Apple Inc. (AAPL:US), ranked a distant eighth in India’s smartphone market, may fail to narrow the gap with leader Samsung Electronics Co. (005930) as a lack of subsidy from local carriers renders its cheapest new model unaffordable.
The iPhone 5c, yet to be released in India, may start at $549, more than five times the $99 buyers opting for a plan in the U.S. pay. Unlike the largest carriers in the U.S. including Verizon Communications Inc. (VZ:US) and AT&T Inc. (T:US), or China Telecom Corp. and China Unicom (Hong Kong) Ltd., Indian wireless providers don’t offer service contracts subsidizing the iPhone, leaving the handset overpriced for most Indians.
While smartphones including the iPhone help generate average revenue per user of $68.49 a month for U.S. carriers, India’s wireless operators, boasting the cheapest call rates in the world, have an ARPU of about $1.60, making subsidies not viable, according to Rajan Mathews, Director General of the Cellular Operators Association of India. That may prove a challenge to Apple as it cuts costs with less expensive components as a way to appeal to customers in emerging economies including India, the world’s fastest-growing smartphone market.
“In a market like India, iPhone prices exclude the vast majority of subscribers from being able to afford them,” said Ian Fogg, a London-based analyst at researcher IHS. Even customers willing to pay extra for a premium product don’t spend significantly more, according to Fogg.
Almost 80 percent of Samsung’s smartphone sales in India come from models priced below 23,870 rupees ($380), according to researcher IDC. Handsets priced below $200 are the fastest-growing smartphone segment in the Indian market, which is projected to overtake the U.S. as the second-largest by 2017, according to IDC.
“There are cultural and economic factors which won’t allow” the subsidy model to work in India, Mathews said in an interview. Also, Apple’s brand appeal has been overshadowed in the nation “by Samsung and their wide product range.”
Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, counted 96 percent of its 191 million wireless subscribers at the end of June as prepaid customers. Verizon, the second-largest U.S. phone company, had less than 6 percent (VZ:US) of its subscribers last year on prepaid service plans.
Consumers fueling India’s smartphone sales surge are purchasing prepaid voice and data packets for as little as $5, said Anshul Gupta, a Mumbai-based analyst at researcher Gartner Inc. Verizon’s basic voice, text and data plan starts at $40 per month, according to the company’s website.
Indian carriers have tried the subsidy model without much success, according to Mathews. When Reliance (RCOM) Communications Ltd., India’s third-largest listed mobile carrier, started its wireless service a decade ago, the company offered LG Electronics Inc. (066570) and Samsung handsets along with an introductory three-year contract for 21,000 rupees. Within months, users had stopped making their monthly payments and the company took a big financial hit, said Mathews.
“People took the phones and disappeared,” he said. “It’s impossible to enforce these contracts in India. There’s no way to recoup the cost of the phone.”
Reliance, based in Mumbai, didn’t respond to two phone calls and an e-mail regarding the subsidy model.
The handset contracts helped Apple sell a record 9 million iPhones worldwide in its weekend debut of the iPhone 5c and the higher-end iPhone 5s, almost double the previous record.
Mobile carriers including Bharti, Vodafone Group Plc (VOD) and Reliance are banking on increased data usage by customers surfing the Internet and downloading music and videos on their handsets, instead of leaning on fewer high-end consumers of devices such as the iPhone, said Gartner’s Gupta.
Average revenue per user from Bharti’s mobile services in India, its biggest market, rose 8.7 percent to 200 rupees a month in the June quarter, while total data traffic in the nation doubled, Bharti said July 31. Vodafone reported in July a 33 percent first-quarter jump in India data users to 41 million, spurred by increasing smartphone penetration.
Bharti, Vodafone and Idea Cellular Ltd. (IDEA), India’s second-largest listed carrier, declined to comment on their business model and the iPhone. Apple didn’t reply to two e-mails seeking information on India plans for the iPhone 5c.
Apple is selling the iPhone 4 and 4S and its iPad at the same price as in 2012, even after the rupee’s 12 percent decline this year, said Redington India Ltd., a distributor of the company’s products. The decision to maintain prices matches their strategy of offering payment plans to tap some of India’s middle-class consumers and helped Apple post a fivefold jump in iPhone sales in the country in the quarter ended June.
Redington rose 1.9 percent to 55.80 rupees at the close in Mumbai trading. The benchmark S&P BSE Sensex (SENSEX) added 0.7 percent.
The Reserve Bank of India on Sept. 17 banned banks and credit-card issuers from offering interest-free payment plans, which included processing fees, to halt retailers from “luring and exploiting vulnerable customers,” according to a RBI notification.
IPhone sales surged 10 percent in the half-year through June compared with the previous six months, according to IDC, after resellers splashed the front pages of Indian newspapers with advertisements for payment plans.
In India, carriers such as Bharti and Vodafone aren’t concerned with which device consumers use to watch videos, stream music or download movies, so long as they’re doing it, said Shashin Devsare, executive director of Karbonn Mobiles India Pvt., India’s third-largest smartphone seller. The company offers a selection of more than 50 China-made smartphone models and 10 tablets ranging from 3,500 rupees to 20,000 rupees, he said in an interview.
“With high-end prices, you’re only trying to address the tip of the glacier, which isn’t really a commitment to this market,” he said. “Apple’s handsets cost seven times as much as ours, so of course volumes are going to be minuscule.”
Carriers are hoping the surge in smartphone volumes will yield huge returns from data products. To lure consumers, Bharti, Idea and Vodafone are replicating a strategy that got them almost a billion subscribers for voice traffic by slashing data prices by as much as 90 percent.
Bharti’s mobile data consumption almost doubled to 203 megabytes per data customer per month in the quarter ended June, the New Delhi-based company reported in July. Still, profit in the period fell 9.6 percent to 6.89 billion rupees.
Revenue from data usage for Indian mobile phone companies as a share of total sales is about 3 percent, among the least in the Asia-Pacific region. That may climb more than sixfold to 20 percent by 2017, according to Nitin Soni, a Singapore-based analyst at Fitch Ratings.
“Apple will pick up some volumes by discounting their older devices,” he said in an interview. “But it doesn’t look like Apple has a strategy to get a large chunk of India’s expected big surge, at least not yet.”
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