The Next Growth Engine of the Dynamic Mobile

Ecosystem:
Robust Growth in Smartphones and Feature Rich Mobile
Handsets, Opportunities Abound!

Thejaswi Parameshwaran
Information & Communication Technologies
20, May, 2011

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 Todays Presenters

Thejaswi Parameshwaran, Industry Analyst

Frost & Sullivan

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Focus Points

Agenda

Product Segmentation

Mobile Handset Ecosystem Overview

Mobile Handset Market Outlook: India

Drivers & Restraints: Overall Mobile Handset Market (Feature Phones &
Smartphones)

Top Trends in the Mobile Handset Market

Emergence of Indian manufacturers

Decreasing price points and channel margins

Strategic shift towards Smartphone's for earning higher margins

Smartphone Ecosystem Overview

Smartphones Market Outlook: India

Drivers & Restraints: Smartphones Market

Top Trends in the Smartphones Market

Operating system perception mapping

Distribution model analysis

Bargaining power impact mapping

Conclusion & Key Take Aways

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Product Segmentation
Mobile Handset Market: Product Segmentation (India), FY 2010
1. Ultra Low-cost Mobile
Handsets (ULCMHs)
Price range:
Less than Rs. 1,500
Key features include
B&W screen, messaging,
and phone book
Mobiles
2. Low- to Medium-cost 3. High-cost Mobile 4. Smartphones
Mobile Handsets Handsets (HCMH)
(LCMHs)
Price range: Price range: Price range:
Rs. 1,500 to Rs. 2,500 Rs. 2,500 to Rs. 4,000 Greater than Rs. 4,000
Key features include Key features include Key features include
colored screen, FM radio, GPRS, extendible application installation,
and VGA camera memory, MP3 player, and QWERTY keypad/touch
digital camera screen, dual SIM, Wi-Fi,
and 3G
Source: Frost & Sullivan
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 Distribution Channels Key Ecosystem Participant for the
Mobile Handset Market
Mobile Handset Market: Mobile Handset Ecosystem (India), FY 2010

Chipset Mobile Application Handset Distribution

OS Developers
Manufacturers Developers Manufacturers Channels

MNCs such as Nokia, MNCs use chipsets Feature phones OEMs assemble There are three tiers
Samsung, LG, SE, manufactured by predominantly devices incurring the of mobile device
and Motorola Qualcomm, Infineon, comprise preloaded entire BOM. distribution in India -
predominantly employ TI, applications. from manufacturers
in-house-developed STMicroelectronics, Thereafter, they ship to super and zonal
OS. and so on. The cost to the them to companies distributors and
handset that sell these finally to retailers.
Nokia uses Symbian Indian manufacturers manufacturer for devices to end
as the OS, but other predominantly use these preloaded customers. Nokia, The margins offered
participants employ solutions from applications is in the Samsung, LG, and a by manufacturers to
Java- or Linux-based MediaTek. range of 3-4%. few other channel partners are
OS for their feature Chipsets account for multinational and different for global
phones.
The preloaded local manufacturers brands and Indian
about 30 to 40 mobile application
percent of the total manufacture manufacturers.
The Taiwanese market was valued handsets on their
chipset manufacturer, cost of a feature at Rs. 580 crores Global participants
phone. own and are the
MediaTek, provides its and is expected to OEMs. pay less and operate
own OS, Nucleus, grow at a CAGR of in a volume-driven
with chipsets. 6.9 percent from market.
2008 to 2012.

Source: Frost & Sullivan

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 Replacement Market to be the Key Driver for the Mobile
Handset Market
Mobile Handset Market: Key Market Drivers and Restraints (India), 2010-2016

The emerging replacement market is expected to 1-2 years 3-4 years 5-6 years
account for more than 50 percent of sales in 2011

Decreasing price points - Due to increasing

Market Drivers

competition, average selling price in 2011 is expected

to decline by a rate of 12 percent from that in 2010

Increasing mobile network penetration in

rural parts of India

3G is expected to drive uptake of 3G-

enabled devices

Lack of after-sales service and support

Market Restraints

Unequal and high VAT rates in certain states

Regulatory Impacts

Impact: High Medium Low Source: Frost & Sullivan analysis.

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CAGR of 11.8% Expected for the Mobile Handset Market

208.362
120.0%

Unit Growth Rate

200.0
Unit Shipment (Million)

100.0%

150.0 98.7%
80.0%

95.235 104.88

100.0 60.0%

40.0%
50.0
10.1% 20.0%

0.0 0.0%
FY 09 FY 10 FY 16
Year
Source: Frost & Sullivan
Unit Shipment (Million) Unit Grow th Rate
100.00%
17%
29%
The emerging
replacement
market is 85%
50.00%
expected to
83%
account for more 71%
than 80 percent
of sales by 2016
15%
0.00%
FY09 FY10 FY16
First time buyer Replacement Units Source: Frost & Sullivan

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Trend #1: Emergence Of Indian Manufacturers

The mobile subscriber base is increasing by 9 to 10 million every month.

Ban on handsets without IMEI number removed 25 million handsets or 5 percent of the existing
Business Opportunity base.
The replacement market is also gaining momentum, accounting for about 20 percent of the mobile
market revenues. New customers in the rural market and the replacement market in urban areas
are the key target segments.
Almost all the Indian manufacturers produce handsets in China, Taiwan, or South Korea and
Business Ecosystem ship them to India. There are about 150 mobile handset OEMs in China shipping handsets to
Indian companies.
of OEMs These OEMs have started to ship handsets with IMEI number to registered companies.

MediaTek, a Taiwanese-based company into/dealing with semiconductors, has brought about a

Chipsets and OS revolution for low-cost local manufacturers by providing cheap chipsets when compared to those
by Qualcomm, Infineon, Texas Instruments, STMicroelectronics, and so on.
MediaTek also provides Nucleus OS for feature phones charging a lump-sum amount to use it
on any number of handsets by its clients. This has made it simpler for new entrants who do not
have to incur a separate cost for the OS.
Local manufacturers are able to procure feature-rich handsets at low price.
Distribution and Many Indian companies start with operating in one or two states initially and create a pan-India
presence subsequently.
Retailing There are about 140,000 retailers (excluding retailers with monthly sales of less than five
handsets) in the country and a few exclusive mobile retail chains such as Univercell and mobile
store.

Large number of Indian manufacturers entered the fray in 2010. The number of participants has
Result increased from just 5 in January 2009 to more than 80 in June 2010.
The number is expected to increase to more than 120 before consolidation occurs in 2011.

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 Trend #2: Decreasing Price points and Channel Margins

Inexpensive smartphone chipsets

Competition between Indian Declining Availability of high-quality open-

manufacturers and global Price of system OS
participants Smartphones

Opportunity for volume production and distribution

Source: Frost & Sullivan

Participants in the mobile market perceive that distributors can impact the sales of a With increasing competition,
brand significantly. Indian manufacturers leveraged on this perception by paying the net margin of certain
huge margins to their channel partners to up sell their products. manufacturers has decreased
to less than 2 percent. Due to
these limited margins, the
Lower Channel Margins Indian mobile market is
expected to witness
The primary reason for low channel margins of large global brands such as Nokia consolidation in the immediate
and Samsung is that they depend on volume sales. future.

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Trend #3: Strategic Shift Towards Smartphones for Earning
Higher Margins

Mobile Device Revenue Breakup

Feature Phones Smartphones

65 to 75 percent is the manufacturing cost 35 to 50 percent is the manufacturing cost

4 to 6 percent on advertising 8 to 10 percent on advertising and R&D

16 to 21 percent margin for retailers as 16 to 20 percent margin for retailers as

well as national and regional distributors well as national and regional distributors

5 to 8 percent net margin for 25 to 40 percent net margin for

manufacturers manufacturers

Source: Frost & Sullivan

Lucrative margins in the smartphone business is attracting traditional OEM players as well as retailers and
distributors in India who are importing Chinese handsets and acting as resellers of the same to obtain these
significant margins.

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Smartphones : Definition

Smartphone

This study defines smartphone as a phone with an OS that can board or host applications,
which can be deployed on the mobile OS of a smartphone. These OSs provide a
framework for the development of applications.
Smartphones also have more advanced user interfaces such as touch screen
technologies and other mobile computing features, including QWERTY keypads.
The smartphone application capability also needs to be advanced to support higher end
applications and ability to host complex/integrated applications.

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 Application Development Community Key for
Smartphone Ecosystem
Smartphone Market: Smartphone Ecosystem (India), FY 2010
OS Vendors
OS vendors are key
value chain members in
the smartphone market.
There are only a few
OS developers
worldwide providing a
smartphone OS. They
basically follow one of
the models listed below: i.
i. Proprietary OS for their
own devices such as
iPhone
ii.
ii. OS on per shipment
royalty basis such as
Windows
iii. Providing application
iii. Open-source OS such
as Android and
Symbian
Chipset
Manufacturers
Chipset forms another Application forms a
important value chain
component in the
smartphone market.
Chipset manufacturers
follow one of the models
listed below:
Providing integrated
application processors
and modems such as
Qualcomm
Providing only modems
for various technologies
such as Infineon
processors compatible
with various modems
Application
Development
Community
OEMs help global
more important
decision-making
parameter for an end
customer when
compared to feature
phones. There are
different participants in
the entire smartphone
value chain developing
platform-
dependent/independen
t applications.
Participants include OS
developers, chipset
manufacturers,
smartphone OEMs,
telecom service
providers, and
independent
application developers.
OEMs Brand Owners
brands in The End users using
manufacturing their Smartphone's
smartphones. In some
cases, OEMs own the
brands such as
Nokia, Samsung, LG,
and so on. However,
in the case of Apple,
China-based Foxconn
is the OEM, and
Apple sells iPhone Market
under its brand.
Chinese OEMs
provide services at
low cost and thus,
many smartphone
participants outsource
their manufacturing to
them.
Source: Frost & Sullivan
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 Convergence and Open Source OSs Key Drivers for
Smartphone Market
Smartphone Market: Key Market Drivers and Restraints (India), 2010-2016
1-2 years 3-4 years 5-6 years
Increased need for converged devices by end
consumers
Increased adoption of smartphone open-source
Market Drivers

operating systems such as Android and

Symbian by OEMs.
Product innovation - Hardware
technology is increasingly becoming
efficient every year.

Lowering of price points

Subsidizing is difficult due to lack of operator-

leveraged distribution model
Market Restraints

Over 70 percent of the population consumes

only voice services, and data services have
not yet received large scale acceptance.

Availability of cheaper, look-alike Chinese phones

Impact: High Medium Low Source: Frost & Sullivan analysis.

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 Smartphones Expected to be the Next Growth Engine with
a CAGR of 39.2%

29.4
30.0 1000.0%
900.0%
25.0 Compound
CompoundAnnual
AnnualGrowth
GrowthRate
Rate(2010-2016)
(2010-2016) 913.8% 800.0%
Unit Shipment (Million)

39.2%
39.2% 700.0%
20.0

Unit Growth Rate

600.0%
15.0 500.0%
400.0%
10.0
300.0%
2.4 2.9 200.0%
5.0
20.8% 100.0%
0.0 0.0%
FY 09 FY 10 FY 16
Year
Source: Frost & Sullivan
Unit Shipment (Million) Unit Grow th Rate

Explosive
Explosivegrowth
growthexpected
expectedininthe
theSmartphone
SmartphoneSegment
Segment, ,the
thefuture
futuregrowth
growthengine
engineof
ofthe
the
mobile
mobilemarket
marketdriven
drivenbybyananecosystem
ecosystemof
ofapps
appsand
andinnovative
innovativeform
formfactors
factors

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Trend #1: Operating System Perception Playing a Key Role
in Smartphone Selection
Smartphone Market: Operating System - Perception Mapping (India) FY 2010
Android,
iOS,BADA for
netbooks, and
other devices

S60, Windows,
and BADA

Android, S60,
WebOS,
Blackberry OS

S40, and Java OS

with advanced UI

Nucleus and other

Java-based
feature phone OS

Source: Frost & Sullivan

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Trend #2: Open Market most prevalent model adopted in
the Indian Market

Open Market
In the open market model, handset manufacturers sell
devices through distributors and retailers.
Handset manufacturers leverage an open market model
Open Market
by having strategic partnerships and alliances with large
distributors.
This can be further classified into
Modern Trade
Distribution Traditional Retail
Models Institutional Sales
Main participants following open market model in India
are HTC, Nokia, Samsung, LG, and so on.

Operator
Leveraged Operator Leveraged
Smartphones are sold through service providers and
locked for services of these providers.
There are two methods to lock consumers to service
providers:
Hard Locking
Soft Locking

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 Trend #3: Bargaining Power of Substitutes, Customers,
Suppliers and New Entrants Key in the Smartphone Market
Smartphone Market: Force Field Analysis of Participants (India), FY 2010

Distributors power

Long
Fully developed Chinese ecosystem
Term OS - Open source Price sensitivity
Feature differentiation

Technological breakthrough
Period of Impact

Tablets

Look-alike phones

Multiple choice
Medium Technological breakthrough
Term Price sensitivity

Mini notebooks
OS - Open source
Fully developed Chinese ecosystem
Distributors power

New Indian manufacturers High-end mobile phones

OS - Open source
Short Chipset manufacturers New technology with chip vendor
Term MTK chips and open-source OS Price sensitivity
Tablets
Device commoditization
Mini notebooks Look-alike devices

Low Medium High

Bargaining Power of the Key Participants in Value Chain
Substitute Customers Suppliers New Entrants Source: Frost & Sullivan

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 Key Take-Aways

SMARTPHONES MOBILE HANDSETS

The Smartphone ecosystem The key strategies for urban market

provides growth opportunities for penetration include sustained
participants. This market is expected branding effort and improved quality
to witness significant growth with of products
high profit margins.

This market space is highly

dynamic, and participants need to Opportunities
Opportunities Provision of innovative products at
constantly innovate on the OS and affordable price is likely to be the
Abound!
Abound! major driver for growth in the rural
product feature fronts.
market.

A comprehensive value
proposition, which includes a rich
feature set, a high-performing OS, Replacement is likely to help maintain
and an application ecosystem growth of the Indian mobile market,
that provides end users a better even after it nears high level of mobile
penetration.
experience is the key to success

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For Additional Information

Caroline Lewis Thejaswi P

Corporate Communications Industry Analyst
91.022.6607 2000 Information & Communication
Caroline.lewis@frost.com Technology Practice
thejaswip@frost.com

Abhishek Chauhan
Senior Consultant
Information & Communication
Technology Practice
abhishekc1@frost.com

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