Indian telecom operators are at it again. Trying to kill each other through cut-throat pricing, that is. While the battle so far has been mostly about ramming down the prices of phone calls and data, it is fast spreading into a new territory: the price of your devices.
In August 2017, Reliance Jio introduced JioPhone, a 4G VoLTE-based low-cost feature phone with bundled tariffs. As Jio vacuumed up subscribers, incumbents Airtel, Vodafone, and Idea Cellular are reportedly coming up with Rs 500 smartphones and bundled tariff plans.
On the face of it, this seems too good to be true. And it is. Based on ET analysis, this move will bleed the operators’ balance sheet. What’s worse is it may not have the intended effect of boosting their data revenues.
Who will use these ultra-low-cost smartphones? The likeliest answer is feature-phone users who primarily use their phones to make calls. The attempt is made to increase smartphone penetration and generate data revenue from this huge untapped user segment. “The smartphone penetration is very low in the Indian market (25%-30%), and we need more internet enabled phones to offer [a] connected experience to [the] masses,” says Jaipal Singh, Senior Market Analyst at IDC India.
This is the biggest segment of India’s wireless telecom subscribers, accounting for more than 65% of them. Assuming 1.2 billion wireless subscribers, the size of this segment works out to 780 million. For the sake of analysis, let’s assume only 15% of them opts for these devices.
Can operators afford subsidies?
Per industry estimates, the average cost of manufacturing an entry-level 4G-enabled smartphone is about Rs.3000. Assuming high volumes will be ordered, let’s peg it at Rs.2700 – which is still more than five times the Rs.500 price point that telcos are said to be vying for.
What is the subsidy cost that telcos will have to bear to really deliver the devices at Rs.500? A back-of-the-envelope calculation throws up a whopping number: Rs.26000 crore. Considering the current financial health of telcos, where the cumulative debt is in excess of Rs 5 lakh crore, they need to be careful and can ill afford this additional burden of subsidies.
Per TRAI data (quarter ending September 2017), the monthly pre-paid average revenue per user (ARPU) in India is Rs.71. Assuming operators bundle these devices with a minimum Rs.60 per-month recharge plan (since the target consumers are mostly low-end feature-phone users), it will take more than 3 years for telcos to recover the subsidy cost – given all subscribers stay with the same operator for that tenure.
Considering the high churn rate in the pre-paid segment and the hyper competition among telcos, the recovery period is likely to increase significantly, which will further put the telcos’ investment at risk.
A decent screen size, access to apps, and functional memory and storage space are considered table stakes for smartphones today. While it’s tempting to be swayed by ultra-low price points, what kind of user experience can you expect from a super-cheap “smartphone”?
Two scenarios are likely:
i) Either these devices will come with a few basic, pre-loaded apps (this will help optimize user experience, but will lead to low data usage because of restricted access to content/apps),
ii) or the operators could consider offering Android Go-based devices and offer access to the full suite of Google Play store apps. Android Go is a stripped-down version of Android Oreo,optimised for entry-level smartphones; however, devices based on it are yet to be launched in the market.
The first scenario won’t be a deal breaker for users who only use their phones for voice calls. However, it will limit data use and prevent telecos from making money off data.
The second scenario will offer users access to more content and will thus drive greater data usage. But the superior device-configuration requirements will increase device costs.
“Considering the price point, such low-cost devices are likely to be highly resource-constrained, and if a lot of applications are loaded then the user experience might be impacted”, says Anshul Gupta, Research Director at Gartner India.