Train Tracks in Teal

Expanding the Smartphone Market in Emerging Economies

February 17th, 2012
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IphoneAnalyst Insight by Wee Teck Loo, Head of Consumer Electronics Research at Euromonitor International

Manufacturers and mobile network operators (telcos) are banking on smartphones to revive declining voice revenues. Euromonitor International examines the challenges inherent in upgrading feature phone users to smartphones, particularly in emerging markets like Latin America and Asia Pacific.

Computers on steroids

Despite Apple Inc's iPhone being hailed as a game changer in the era of smartphones, it was Nokia Group which envisioned a mobile phone with the processing power to rival a computer. Nokia launched the Communicator range of mobile phones in the late 1990s. The Communicator, however, failed to take off, with a lack of infrastructure for mobile internet being its Achilles' heel.

Nearly a decade later, the new generation of smartphones, supported by the influx of 3G mobile networks and a pared down “lite” version of a computer operating system (OS), has proven to be a hit, much to the delight of manufacturers and telcos.

Fighting for subscribers

While a company is always judged by its revenue and profit, another critical measure of a telco's profitability is its average revenue per user (ARPU) – how much money a company earns from each user. ARPU is a critical measure because it provides a breakdown of what is driving revenue growth. There are primarily two ways in which telcos derive their revenue:

1. Existing subscribers

2. New subscribers

Increasing the number of new subscribers is a viable business model when the mobile phone market is in its infancy as consumers will be rushing to sign up with the telcos. When the mobile phone market becomes saturated with consumers already having a mobile line, adding new subscribers will incur additional costs like offering discounts to encourage users to switch operators, effectively eroding the profit margins of the telcos.

Revenue driven

A review of the ARPU of the major mobile network operators (MNOs) globally highlighted contrasting fortunes and revenues. Bharti Airtel Group's ARPU is only one third of Mexico's, reflecting the highly competitive and saturated Indian market. India mandating that there must be at least three telcos per state was meant to prevent a monopolistic structure and encourage competition. Chinese regulators, on the other hand, forced the telcos to merge into three operators before handing out 3G licences in an effort to make the telcos focus on improving network quality. Despite having the largest number of mobile subscribers in the world, China Mobile's ARPU trails behind Mexico's América Móvil, which enjoyed a virtual monopoly.

The net effect of low margins is that the telcos are reluctant to invest in improving infrastructure and rolling out new technology. Long Term Evolution (LTE) is light years away and even Evolved High Speed Packet Access (HSPA+) which provides data rates up to 84Mbps (downlink) and 22Mbps (uplink) is generally not available in these emerging markets.

No to contracts and smartphones

The telcos' reluctance to invest in HSPA+ and LTE is also linked to the number of subscribers on mobile plan contracts. A large majority of mobile phone subscribers in these emerging markets are on pre-paid plans, which also inadvertently negatively affect the MNOs' ARPU. Typically, expensive mobile data plans are bundled with subsided smartphones. The telcos enjoy higher revenues from smartphone subscribers compared to consumers on pre-paid mobile plans.

Looking for smartphone users

As long as a significant number of mobile phone users are still not on mobile contracts, the demand for low-cost feature phones will remain strong. The challenge is thus for manufacturers and MNOs to capture these consumers.

The price of smartphones is on a downward spiral and is becoming increasingly affordable. The telcos should also consider offering free trials or bundling limited data services tied to pre-paid plans. Consumers on pre-paid plans are typically less tech-savvy or may belong to lower-income groups. Interestingly, these are the same consumers who are willing to splash out on mobile phones rather than laptops. The onus is on the telcos to explain the integral cost savings if consumers are using their smartphones for internet browsing and free internet calls.

Much has been said about the impact of mobile phones and the time is now for the telcos to really expand the role of a mobile phone beyond that of a voice and texting medium in emerging markets.

Have a question or a thought to add? Leave us a comment below.

Cat Dix

Catherine Dix is the Corporate Social Responsibility Manager at Euromonitor International.  She is responsible for the design and implementation of Euromonitor’s CSR programme across the 12 global offices.  Prior to this role she worked for a charitable foundation for 6 years advising corporates and high-net-worth individuals on their philanthropic giving.