Undercut on the Low End: Rethinking Strategy in the Mobile Handset Market

The huge and rapidly growing Indian mobile handset market once seemed like a boon to developed-country manufacturers, but lately it is starting to cause them some sleepless nights.  Formerly the dominant player with over 70% of the market, Nokia has seen its share slide to 31.5%.  Samsung, meanwhile, recently lost the number-two spot to the relatively unknown Chinese brand G'Five, which now holds a 10.6% share to Samsung's 8.2%.  Although Nokia and Samsung still make up the largest share of the market, fierce competition from domestic and Chinese companies is quickly changing the market landscape.  Last year alone the number of Indian domestic handset manufacturers grew from five to 28. These companies have learned that they can score by addressing rapidly changing consumer preferences, such as longer battery life and feature-rich phones with low price points.

The shake up in the Indian handset market points to the challenges Western companies are having in maintaining a strong presence in emerging markets as new players offer value products in the low- and mid-markets with rock-bottom prices and novel features.  While not alone in struggling in the Indian market, Nokia stands out because it is being squeezed on the low and high ends, and in both emerging and developed markets.  In the global smartphone market, rising competition from such large players as Apple, Research in Motion, and Motorola has eaten away at Nokia's market share.  Commentators note that Nokia's market share loss is due in part to an insufficient focus on consumer needs and the emphasis consumers place on style and design, which rings similar to what is driving its loss in the Indian market - a lack of understanding the demand the Indian consumer has for cheaper, feature-rich products.  The fierce competition in markets such as India means that companies like Nokia need to find a way to stand out in the crowd, as they risk losing their competitive edge in low-cost device markets to homegrown emerging-market players.

One potential strategy is for multinational companies to move into solutions that require more than just the ability to manufacture cheaply, such as offering ancillary or end-to-end services that bind consumers and business customers more tightly to certain brands.  Nokia is pursuing this path with its Ovi suite of mobile services, with some success so far. Focusing on offerings that go beyond hardware can help shield companies from competition in low-end device categories by increasing customer loyalty and providing a new revenue stream.  Learning how to do this requires an understanding of evolving local preferences and trends, but it can help companies hold their own as competition intensifies.

Low-cost Devices Take Heat for Poor Low-cost Strategies

Initially heralded as a lifeboat for the PC industry and the single largest growth area for handsets, low-cost devices are now taking a beating in the press. Analysts last week blamed Motorola’s dismal quarterly results on their overly eager entry into the ultra-low-cost market and claimed Intel’s foray into netbook-powering Atom processors is disastrous for the company and the industry.

What you’re hearing is the common industry lament over razor-thin margins and the limited buying power of emerging-market consumers. Such challenges caused some low-cost PC manufacturers to abandon emerging markets to sell second devices to current technology users in mature markets. For other manufacturers, miscalculated strategies in developing countries have caused hiccups in their growth. Motorola’s low-cost handsets, for example, sold well, but the slow pace of innovation and lack of breadth in their product portfolio sent their customers to other companies when it was time for an upgrade.

In spite of (or due to) these missteps, there are still large, relatively untapped markets in developing countries. Business managers who explore new business models will find that low cost does not necessarily mean low margin. Support for alternative payment strategies can bring down the perceived cost of a device and help bring technology to first-time buyers and new customer segments, offsetting (rather than further eroding) declining sales in mature markets. Alternative payments require the right partners and new business models. Companies that put rigor behind all aspects of their emerging-market strategies will follow the demand for affordable devices into new markets and find a better balance between revenues and growth.

Bypassing the Network May Connect the Unconnected

This week’s nugget was unearthed when a little-known telecommunications company promised to bring to market a mobile phone that can bypass operator networks and enable users to text and make free calls to people within a one kilometer radius. Sweden-based TerraNet believes the technology addresses the need for communication in developing countries, especially in rural areas where operator networks do not exist, and could also aid in disaster relief. The technology can even be used for free phone calls outside the immediate vicinity if there is a broadband-enabled PC with Voice over Internet Protocol (VOIP) capability within range. Focusing on areas without existing operator networks, TerraNet intends to launch a commercial network in 2008 with revenue models based on licensing and handset sales.

Though TerraNet's technology requires special handsets, the company hopes it will eventually be a feature available on standard phones. Phone manufacturers, however, will have to overcome the objections of operators if they intend to offer a service that bypasses the operator’s network to make free calls. Indeed, many operators – focused relentlessly on competition from other operators and maintaining ARPU (average revenue per user) – may not be prepared for a competitive threat like TerraNet’s solution. Because consumer needs and user habits differ considerably in emerging and mature markets, a solution could quickly become formidable competition in emerging markets while not posing a threat in developed countries.

While TerraNet’s solution poses a threat to telecommunications companies, Vital Wave Consulting suggests that it may also present an opportunity for PC maufacturers and local entrepreneurs. Mobile technology that taps into a connected village PC for free VoIP calls could present not only a lifeline to the outside world but a strong enough value proposition to prompt community or entrepreneurial investments in PC-based connectivity for longer-distance communications. TerraNet’s solution is also a reminder that multinational technology corporations doing business in developing countries would do well to look far outside traditional technology and business model solutions to understand competitive threats and accurately identify growth opportunties.

Also in the news:

• Motorola loses ground because of ultra low-cost segment
• Everex partners with Zonbu for low-cost laptop
• OLPC signs Peru for 260,000 laptops

Addressing the Value of WiMax to Emerging Market Consumers

Late last week, Motorola announced an agreement with Vietnam Data Communications to launch WiMax testing in Vietnam later this year. This announcement came just days after Ericsson spoke publicly about their refusal to put their weight behind WiMax, claiming it lacks a business model. While Ericsson continues to remain focused on cellular broadband, building upon existing infrastructure instead of transferring over capabilities to WiMax, others like Motorola and Intel believe that WiMax is a cost-efficient way to boost broadband adoption in developing countries. Motorola, Intel, Samsung, and others are clear about their interest in this emerging technology. Yet, widespread WiMax adoption in developing countries is not guaranteed.

Investors bear the risk that governments may choose not to support WiMax in their spectrum allocation policies favoring homegrown technologies. In addition to spectrum policy issues, WiMax success or failure rests on its true addressable market and its value proposition against available options in developing countries. Once established as a viable technology, the addressable market for WiMax will depend on customers’ eagerness to have and ability to afford broadband access and devices. With price-sensitive consumers, the value (or net utility) of broadband has to be carefully weighed, and recent studies show that, for new users, access to high-speed connections is not necessarily a priority.

The opportunity for corporations banking on WiMax is to focus on the value proposition of the technology in this market. The technology alone will not automatically induce adoption. Essential to WiMax success are service offerings, devices and go-to-market plans that maximize the net utility offered by the technology to the price-sensitive customers of emerging economies. This can be done, in part, through the introduction of services and applications via strategic relationships. Key partnership areas will include financial institutions to facilitate electronic payments and remittances, health professionals for delivering and collecting health-related information, and advertisers who are willing to supplement WiMax service costs in return for access to these new markets. With a great value proposition for the customer and reliable market data about where to focus their efforts, MNCs will be better equipped to benefit from the potential of the WiMax market.

Also in the news:

• Cisco shows link between economic development and broadband penetration
• Laptop industry eyes emerging markets
• MNC business execs know little about business in emerging markets

Bare-bones PC Finds Customers Outside Emerging Markets

Almost unnoticed in the low-cost PC craze is the MicroClient Jr., a small, limited-function personal computer (PC) produced by Norhtec, based in Thailand. Designed for environments with limited space or extreme temperatures, the device retails for $85 without a monitor, mouse or keyboard. Norhtec has no flashy marketing campaign and has steered clear of the OLPC (AMD) versus Classmate PC (Intel) battle. And the company is treating the low-cost PC market strictly as a business endeavor rather than a philanthropy project.

Due to their fear of cannibalizing mature-market product lines, multinational PC and chip manufacturers have aimed their low-cost computing solutions at emerging-market consumers. Norhtec, however, has recognized a demand – even among mature-market commercial customers – for inexpensive PCs that reliably perform only a few basic functions. And they’re selling thousands of units. Customers include a Canadian diamond-mining company and McDonald’s franchises.

Norhtec’s strategy supports Clayton Christensen’s theory, widely publicized in The Innovator's Dilemma, that technology innovation will originate from the low-end of the marketplace and eventually evolve to displace high-end technology. While multinational giants are fighting to sell higher-margin products and protect existing product lines from cannibalization, scrappy start-ups in emerging markets are innovating with the low-end customer in mind and finding high-end mature-market demand, as well. Multinational technology companies that overcome their resistance to low-end offerings will be better prepared for the Norhtecs of the world, who will inevitably enter mature markets through the back door.

Also in the news
• Analysts push Motorola to gain momentum in India
• Developing countries strengthen their hand in the global economy
• Intel and AMD battle over low-end laptops