reasonably loyal customers, and their market position does not come under any threat in the near future. The market share would definitely change.

Urban markets are considered saturated, growth has to come from rural markets. Unlike in other markets where a mobile phone vies for the spot of a third or fourth screen in a consumers’ communication/media-consumption devices, a mobile phone is THE ONLY screen for much of the rural population in low income countries like India. There is still a large untapped market outside the urban areas. While it is clear that growth will come from serving rural consumers, the fact that rural users would invoke services on a need basis necessitates businesses to innovate to create compelling services beyond voice. Voice has thus far provided the bulk of revenue.

Other MNOs have ventured into handset business in the past with mixed results. White label manufacturers provided a bulk of these phones. BeeTel is unlike other also-rans, it has a huge distribution channel, in Bharti Airtel, and has been in the phone manufacturing business for a long time. Admittedly a mobile phone is much more complex than a cordless/land-phone.

What merits attention to this move is the phenomenon of creating products that cater to developing economies which could then be marketed to developed economies – either disrupting the status-quo or creating a whole new market for devices that do to compete with features offered by the best in the class but are priced much less. Vijay Govindarajan and Chris Trimble of Tuck School of Business call this phenomenon Reverse Innovation. Revolutionary products such as the $2500 car (Nano) from Tata and $1,000 hand-held electrocardiogram from GE showcase India’s growing design and engineering prowess.

Bharti Airtel has a track record of such innovative thinking. Having no expertise in building telecom networks or running a large scale IT infrastructure, it made perfect sense for Bharti to outsource functions outside its core competency. It has since excelled by creating innovative services by keeping its ears to the ground. Judging from Bharti’s history, most of the the design and manufacturing of handsets will be outsourced – Bharti famously outsourced all network operations to Ericsson and Nokia-Siemens; and IT operations to IBM. Beetel, however, has been in the manufacturing business for a while and has been successful at it. It remains to be seen if most of the complex task of designing and manufacturing a handset would be outsourced.

Although manufacturing in China would seem like a good option, market forces and regulatory policies make the decision a tough call. Device vendors have been manufacturing within India to get around import duties. Chinese manufactured handsets – some of which lack IMEI numbers – have been facing increasing scrutiny from security agencies. Top vendors like Nokia already manufacture in India. Although Nokia’s share continues to decline, designing products catering to the unique needs of the Indian consumer has enabled it to dominate the market from early on.

Thus, Bharti’s advantage lies in its understanding of the Indian customer and the Indian market. Bharti would save itself a lot of time and trouble by not venturing into the innards of handset manufacturing. It should instead dole out most of the design and manufacturing to the best in class. As Bharti gains foothold in this market and expands to other low income markets, low cost handset platform vendors such as ST-Ericsson and MediaTek stand to gain.

As the sole reseller of Apple iPhone in India, Beetel has some sense of excellent profit margins possible with a successful samartphone platform. That is one temptation worth staying away from. Even the mighty Nokia is struggling with its smartphone strategy. It would be best to innovate at the low end and gradually add features to expand upstream.

Reserve Bank of India recently granted Bharti Airtel a license for mobile payments in the form of “semi-closed mobile wallet”. The set up is akin to a secure credit card. User loads up the payment instrument — a mobile phone — and uses it for paying at participating merchant locations, but cannot  draw cash. Bharti has not revealed implementation details; It is not clear if it will use NFC or simple SMS based transactions. MNOs acting as gatekeepers have so far resisted NFC in phones. If one subsidiary (Beetel) of the Bharti group makes mobile phones for use in another subsidiary’s network (Airtel), NFC could take off sooner in India than in other markets.

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Written by Nalini Kumar Muppala

October 25, 2010 at 11:00 pm

Posted in Bharti, NFC, Nokia

Tagged with , , ,

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