Boosting Telcos Smartphone Sales in Developing Markets Smartphones could be a lucrative revenue source for telecom operators in developing markets. Done properly, operators share of smartphone sales could increase fivefold over the next four years. 1
In developed markets, telecom operators have traditionally played a major role in distributing handsets subsidizing retail prices and promoting phones to consumers who typically post-pay for service based on previous usage. Even as popular high-end smartphones such as Apple s iphone and Samsung s Galaxy have altered this market somewhat, operators still hold the upper hand in pushing phones with their customer-pleasing, revenue-boosting plans. Developing markets are more challenging when it comes to handsets and data plans. Roughly 95 percent of consumers use prepaid, no-contract phone plans on low-cost phones, which result in lower revenues per customer than contract plans. Telecom operators have traditionally avoided promoting and bundling high-end devices with their plans, largely due to fear of losing traction. Most of the efforts made to bring smartphones to developing markets have been sporadic and generally unsuccessful as demonstrated by the limited uptake for Vodafone India s 2011 Facebook Blue phone (by Alcatel) and Indosat Indonesia s 2010 Wigo. The next wave of growth is smartphone sales to low-income and rural customers. But the market is shifting. Smartphones are proliferating rapidly in many emerging markets, with penetration expected to more than double between 2011 and 2015 in countries such as Brazil, Thailand, Indonesia, and India. Demand for data services and applications is also rising in emerging markets particularly as operators roll out 3G speeds, and younger, more educated users flood the market. And handset makers are unveiling affordable mid-tier smartphones evident in the $100 to $200 price tags on the G-series line from Huawei, Nokia s Asha series, and phones from a number of local Indian handset companies. 1 As smartphone and data penetration rise, the next wave of growth will come with sales to low-income and rural customers. For example, in India, mobile data traffic is expected to explode, from seven megabytes per user in 2011 to 274 megabytes per user in 2016, by which time nearly one-quarter of all Indian Internet traffic will be mobile. Already, two-thirds of smartphone owners in India use their phones primarily for the Internet. Handset makers are now seeking out telecom operators that can provide access to low-income and rural customers (see sidebar: Smartphones for Low-Income and Rural Customers). Smartphones for Low-Income and Rural Customers The market for low-income and rural customers is challenging for both operators and handset makers. There are several reasons. Affordability. The typical low-income and rural customer spends between $30 and $60 to buy a new device and less than $5 per month on a communication plan. Drawing these customers 1 All monetary values are in U.S. dollars. will require affordable devices and plans. Awareness and education. Many within this segment have low literacy and education, along with limited to no previous exposure to the Internet. Recent research suggests that for some users in this segment, the first step will be educating them about the benefits of Internet access. Access. Low-income and rural markets largely obtain their phones through unorganized channels in which handset suppliers have limited control. Operators, with an established presence in rural markets and access to customers, are in an ideal position to grow by partnering with handset suppliers to reach users in untapped markets. 2
The question for telecom operators is not if or when to tap into these emerging markets the time is now. The question is how to define coordinated smartphone retail and data strategies to capitalize on the opportunities. Done properly, our research has found that operators could increase smartphones share of phone sales from 2 percent today to as much as 10 percent by 2015. Defining Strategies A country s smartphone penetration correlates closely to data revenues as a percentage of total revenues (see figure 1). This demonstrates that consumers are either getting hooked on data services and buying smartphones to gain better access to them, or they have acquired smartphones and increase their usage multifold as they discover smartphonebased applications. Recent market research in emerging Southeast Asian markets suggests that 70 percent of smartphone users sign up for a data plan, and they consume 30 times more data than owners of data-enabled standard phones. Figure 1 Smartphone penetration correlates closely to data revenue as a percentage of total revenue 40 Data as percentage of revenue 35 30 25 20 15 10 5 Correlation coefficient: 0.93 India Brazil Thailand Malaysia Indonesia 0 0 5 10 15 20 25 30 35 40 Smartphone penetration Source: A.T. Kearney analysis Across the globe, smartphone sales and data revenues have increased in line with the rollout of 3G mobile technology. In Brazil, data revenues took off in 2011 after 3G coverage increased to 75 percent of the population. Not only did mobile phones become the preferred method for accessing the Internet, but social media, gaming, and video applications also increased significantly. 3
From a retail perspective, the options in emerging markets are evolving. Traditionally, because of market challenges, a passive approach to data plans and smartphones was the name of the game. Now, with significant growth potential in these markets, expansion plans might consist of one of two strategies: branding, or data upsell and monetization (see figure 2). A branding strategy calls for using existing retail outlets as primary destinations for data services, drawing walk-in customers interested in expanding their use of mobile data plans. A data upsell and smartphone monetization strategy takes this a step further by making smartphones an entry point to increased data use and in turn new revenues. Figure 2 Emerging market telcos can increase their data and smartphone focus Aggressive Branding Data upsell and smartphone monetization Data upsell and smartphone monetization Move in line with developed market practices Use smartphones to increase data uptake Contract lock-ins and bundling can lead to data upsell Data and device experience in stores draws customers Analytics can craft appropriate data plans for customers Emerging market telcos today Branding Attract walk-in customers to stores and enhanced branding Turn stores into destinations to learn about devices and data Weak Aggressive Smartphone retail focus Source: A.T. Kearney analysis The strategy of choice depends on the market, its data evolution, and your focus areas. Some emerging market operators (Idea in India and Telkom Indonesia, for example) have selectively explored the branding play by promoting a few own-branded smartphones and data plans but have not gotten involved completely in the handset-buying process. Other emerging market operators have aligned with handset makers and e-commerce sites to offer new data plans. Because operator-branded retail stores are generally located in good catchment areas and offer traditional services, it is possible to kill two birds with one stone by maximizing productivity in existing stores while also increasing profitability through sales of smartphones. Here, the secret to success is to make good use of the data already on hand customer spending behaviors and handset usage patterns to become trusted customer advisors. Handset makers are not privy to this level of data so it becomes a huge customer service advantage for operators that track, monitor, and know how to use this level of customer information. 4
What Matters to Smartphone Buyers? Our recent research of India s smartphone market finds that the primary purchase criteria for buyers in India are competitive prices, superior device and data experiences, convenience, and strong brands (see figure 3). Fewer than 20 percent of smartphone buyers rate accessories, financing, and bundling among their top three criteria. For the in-store experience, holding and trying the handsets and a knowledgeable sales force are important, followed by multiple handset options, store look and feel, and availability. Among sales agents with strong product knowledge are important, while post-purchase services are considered nice to haves, with service and repair ranking highest. Yet, people are still largely unaware that such services are available. Generally speaking, existing retail and wholesale channels in emerging markets do not meet these customer expectations, or at least not completely. So there is an opportunity to plug the gap and provide a superior customer experience, while highlighting brands and new devices. A handful of players are aligning their smartphone retailing strategies with handset makers. For handset makers, emerging markets such as India and Indonesia are crucial growth areas, and they may consider similar partnerships to drive captive sales. Figure 3 How smartphone buyers make decisions Why do you select a purchase point? (% of respondents who select parameter as top three) 65% 51% 38% 28% 23% Competitive price Superior experience Convenience Brand/ reputation Range of SKUs What are the most important aspects of the in-store experience? (% of respondents who select parameter as top three) 58% 45% 35% 33% 29% Experience live handset Knowledgable sales force Range of SKUs Store look and feel Stock availability What are the most desired post-purchase services? (% of respondents who select service as most desired) 47% 26% 15% Customer care (service and repair) Sync contacts Set up email and data Source: A.T. Kearney survey of Indian consumers 5
Uncovering the Hidden Value It is important to capitalize on emerging markets now as the full benefits of the boom in data revenues will come to fruition over the next two to four years. Figure 4 outlines our retail excellence framework, which highlights the important steps in defining the building blocks to execute a smartphone retail strategy. Each layer in the framework format, delivery model, execution is designed to work in concert to capture the entire smartphone value proposition. Figure 4 A.T. Kearney s retail excellence framework Retail value proposition Format Product portfolio Layout and design Ownership model Location Delivery model Range planning, forecasting, and pricing Supply chain, logistics, and partner management IT, data, and analytics Product placement, promotions, upsell, and post-purchase Organization, process, and capability building Execution Source: A.T. Kearney analysis Within the framework are three areas that require CEO-level attention to ensure immediate action, happy customers, and sustainable returns on investments: Develop a retail product portfolio. A good retail portfolio does two things very well: It addresses the right target customer segments and it provides enough loyalty incentives to make sure customers buy their next smartphone from your store. Because customers will be tempted to bypass the store and buy through alternative channels (multi-brand or manufacturer), the store value proposition has to be enticing. Offering guarantees and care plans as part of a smartphone sale is a good way to attract buyers and address their unmet needs. Redesign the existing store layout. Creating a live in-store experience can increase smartphone sales; this includes providing adequate space for the customer to handle and use the phone. The store layout should be oriented toward providing this experience and workers should be trained to focus on sales, rather than merely providing customer service. 6
Build capabilities. To squeeze the most from smartphone sales may require investment in new tools and capabilities. Some important ones to consider: demand assessment tools (based on walk-in profiles and other metrics) to incorporate store-level variations in ranging, advanced in-store POS systems to help identify upselling and bundling targets, device training for store staff, and reverse supply chain links to handset manufacturers. Staking a Claim in the Smartphone Market A renewed focus on smartphones can create an immediate impact on sales and a long-term advantage, as buyers tend to remain loyal to their telecom operators. Done properly, operators share of smartphone sales could increase from 2 percent of phone sales today to as much as 10 percent in in four years or less. However, tapping into this growth requires a coordinated smartphone strategy and execution focus. Authors Nikolai Dobberstein, partner, Mumbai nikolai.dobberstein@atkearney.com Sridhar Narasimhan, principal, Singapore sridhar.narasimhan@atkearney.com Sarovar Aggarwal, principal, New Delhi sarovar.aggarwal@atkearney.com 7
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