Tailor-made for Villages

The Indian telecom growth story has now reached its second phase. After
conquering metros and 'A' category circles, the industry is now set to win the
battle in rural areas. However, it's not going to be a cakewalk. All the age-old
issues of villages-illiteracy, transport, power, and poverty-need to be tackled.
The whole telecom fraternity has geared up to face this daunting task of
providing telecom services in the six lakh-plus villages of India.

Among the fastest growing sectors in the country, the telecom industry has
been zooming up the growth curve at a fiery pace for the past few years. The
last few years have seen India adding many firsts to its list of achievements.
Some of these achievements are: having the world's lowest call rates (Re
1/minute), the fastest growth in the number of subscribers (6-7 mn per month),
the fastest sale of a million mobile phones (1 week), the world's cheapest
mobile handset (Rs 777), and the world's most affordable color phone (Rs 1,234).

Riding high on the telecom growth story and with a focus on catering to
customers of every category, mobile handset manufacturers have left no stone
unturned to reach them. While service providers come up with innovative ideas
and various tariff plans that would suit everyone's pocket, handset vendors pick
up new ways to ensure that customers get a handset at their doorstep.

As the focus has shifted to 'B' and 'C' category circles as well as rural
India, handset-manufacturing companies are redesigning their business models.
The companies are getting a boost with the fact that the total number of mobile
users is expected to cross 500 mn by 2010, with additions of about 6-7 mn
subscribers every month. Besides, almost 50% of India's population is still
untapped by this industry. And this figure refers to rural India, as 65% of the
Indian population lives in villages. So, rural areas are turning out to be the
real goldmine for the telecom industry.

The Goldmine

The set target of reaching around half-a-billion customers by 2010 seems
achievable. Investor-friendly government policies, a consistently strong GDP
growth, the exploding young population, and the Indian business model of being
profitable despite having the lowest tariff in the world give the industry the
confidence of achieving these numbers.

The demand for mobile telephones is increasing at a very fast pace, even in
small towns. Category C states have, on average, 85% of the rural population,
while A and B categories comprise 67% and 75% of the rural population
respectively. Further, Category C states-Himachal Pradesh, Bihar, Jharkhand,
Orissa, Northeast states, and Jammu & Kashmir-have lower average per-capita
incomes than that of states in other categories-approximately Rs 8,000 as
compared to Rs 10,000 and Rs 13,000 for B and A category states respectively.
Yet, C category circles have outperformed the national and other category
averages for percentage growth over multiple quarters. This indicates a great
potential in these areas.

The Take-off Point

The Take-off Point

The Indian telecom growth story is undoubtedly commendable. However, a lot
more can be done if New Delhi is serious about improving the lot of rural India,
home to two-third of the country's one billion-plus population. Most analysts
believe that wireless mobile networks and affordable handsets could quickly
change all that. Prime Minister Manmohan Singh's government has rolled out the
welcome mat to global wireless operators and handset manufacturers to invest in
the country's massive telecom build-out, and domestic companies too are
expanding rapidly.

“India has reached a take-off point in telecom,” says Asim Ghosh, managing
director, Vodafone-Essar.

While India has a very long way to go in establishing a nationwide network of
landline telecom networks, let alone high-speed broadband service, the country
could overtake China in the next few years in terms of the mobile phone
subscription growth.

Rolling out towers and base stations to support wireless networks certainly
isn't cheap. But it will likely be wireless networks-not copper-wire fixed
lines-that do most to pull India out of the telecommunication dark ages.

The Power Challenge

Challenges are plenty in rural areas as far as providing telecom services is
concerned. The key challenges are erratic power supply and affordability.
Handset makers, keeping an eye on the rural market, are coming out with low-end
handsets that can be pushed into villages.

A major part of India comes under the rural segment. And rural India is
either devoid of electricity connections or has a shortage of power supply,
which is likely to ruin the coverage expansion plans of mobile operators in
rural India. Power accessibility in rural India is unfortunate. But, by
converting the energy of organic matter into biofuel, communities in rural areas
can market it to mobile companies, which can use it to power their base
stations.

Currently, two experimental schemes are in progress in Lagos (Nigeria) and
Pune in an attempt to power Global System for Mobile Communication networks with
biofuel. Globally, over 2 bn people use GSM, a digital-standard for cell phones.
The GSM Association (GSMA), a development fund, along with Idea Cellular and
Ericsson, are now testing a mobile phone base station powered by biodiesel. The
project's first phase, which examines the viability of non-edible plant-based
fuels like Jatropha and cotton, is near completion. In the next stage, a supply
chain will be established, which will use home-grown crops for producing
biodiesel to supply power to 5-10 mobile phone base stations in Maharashtra. If
the experimental project is successful, the GSMA aims to take this program to
other regions of India.

STD/ISD booths are quite common in rural India. Low-cost handsets will fuel additional growth

ULCH as Savior

Lower income rural households may perceive mobile handsets or access devices
as expensive. The cost of a handset constitutes an entry cost and is, therefore,
an important barrier in the growth of mobile services. Recently, single chip
cell phone solution was launched in India that will bring down the cost of
handsets, making the Rs 1,000 mobile a reality. Such single chip solutions are
expected to reduce power consumption by 50%.

The GSM Association recently announced that its Emerging Markets Handset
program is exceeding expectations: mobile operators in Bangladesh, China, India,
and Russia have already sold 12 mn of their Ultra-Low-Cost Handsets (ULCH).
According to ABI Research, network operators will increasingly partner with
small handset vendors to offer low-margin, ultra-low-cost handsets, particularly
in emerging markets like rural India, where new subscriber growth remains
strong.

Ultra-low-cost handsets will enable telephony in those parts of the world
where the landline service is unavailable or unreliable, says Douglas Grant,
business-development manager with Analog Devices' RF and Wireless Systems Group.
Grant adds that chip-set suppliers pursuing the ultra-low-cost handset market
need to provide robust reference platforms and even complete turnkey designs
with preloaded software features to simplify the development of the final
product-handset.

A service- and price-sensitive market like India is motivating semiconductor
vendors to develop single-chip handset offerings. For example, Texas Instruments
recently demonstrated the first less-than-$40 handsets built in India from
concept to production. Some handset makers, like BPL and Quasar Innovations,
developed the Primus GSM phones based on Texas Instrument's TCS chip set. These
handsets incorporate only basic voice and short-message service-no cameras,
color screens, or MP3 players, instead emphasizing on low cost and an intuitive
user interface.

Nokia and Motorola currently dominate the sub-$50 handset space, in part, due
to their ownership of intellectual property, which reduces their overall costs.
ABI forecasts that more than a dozen vendors would be offering ultra-low-cost
handsets by next year and one-in-four handsets sold in 2011 will fall in that
category.

Large operators have been cutting deals with smaller vendors eager for volume
deals to sustain their handset businesses. For example, earlier this year,
Vodafone announced deals with Chinese vendor Huawei for Vodafone-branded
low-cost handsets and with ZTE Corporation for low-cost 3G phones.

According to ABI, the list of vendors eyeing the ultra-low-cost space
includes the balance of the top-tier handset vendors such as Samsung
Electronics, LG Electronics, and Sony Ericsson Mobile Communications, but also
includes a long line of challengers such as ZTE, Kyocera, Huawei, Haier, Sagem,
Ningbo Bird, Philips, and Rose Telecom.

Some Successes

Almost all handset manufacturers have come out with low-cost models that
would suit the rural budget. Also, they are not overseeing the power problem, ie,
the battery back-up of phones aimed at rural areas is pretty good.

Motorola has a comprehensive range of feature-rich mass-market phones in GSM
& CDMA technologies. Motorola W205, a color phone, is a mass hit in rural areas.
This phone has a 32-channel polyphonic ringtones, iTAP predictive text, Hindi
SMS capability, and 1 MB of storage. It also has a strong battery life of over
seven hours of talk time and 30 hours of standby time. This phone is priced at
Rs 1,999. The other models such as W209 and W215 are also quite popular among
the rural youth for their FM radio functionality. In addition, the company has
tied up with both GSM and CDMA operators for a bundled sale scheme. It sells its
entry-level handset (W210 priced at Rs 2,349) with Tata Teleservices. With
Airtel, it has the C123 (Rs 1,399) and C139 (Rs 1,599), and with Idea, the C119
(Rs 1,499 onwards).

Motorola also has a mobile handset-financing tie-up on 0% interest with GE
Money, the consumer finance arm of General Electric (GE). This first ever
cross-industry agreement extends consumer finance to the purchase of mobile
handsets on a 0% interest rate.

The GSM lobby has been successful in getting Nokia to work on low-cost
localized handsets to push their services in the rural and lower income segment
of the Indian cellular services. Just a while ago, Nokia India launched six new
low-cost handset models, all priced between Rs 2,000 and Rs 4,500. Though
slightly expensive than its counterparts, Nokia's GSM handsets will give
consumers the freedom to switch operators by changing the SIM card. Last year,
Nokia became the first company in the world to ship one billion mobile handsets.
By 2010, they expect to ship 4 bn handsets.

Sony Ericsson also announced the research and development unit for mobile
phones in Chennai. The move closely followed the company's January announcement
of sourcing local manufacturing of phones in Chennai with EMS partners
Flextronics and Foxconn. It would help the handset maker to penetrate the rural
hinterland by pushing its low-cost handsets. Apart from this, the widened
portfolio of feature-rich entry-level handsets from Sony Ericsson will also help
the company further strengthen the presence in these circles.

Distribution is the Key

Distribution plays the most vital role in the success of a product. Almost
all the handset manufacturers have a well-planned distributions system, starting
with national distributors and ending with retailers. In terms of distribution,
there is a clear demarcation between CDMA and GSM phones. CDMA is distributed
directly through operators (except Nokia and Motorola, which distribute handsets
through Brightpoint), whereas GSM through open market.

Nokia phones are distributed through HCL Infosystems, but with an expanding
market, the company is looking at direct sale of handsets. The company has a
wide reach in terms of retail distribution, as it is available at 90,000 retail
outlets across India and is catered by around 800 distribution points. In terms
of coverage, it is present in 5,000+ towns. The company is also planning a
massive expansion in towns and villages and is at par with massive expansion
plan of service providers.

Early last year, Nokia decided to rework its 10-year alliance with its
distribution partner, HCL Infosystems. The new agreement has led to Nokia
venturing into direct distribution and sales for the first time ever since its
entry into India a decade ago. Even as HCL Infosystems continues to remain its
sole distributor and marketing partner, till 2011, this will be applicable to
just half the country's geography.

Brightstar is the largest wireless products distributor in the world and it
had launched its subsidiary, Brightstar Telecom, in India, in 2005, to support
the high growth market of India. To best serve this market, the subsidiary
operates two main sales and distribution offices in Mumbai and Delhi, as well as
22 main hubs supported by 79 billing points throughout the country. This
infrastructure allows Brightstar fast delivery, localized distribution and
billing support across India. Brightstar is the sole distributor of LG GSM
phones.

Ingram Micro is the largest distributor for IT and telecom products in India
and is the national distributor for Sony Ericsson. This company has more than 50
branches in India, and through Ingram Micro, Sony Ericsson has a presence in
more than 15,000 retail outlets.

Sudhin Mathur, general manager, Sony Ericsson India, says, “With the enhanced
portfolio of products across segments that we have offered since 2006, now is
the right time to consolidate further on the inroads we made into the booming
market last year. The tie-up with Ingram would help us make a Sony Ericsson
handset available to even the farthest consumer in the country. The expansion
would help us gain increased market presence and would lead to a wider purchase
choice for the end consumer.” Salora International is the second national
distributor for Sony Ericsson. It is also the national distributor for BenQ
mobiles. Salora has more than 4,000 retailers out of whom 3,500 are loyal
retailers.

Motorola has two national distributors-Bharti Teletech for GSM handsets and
Brightpoint for the CDMA model. With these two national distributors, Motorola
handsets are available at 32,000 retail outlets, covering 200 towns across the
country. “In order to achieve success in India, we need to go where India
lives-the villages,” says Lloyd Mathias, director marketing, Motorola India. The
company also has a distribution system through various rural retail initiatives
like Haryali Bazaar stores of DCM Sriram, ITC e-Choupals, and Godrej's Aadhar
stores. ITC e-Choupal reaches out to more than 3.5 mn farmers through 5,200
kiosks across six states (Madhya Pradesh, Karnataka, Andhra Pradesh, Uttar
Pradesh, Maharashtra, and Rajasthan). These stores mainly cater to the needs of
the rural people.

“For rural areas, one has to set up a viable model by piggybacking on
existing distribution model, where focus would be on cross player tie-ups, use
of existing channels like the postal department, public distribution system and
others,” says James V Abraham, VP and director, the Boston Consulting Group
India. Some manufacturers have already started taking steps in this direction.

According to Payal Gaba, head, Marketing, Spice India, “We are in talks with
the postal department to sell our products through them.” Unlike other players
in the same field who start their distribution at the national level and reach
the retailer at the end of the string, the Spice Group follows a reverse
distribution system. The company's distribution starts with retailers and on the
way reaches micro distributors at the district level and at the end reaches
regional distributors, which could be at the state level or national level.
Currently, Spice has 36 regional distributors and 375 micro distributors,
catering to 20,000 retail outlets across India.

With the kind of growth that is expected from rural India, almost all handset
vendors are heading to cater to rural masses. A Boston Consulting Group report
suggests that a huge number of retail outlets are going to be set up in these
geographies by 2010. In terms of retail outlets, metros have around 45,000
outlets and rural areas have around 30,000 outlets, but in 2010, metros will
have 60,000, whereas rural areas are expected to have 140,000 outlets.

Chinese handset vendors are also heading toward India, equipped with
low-cost, low-end phones with an eye on rural India. So, this is going to see a
cutthroat competition among other players too, which is a good sign for the
rural people, as it would propel the cost reduction of handsets.

Retailing the Business

The retail market for mobile phones-handset, airtime, and accessories-is
already a Rs 75,000 crore business, growing at over 20% per year. In comparison,
the consumer electronics and appliance market looks paltry, at just Rs 25,000
crore, with a growth rate just half of that of the mobile market. Also, there
are more than 90,000 retail outlets in the country, out of which only 1% are
organized. And this figure is lucrative enough for entrepreneurs and business
houses like Essar and BK Modi Group to plunge into this business. In a span of
three years, an array of retail chains like Mobile Magic and MobileNXT have
opened their stores exclusively focusing on the mobile business. Already big
names in the retail business, like Pantaloons and Subhiksha, are not behind.

India has already emerged as the fastest growing mobile market globally, with
close to 5 mn new handsets and 7 mn new subscribers every month. This has
compelled telecom distributors and retail houses to look at this business
seriously. Romy Juneja, founder and COO, MobileNXT, says, “India thrives on a
huge distribution market and that's why local players will have a big role to
play in mobile penetration.” He also adds that a consortium of investors with $5
mn investment is backing the company, headquartered in Bangalore.

Pantaloon Retail of the Future Bazaar Group has recently floated a separate
company, called Convergem Retail India, to cater to the growing demands of the
mobile industry. Investments worth Rs 100 crores have been earmarked for this
venture. The group has opened its outlets in its existing Big Bazaar stores
across the country, thus cutting down the real estate cost.

“India has 160 mn mobile subscribers and we are looking at 50 mn more this
year, translating into a huge opportunity for mobile retail,” says Malini
Chopra, head of Convergem. MobileStore, another chain of retail stores, is a
joint venture between the Essar Group and Richard Branson's Virgin Group. As of
now, they have opened more than 200 stores in India, a testimony to the success
of this business model.

Subhiksha, a big name in the retail business, has also taken the bait of the
mobile business. They started doing their mobile business in Delhi and are now
expanding it to other cities. According to R Subramanian, managing director,
Subhiksha, the company is planning to open shop-in-shops in all of its existing
stores across the nation. This retail company is all set to invest Rs 300 crore
in its mobile retail business in the near future.

Future Challenges

One area of concern has been the slow progress on the front of rural mobile
telephony. Rural teledensity continues to remain at around 4%. Most of the
growth has happened in urban areas and if the target of 500 mn by 2010 is to be
achieved, private operators need to extend their urban success story to rural
areas.

Handset manufacturers are looking at increasing localization of components as
it will help in reducing costs and will open up new markets in B and C category
towns. On the distribution front, vendors have to increase their coverage area
from the present 4,000 to 5,000-6,000 cities. Not an easy task, as one has to
also provide after-sales services in these cities. Content in regional language
will also help in an increased usage of phones in the country. All this, if
properly tackled, will help India to achieve 500 mn by 2010 and bring smiles to
the mobile handset industry in the country.

Gyana Ranjan Swain

gyanas@cybermedia.co.in