HANDSET Strategy : Ride to Rural India

The great Indian mobile revolution is all set to move to the rural part of the
country, with handset manufacturers gearing up to come out with market-specific
products to acquire maximum share. The next big opportunity for telcos will be
in the hinterland where two-thirds of the country's 1.17 bn population lives.

As of March 31, 2008, the rural tele density in the country stood at just
9.2% vis-à-vis the urban tele density at 65.9%, according to the Association of
Unified Telecom Service Providers of India (AUSPI). Figuratively, the all-India
rural wireless subscriber base stood at 62.2 crore, while the all-India urban
wireless subscriber base stood at 198 crore. Also, Uttar Pradesh (including
Uttranchal) boasts of the maximum rural wireless subscriber base at 8.5 crore,
followed by Maharashtra with a subscriber base of 5.4 crore. Clearly, now the
focus has shifted from a small increase in tele density to reach a critical mass
in rural areas that have access to and affordability of telecom services.

There are many factors driving handset manufacturers and operators to the
rural market. Though India is emerging as one of the biggest telecom markets,
metros and tier-2 cities are already reaching saturation point. Hence, companies
have no option but to explore newer markets to sustain the growth. As of now,
India is adding around 8 mn subscribers a month, and in July 2008 the country
added 9 mn subscribers.

Falling handset prices along with services available at extremely competitive
prices have made mobility accessible to the lower strata of the society, which
has mostly remained untapped. Handsets are available for as less as Rs 1,000,
and affordable prepaid packages are making mobility very tempting for the mass
market.

Another driver for this market is that the Department of Telecom is planning
to launch the second phase of mobile phone expansion covering around 2 lakh
villages. About 11,000 additional towers will be installed under the scheme to
cover habitats with population of 500. The details of the scheme are being
worked out and locations of the towers are being identified.

Under phase-I of the scheme, about 7,900 towers will be installed in 500
districts spread over 27 states. The state-owned BSNL will be installing over
6,000 towers. The setting up and managing of these infrastructure services
started in June 2007, with subsidy support from the Universal Service Obligation
Fund (USOF) of DoT.

It is believed that of the next 250 mn users who will go mobile in the
future, as many as 100 mn are likely to come from the rural parts of the
country. As of now, rural mobile subscribers account for close to 25% of the
total mobile user base in the country. However, there are many challenges
associated with expansion in the rural segment as well. It is an extremely
price-sensitive market and the requirements are going to be vastly different
from the urban market.

Recently, an Ernst & Young-FICCI study said that low income and geographical
variance pose difficulties for network layout, as well as for setting up of
distribution channels in remote areas. Apart from that low ARPU generated by
rural customers does not immediately offset return on investment and revenue for
rural outlay for private operators.

Possibly, the most crucial element in catering to the rural market is
pricing. The rural market is believed to be extremely price conscious. Thus,
affordability is a major plank for handset manufacturers, most of whom believe
that pricing is going to be crucial to tap first-time buyers in the rural
segment. "Affordability is one of the key factors, and our effort will be in the
direction of making our products more accessible to rural consumers, be it
easier finance or pricing itself," says Sunil Dutt, country head, Samsung Mobile
Business.

However, it is not just pricing, handset manufacturers would also have to
come out with features that would appeal to the rural segment. "One of the major
challenges for handset companies is that they have to have an understanding of a
model that responds to user needs. It is not just pricing. Rural India is also
looking for features, that are specific to their needs. For instance, Nokia
1100, one of the best selling Nokia model was specifically targeted at the rural
segment with long battery life and came with a torch. Hence, it is imperative
that manufacturers have to understand the needs of the rural segment," says
Anshul Gupta, principal analyst with Gartner.

There is another issue facing handset manufacturers-features that appeal to
an urban user are not likely to appeal to the rural India. "Contrary to popular
belief, price is not the only driver for rural users. They seek a value for
money proposition. In most cases the demand emerging from the rural market is of
sturdy handsets that have strong battery life. Also, voice and easy text
messaging are other essential and important features in an entry-level phone,"
says Devinder Kishore, director marketing, Nokia India.

In fact, some players like LG have decided not to play the price game.
"Though the scope of hi-end phones in the rural market is less, our strategy is
oriented toward growth as income levels and prosperity are on the rise in rural
India," says Anil Arora of LG.

Lloyd Mathias, senior director, sales and distribution, India & South West
Asia at Motorola Mobile Devices supports this: "First time consumers are not
just looking for a low-priced handset, but a phone that meets their daily needs.
Today, the mobile phone is fast evolving into a ubiquitous tool performing
multiple tasks. Our entry-level market strategy seeks to address the very needs
of an aspiring Indian consumer for whom affordability and features are
essential, without compromising on style and design." Motorola has tied up with
Bharti TeleTech as its national distributor, and their products are available
through 20,000 outlets in the country.

Though many players say that pricing is just one of the factors, the prices
of the handsets are continuously falling, making mobility more appealing.
Moreover, the customers are looking at total cost of ownership. "Handset
manufacturers have to come out with features which are specific to the needs of
the rural consumer. Basically, affordability, access, and availability are going
to play a key role," says Naresh Priyadarshi, head of Synovate Business
Consulting India.

Spice recently introduced a handset priced at just Rs 800. LG has the Bullet
series phones targeted at this segment. LG has also recently launched the KP106B
catering the rural segment. This basic phone is targeted at high capacity users
with high talktime requirements, and also supports the best-in-class battery.

Motorola, on the other hand, has its Motoyuva series, Motoflip W220, Motoflip
W375, and Motorola W218. The company has come out with features targeted at the
rural segment like Hinglish predictive text input, Hindu calendar, Indian
wallpaper, Hindi texting, phonebook storage, and vernacular languages, which it
believes are likely to appeal to the rustic part of the country.

Distribution Roadblocks

Analysts and experts believe that the distributor model that handset
companies use might have to be reworked or enhanced to reach the hinterland of
the country. The main challenge in distribution would be reaching the rural
population and developing an efficient channel strategy. An associated challenge
is also to educate the masses about the handsets and its advantages. Tying up
with key opinion leaders and players like ITC e-Choupal or DSCL Kissan Sagar
might also play a key role.

To reduce the cost of total mobility, it is important for manufacturers to
work in tandem with operators. And bundled schemes are likely to become the
order of the day in this scenario. "Handset manufacturers would have to work in
tandem with operators to reach out to new subscribers in the rural market. This
is mainly because the consumer is looking at total cost of owning a mobile, and
bundled schemes become very important in this scenario," says Priyadarshi of
Synovate.

Bundling is essential for the rural market as they would desire a mobile
phone with connection and talktime to ensure a complete package. This is also
required since prepaid is likely to be the norm in this segment, so the consumer
would be looking at total cost of ownership rather than just the cost of the
handset or service provider.

Bundling is inevitable since the rural populationsees it as a key value
proposition. Bundling also makes business sense since due to decreased ARPU
realizations, companies will like to reduce their spending. This way, handset
manufacturers, as well as telecom companies could pass on the benefits to the
customers in rural areas.

There are other advantages as well. Both handset manufacturers as well as
telecom companies will be able to take advantage of each others distribution
network, to ensure a higher market penetration. Lesser-known handset
manufacturers will also get an opportunity to garner higher sales on account of
brand image of renowned service providers.

"Nokia has always been at the forefront as far as extending affordability to
consumers in concerned. As part of our strategy, we essentially look at
maximizing customer value by reducing the total cost of ownership for consumers.
We will continue working with operators and the government to drive down the
cost of mobility, thereby making it affordable, and bring the benefits of mobile
communication to the Indian consumers," says Devinder Kishore, director
marketing at Nokia India.

Handset manufacturers like LG and Samsung might have an advantage over other
players since they already have a presence through their other products in the
rural segment. The brand recall for these companies would be higher in rural
India than Nokia, Sony Ericsson, and Motorola.

"LG has been very aggressive in the rural market with products like Sampoorna
TV being a complete hit in this segment. Also, these companies have a
distribution network in place to leverage on as a competitive advantage," says
Priyadarshi of Synovate.

There might be other factors in favor of companies that already have a
substantial network in the rural segment. Brand loyalty in rural population is
much higher than in urban population, and word of mouth publicity holds high
potential. New entrants in the rural market will have to start from scratch to
build a user base where companies like LG and Samsung already have a user base
and a trust factor among the population due to reliability of their products.

Samsung has recently strengthened its distribution network in the country by
appointing SSK and Link as its distributors for mobile sales in the Western and
Eastern part of the country, respectively. The company already has Telemart and
United Telelinks as its distributor in the Northern and Southern parts of the
country.

Most handset manufacturers have already started using alternate distribution
channels to get in touch with prospective customers. "We are targeting alternate
distribution networks to reach the rural market, which is the next growth area
for the mobile industry. We are also looking at tying up with local
co-operatives to push handset sales in the rural segment. Samsung recently tied
up with the Indian Farmers Fertilizer Co-operative (IFFCO) for rural telephony,
which will take our handsets to the countryside. We will use IFFCO's
co-operative network for marketing our handsets. The handsets will be especially
beneficial for accessing commodity prices to agricultural inputs, among other
benefits," says Dutt of Samsung.

However, this might be difficult for handset companies since both FMCG and
the pharma industry are high-margin businesses, and they can afford to have
their own distribution network in rural areas. The margins are not very high for
handset manufacturers. The report however suggests that collaboration with FMCG
and the pharma industry will yield a much better result for handset players, as
well as for operators.

Nokia has a partnership with HCL for distribution of its phones. Last year
the company also decided to start its own distribution efforts, and has set up a
number of concept stores in metros and tier-1 cities. The company is planning to
come out with a slew of measures to make its brand stronger in the current year.
"Making our products, as well as services available in rural India is our key
focus this year. As of now there are 130,000 mobile outlets in the country, out
of which 75,000 are Nokia brand outlets," says D Shivakumar, VP and MD of Nokia
India?.

Nokia was probably one of the earliest to realize the potential of the rural
market in the country. The company started the Rural Van project about two years
back. The van forms a traveling retail and distribution center designed to
improve awareness of the benefits of mobility.

"In addition to increasing our existing fleet of Rural Vans, we are also
planning to reach out to villages across India to showcase the relevant product
portfolio and solutions to demystify the use of mobile technology," says Kishore.

Nokia is also looking at microfinance as a major initiative to increase
mobile penetration in the country. The company is currently running pilots and
trials to gauge consumer response in select markets and will soon come out with
specific offerings to make buying a mobile phone more affordable. Nokia has one
of the largest distribution networks in the country, and offers support for nine
Indian languages. The company is also providing agriculture-based solutions
catering to the vast farmer community in India. It is working with a host of
content providers and has started programs for farmers, which include providing
solutions from information on market prices agricultures products, weather
updates, and financing options.

Smaller players like Meridian Mobiles are also planning to tweak their
distribution channel to cater to the rural segment of the market. "We are
expanding our distribution network in a large manner to reach out to rural
customers and facilitate them both in terms of products and services. For this
we are also in the process of recruiting 100 strong channel partners in
different areas," says Rajiv Khanna, CEO, India, Meridian Mobiles.

The VAS Angle

Experts and analysts believe that VAS will not be the driving force in the
short term. Voice and mobility will drive the market. However, in the
medium-to-long term, voice-based VAS, especially those relating to entertainment
and ringtones, will form an important source of revenue for telecom companies.

Vernacular content in all likelihood will become a key differentiating factor
in the Indian rural market. As companies enter the innermost areas of the
hinterland, where the proportion of population understanding English is
negligible, the true value of vernacular languages will emerge. A beginning will
have to be made from tier-3 cities and semi-urban towns to gain a deeper
understanding of the rural market.

"VAS will definitely be the driving factor, but what is important is the
end-offering customized to appeal to the target segment. It is very important to
understand the needs of the rural population to ensure that the services are
aligned on those lines. Vernacular content is already a differentiating factor,
considering the wide language diversity in the rural population which a lot of
handset manufacturers are already exploiting," says Priyadarshi.

Since the rural market is extremely price sensitive, it is likely that the
volume economics will come into play and VAS providers will offer applications
in small denominations. Language and ease-of-use are going to be major concerns.

Handset manufacturers have already started working on specific content for
the masses. "Nokia is working with a host of content providers, and we have
kick-started a program for farmers, including solutions ranging from providing
information on market prices for agricultural products, to weather updates and
financing options," says Kishore.

The rural revolution is all set to become a reality but the road to the
destination is not going to be easy for handset manufacturer.

Gagandeep Kaur

gagandeepk@cybermedia.co.in