Vodafone's Low-Cost Cell Phone Gambit

The world's top mobile operator wants to pitch cheap sets to emerging markets. Can it compete with established brands like Nokia and Motorola?

by Kerry Capell

Hoping to push deeper into emerging markets, the world's largest mobile operator, Vodafone Group, is taking a page from the Nokia and Motorola songbook. On May 21, Vodafone executives announced in London that the company is rolling out its own line of ultra-low-cost handsets. To be built by a Chinese partner, the GSM-standard phones will carry the Vodafone brand name and sell for $25 to $45, depending on locale.

With its unexpected move, Vodafone (VOD) becomes the first carrier to introduce its own phones intended specifically for customers in developing countries. Until now most so-called "private-label" devices resold by operators have been aimed at the high end of the market. "[These] will be the lowest priced GSM products ever," crowed Jens Schulte-Bockum, Vodafone's global director of terminals, at the event.

True enough, but Vodafone could have a tough time getting its newfangled devices into the hands of consumers. For one thing, it faces stiff competition from the likes of Nokia (NOK), Motorola (MOT), and Sony Ericsson, all of which market their own inexpensive models and already have a big head start in markets such as Africa, South Asia, and Latin America (see BusinessWeek.com, 1/31/07, "Handset Makers' Emerging-Markets Boost").

Dealing With Saturation

Adding pressure, in February the GSM Assn., an industry trade group that represents scores of mobile operators around the world, made its latest award in a series of tender offers designed to drive inexpensive handsets into developing economies. This time South Korean giant LG Electronics was selected to supply millions of cheap, third-generation (3G) phones to a dozen carriers who have signed up for the plan. (Motorola has won several earlier bids for second-generation handsets, while Nokia largely sat out the program.)

Yet despite the crowded field, Vodafone sees value in getting devices bearing its name into the hands of new buyers. It's all part of the Newbury (England) company's two-year-old strategic push to fuel growth by moving into emerging markets. With markets near saturation in the developed West and Asia, Vodafone has little choice but to expand elsewhere. (see BusinessWeek.com, 12/19/05, "Vodafone's New Growth Map").

Over the last three years the British giant has shed businesses in mature markets such as Sweden, while acquiring operators in Romania, Turkey, and most recently India, with the $11 billion-plus takeover of Hutchinson Essar. (see BusinessWeek.com, 1/17/07, "Why an India Deal is Vital to Vodafone"). Within the company, the India deal is seen as especially important. "It's a game-changing deal," says Schulte-Bockum.

Turning on a Dime

But Vodafone lacks brand awareness in markets such as India, so it's hoping that selling phones carrying its own moniker will bolster its image and visibility among first-time buyers. Despite a relatively late market entry, the company argues it can compete successfully against Nokia and others, selling "double-digit millions" of the candy bar-shaped phones over the next three years.

Made by Chinese up-and-comer ZTE Corp., the initial lineup of GSM phones includes a monochrome-screen model called the 125 and a color-screen version called the 225.