At midnight on August 22, Apple rolled out its iPhone in India and some 20 new countries. It didn’t roll too far. Some retail outlets of the two service providers Apple has linked up with — Vodafone and Bharti Airtel — discovered that they did not have the necessary permissions to stay open at that late hour. Others attracted a small number of curious consumers. But missing were the lines and fanfare that accompanied the iPhone’s launch in the U.S. and some other parts of the world.
“Only a few buyers turned up at midnight launches done by both Airtel and Vodafone across eight cities in India,” The Economic Times reported. “At a Vodafone store in Connaught Place, Central Delhi, journalists outnumbered customers by a huge margin.”
Rival phone makers in India are eager to claim victory in the first round, and say they are planning to build on that. However, despite the lack of buzz surrounding the iPhone and other potential hang-ups, some Wharton faculty see a clever strategy at work where Apple is “testing the waters” and getting prospective customers acquainted with its device before a full-scale marketing assault.
One reason for the lack of excitement could be the almost total absence of any marketing. Newspapers reported the coming launch based on statements from Vodafone and Airtel: Apple was nowhere to be seen. The local Apple office in Bangalore — merely a sales and distribution set up — was “not authorized” to make any statements. And Apple’s Singapore operation, where press inquiries were directed, was not particularly forthcoming. “We’re a product-focused company,” says Malini Mitra, a Singapore-based Apple spokesperson. “We don’t comment on pricing strategy, market outlook, country strategy, etc…. We work closely with our partners Bharti Airtel and Vodafone on the marketing campaigns across India.”
Vodafone and Airtel themselves are rivals. According to the Telecom Regulatory Authority of India (TRAI), in June 2008, Airtel was number one in the wireless telephone market with 69.38 million subscribers and a market share of 24.50%. Vodafone was number three with 49.19 million and 17.2%. (In the number-two spot was Reliance Communications with 50.78 million and 17.7%.) Cooperation between the two companies to promote the iPhone is not a likely scenario, and the advertising campaign announcing its arrival has been bland and basic.
“The build-up for the iPhone launch in India has been poor, if not pathetic,” says Harish Bijoor, brand specialist and CEO of Harish Bijoor Consults. “One of two things has happened. Either Apple believes the game has been lost in India even before it has begun, or it feels that the service providers will do magic with their mega-reach in India. There is a near abdication of ownership of the brand in the Indian market. The model at play seems to be outsourced marketing, outsourced branding and outsourced selling.”
Skimming the Market
Wharton marketing professor Peter Fader is inclined to believe that Apple may have a smarter strategy for its Indian iPhone launch than is immediately apparent. “If you compare [the iPhone’s] U.S. launch to the India launch, it is a beautiful example of the distinction between a ‘penetration strategy’ and a ‘skim strategy,'” he says. “Here in the U.S., Apple basically wanted to bust the market open all at once. So, they had all these people lined up all around the block, and when they flipped the switch — boom! — the market existed. In India, it’s almost like they are doing a test market.”
In Fader’s view, Apple’s India strategy allows for much more flexibility. “It lets [the company] learn about the market in a much cheaper, lower-risk way.” Apple could use that extra cushion to understand how its early users react to the product and its features, evaluate its distribution strategy and even reassess which service providers it should work with.
“A skim strategy is a great way of testing the waters so that you can change course, whereas with a penetration launch, whatever tactics you committed to, you’re stuck with — you can’t change them,” he says. “This way, they can change the price, change the messaging and broaden out to the larger market in a few years.” Several risks are associated with a product like the iPhone that is “radically different” from others in the market, he adds. “There is social risk [with people wondering] ‘What kind of phone is that?’ as well as functional risk.”
Apple doesn’t have a large installed base of Macintosh users in India, and that may also have persuaded it against a penetration launch for the iPhone, Fader notes. “If you don’t [have a significantly large base], you must go with a skim strategy, because you can’t create that market overnight.”
Another albatross around the iPhone’s neck is its price. The 8GB version costs Rs. 31,000 ($710) while the 16GB iPhone is priced at Rs. 36,100 ($825). The corresponding prices in the U.S. are $199 and $299. “India is a price-sensitive market,” says Bijoor. “These levels are ridiculous.”
Bijoor believes that the iPhone will become a popular gadget, but that India’s tech consumers will likely “crack the [price] code” by purchasing it abroad at much cheaper rates and bringing it back to India. “If the iPhone is to increase its sales in India [beyond] sales for [officially imported or smuggled phones], it needs a price correction.” His prescription is drastic: Bring the price down to Rs. 12,000 ($275). Sunil Dutt, India country head for Samsung’s mobile division, thinks that will happen. “As for any new technology introduction, volumes are small in the initial phase. Once volumes grow, prices come down. I expect a similar trend.”
Why does the iPhone cost so much in India? The simple reason is that, unlike in the U.S. and other countries, the service providers are not subsidizing the handset. In the U.S., AT&T recovers the subsidy amount from subscribers during a contract “lock-in” period. The ARPU (average revenue per user) for AT&T is $50 plus. In India, Airtel has an ARPU of Rs. 357 ($8.16) and Vodafone’s is Rs. 350 ($7.99). These numbers don’t allow the luxury of subsidies. “The Indian cellular industry could never afford deep phone subsidies,” says Ravi Bapna, associate professor of information systems at the Carlson School of Management and executive director of CITNE at the Indian School of Business.
Wharton professor of operations and information management Kartik Hosanagar says U.S. carriers are able to subsidize the cost of a mobile phone device not just because of contractual lock in periods but also because “the phone [itself] is locked so you can only use it with a specific carrier.” These practices allow U.S. carriers to recover their relatively high subscriber acquisition costs over the period of the contract, says Hosanagar. “But in India, the majority of consumers use prepaid cards and can easily switch carriers. The economics are not conducive to subsidizing the phone.”
Bapna believes that it’s not just the low ARPUs which work against possible cross-subsidization. “India’s open network/open application cell phone industry is [incompatible with] Apple’s strategy in the U.S., where it offers exclusivity to AT&T,” he says. “Lock-in is anathema for Indian consumers and, consequently, the purchase of the phone has never been linked to the purchase of the service.”
The one reason why customers tend to stick with their service provider is that there is, as yet, no number portability in India; if you change carriers, you will have to change your mobile number, too. In August, the government approved number portability, though it will take some time to implement. When portability arrives, observers expect large-scale migration by disenchanted users; some estimate that it will be as high as 20%. Locking in customers through other routes — such as Apple’s strategy in the U.S. — will thus become more important.
AT&T reports that in the U.S., users of 3G (third generation) instruments such as the latest iPhone typically have ARPUs double those who use 2G devices. That won’t help in India, because the country doesn’t have a 3G network yet. “The iPhone 3G currently utilizes the EDGE network available in India,” says Mitra of Apple. But EDGE (Enhanced Data rates for GSM Evolution) is technologically a poor cousin of 3G, used in countries that haven’t yet made the transition.
“Not having a 3G network does not help,” says Bapna. Two years ago, he had made a presentation to the TRAI that recommended that 3G spectrum be auctioned as soon as possible. It hasn’t happened yet.
Hosanagar points out that India’s department of telecommunications has begun the process of auctioning 3G spectrum and that it is “significantly larger” than in many other countries. That could result in several carriers offering 3G services and price competition among them — and an advantage for Apple, he says. “While such price competition is problematic for the carriers, it is good news for Apple because it makes 3G more affordable to the consumer. By being the pioneer in offering a 3G phone, Apple may even have a head-start in the 3G market.”
Wharton marketing professor Jagmohan Raju believes the absence of a 3G network in India explains why Apple “seems to be targeting a very narrow segment of the market — one that uses the iPhone more as a status symbol.” Besides that, he says the “superior design and ease of use” of Apple’s products will bring in customers. “While a large majority of Indian consumers is price sensitive, there is a segment that is willing to pay for quality.”
Fader says the lack of a 3G network in India will not be a real issue. “People are not buying [an iPhone] necessarily for its functional reasons; they are buying it to be seen at the club with it.”
Consumers: Beyond the Basics
With Apple not talking officially, and Airtel and Vodafone plowing their own furrows, there is little clarity on the numbers the iPhone has already achieved or expects to. More than 200,000 potential users pre-registered with Airtel and a similar number with Vodafone, but these figures are most likely inaccurate because registration could be done over the Internet and didn’t involve any commitment. Actual bookings had to be made by putting down $114 (for Airtel) and $228 (for Vodafone). According to estimates by The Economic Times, the real sales figures are more likely to be 5,000 per service provider.
Eventually, the iPhone will be available through 250,000 outlets (including independent retail chains such as Croma and The Mobile Store). This brings its own complications. Indians who are likely to be able to afford the iPhone are not particularly tech savvy. Airtel and Vodafone have had to invest in training their staff to guide new adopters on how to use the device. Airtel alone has 3,000 such customer-care executives, and this will certainly add to the costs for a product where the margins are very low.
How many iPhones will sell? Optimists are looking at a full-year local sales figure of 500,000 — the same number of users analysts estimate BlackBerry has in India. (In May, the government announced that the BlackBerry number was 114,000; most agree this is an underestimate.) But not everybody using BlackBerry has a BlackBerry handset: Research in Motion (RIM), the company behind BlackBerry, has just launched the Bold, seen as one of the iPhone’s major rivals. Coming up soon is the touchscreen Blackberry Storm.
India is now the third-largest smartphone market in the Asia-Pacific region, after Japan and China, says Canalys, a technology consultancy. Quarterly shipments are more than 1 million units and the estimated total for the next three years is 19 million. But this is a small fraction of total handset sales. According to IDC, a market analysis firm, mobile phone shipments in India in 2007-08 (April-March) were at 84.9 million, up 28.9% over the previous year. India is the world’s fastest-growing mobile services market: In July, according to TRAI figures, it added a record 9.22 million subscribers in July to reach 296.08 million.
These large numbers of users are increasingly moving beyond basics. “As the need of Indian mobile phone consumers is evolving, they are demanding feature-rich devices, which can cater to their business communication requirements as well as their personal needs,” says IDC.
Fader believes Apple could gradually broaden the Indian market for the iPhone by starting out with “leading-edge users who love to take on the challenge of a radically different device and can figure it out on their own.” In the process, these leading-edge users “can not only help educate others (in how to use the phone), but also help Apple learn how to educate the others.”
Meanwhile, Apple’s competitors are not relaxing. LG has unveiled the LG10000, a CDMA phone which will use the Reliance Communications network. This is already available in the U.S. as the Voyager. It will cost Rs. 22,000-25,000 in India. Philips has the Xenium in its product portfolio. Both are touchscreen, one of the iPhone’s principal attractions.
Nokia, the market leader by far, preempted the iPhone in India with its N96, priced at around Rs. 36,000. The campaign for the N96 began on August 19, three days before the iPhone’s arrival. “We have unveiled the N96 in India and will be launching it in the market in early September,” says D. Shivakumar, Nokia India vice president and managing director. “It will be a global launch — in fact, all our products are rolled out in India at the same time as they are worldwide. What we have launched on [August] 19th is a pre-booking scheme, offering consumers the opportunity to secure the device early.” According to research firm Gartner, Nokia has a 45% share of the global smartphone market (as of the first quarter in 2008). RIM has 13.4%, with Apple just 5.3%.
Rival Samsung has also thrown its hat into the ring with the Omnia. “It will be launched in India in September,” says Dutt. “Our new 2008 range of mobiles has been well received by customers. Our recently introduced TouchWiz has generated a lot of consumer interest, and I am confident that Omnia will do well here…. It is our all-in-one maxi phone.”
Loans for Phones
From a marketing perspective, there are other issues about which the iPhone launch has started a debate. The first — which may be unusual for Western audiences where a mobile phone is not a big-ticket item — is about whether people would be willing to take loans to purchase phones. Vodafone has tied up with Axis Bank and Barclays Bank to offer the iPhone to customers in six or 12 monthly installments. Will the strategy add sales? It depends, of course, on who the customers are.
Bijoor has definite views on that. “The iPhone is the Gucci phone for the top end of the market,” such as C-suite inhabitants, he says. “In India, these are not the masses.” His conclusion: The people buying the iPhone can well afford to pay for it.
The second debate, which has been provoked by the very low conversions of bookings into sales in the case of the iPhone — is on whether pre-bookings work. “We have opted for a pre-booking strategy to launch the Nokia N96 to cater to the needs of that segment of the population that always aspires to own the latest and the newest in technology,” says Shivakumar. “We had also offered pre-booking schemes on the N95 last year and on the E71 more recently, and received an overwhelming response from consumers in India.” Dutt is somewhat skeptical, however. “Our experience is that Indian consumers like to touch and feel the product before making a purchase.”
The third issue is whether it is better to have one product — like the iPhone — or a range straddling the entire spectrum. Apple has always believed in creating icons, which is why it needs limited marketing. “We believe that the handset business is not about one device but about scale and offering a range of products that cater to each segment of the market,” says Nokia’s Shivakumar. “The success of a brand lies in addressing the diverse market and consumer needs with a wide range of products and services. To succeed in India, one must understand that the market is not monolithic, but is comprised of individuals who want devices that can offer them varying combinations of features, design and value at different price points.”
Bapna of ISB says that although Apple may have lost its first battle, the war is only beginning. “Proven successes in the West do not necessarily replicate in emerging markets,” he says. “EBay’s failure to penetrate the Chinese market — and it’s been a damp squib in India too — is a good example of this. Apple needs to recognize this if it is serious about ‘the other 90%’ of the world. But [these are] early days yet. If Apple can take a leaf out of Nokia’s book, things may get interesting.”
Fader says Apple “hasn’t had a thorough disaster in a long time,” except for initial problems with its MobileMe email program that it launched three months ago. “That was very, very bad, and it got a lot of people very upset,” he says. “But eventually they fixed it pretty well. Rarely do they do something so bad that it brings down the product as a whole.”
All things considered, Apple appears to be trying for “moderate success, at least in the short run,” with its Indian iPhone launch, according to Fader. “There’s every reason to believe they will achieve those goals and then bigger, better things later on,” he says. “It’s hard for me or any analyst to know what they have up their sleeve. So I am going to give them the benefit of the doubt.”