Vodafone's Low-Cost Cell Phone Gambit

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Both should start shipping in the next week to Egypt, Tanzania, South Africa, and Romania. Vodafone says it's also working with French electronics giant Sagem on later additions to the lineup. Keeping the price down is the key. "Every 10 cents we take prices down on these products extends the reach of mobile telephony in these markets," Schulte-Bockum says.

Selling inexpensive handsets pre-loaded with Vodafone software also is a camel's nose in the tent to boost usage of mobile services. Like most carriers, Vodafone still gets the vast majority of its revenues from good, old-fashioned voice calls and text messages. But it sees opportunities, even in the developing world, to sell other wireless applications such as mobile banking.

The Challenge of Distribution

In February, for instance, Vodafone joined forces with Citigroup (C) to launch a Vodafone-branded money-transfer service that runs over handsets. The service is now up and running in Kenya via Vodafone affiliate Safaricom. Similar offerings have big potential in countries where many people lack bank accounts and often receive remittances from friends and family abroad. According to the World Bank, money transfers to developing nations have increased from $147 billion in 2001 to $268 billion in 2006.

"These are exactly the kinds of new services operators should be going after in emerging markets," says Carolina Milanesi, research director at market researcher Gartner in Egham, England.

Still, analysts are skeptical about the likely success of Vodafone's handsets. One big challenge is distribution. Nokia has spent years building presence on the ground to ensure that its line of low-cost phones make it into the hands of emerging-market consumers, many of whom live in rural areas with poor infrastructure and few if any retail outlets. (see BusinessWeek.com, 5/4/07, "Nokia Gets It Right for South Asia").

Changing the Sales Model

"Vodafone has the product, but not necessarily the brand and distribution," says Neil Mawston, associate director of market researcher Strategy Analytics in Milton Keynes, England. "And distribution will be their biggest challenge."

That's because emerging markets tend to rely on a completely different sales model. In the U.S. and much of Western Europe, upwards of 90% of handsets are sold via operators or operator-linked stores. But in China, by comparison, carriers account for only about 5% of cell phone distribution, says Mawston. The rest happens via independent retailers—often just mom-and-pop stores.

Reaching deep into countries to develop relationships with such stores requires deep-pockets marketing spending and years of steady effort. Nokia, more than any other company, has managed to accomplish that in booming markets such as China and India. "Nokia is way ahead of anyone else in reaching consumers through these retailers," says Mawston.

Sweet Spot for Buyers

Vodafone's other problem is more subtle. No doubt low price is essential in emerging markets, where a handset can be the most expensive item a poor consumer has ever purchased. But for that very reason, buying name brands acquires significant importance. Analysts concede that Vodafone is a known entity—but global mega-brands like Nokia and Motorola have even more pulling power.

"In these markets the brand is a very important part of what a mobile phone represents; it's how people express themselves," says Gartner's Milanesi. In India, she notes, buyers sometimes shy away from the lowest-price model "because they don't want their family and friends to think that's all they can afford." Milanesi reckons the sweet spot for "aspirational," low-cost phones in emerging markets is around $50 to $70.

Still, observers praise Vodafone's low-cost handsets as a useful experiment. The move should help get the Vodafone name out to a new generation of customers. And it carries little financial risk, notes Strategy Analytics' Mawston. "If it flops, Vodafone hasn't lost much because ZTE bears some of the costs," he says. "But if it goes gangbusters, this creates a huge opportunity."

Capell is a senior writer in BusinessWeek's London bureau .