The mobile handset space has witnessed a paradigm shift in the last decade. From a near monopoly between the likes of Nokia and Motorola at the beginning of the decade to the huge influx of new entrants, the market structure has metamorphosed, particularly in cost-sensitive, volume-heavy markets such as China and India. Consequently, major handset manufacturers are likely to shift their focus from -high-income
(HI)’1 developed economies to -lower middle income (LMI)’2 developing economies.
Over the next five years, with the increasing number of subscribers coming from -lower middle income (LMI)’ developing economies, the average size of the consumer wallet is expected to shrink. To meet this demand, manufacturers are likely to reduce the price points for mass-market phones, but at the same time increase the number of features in these low-cost handsets. Evalueserve estimates that approximately 70% or 4.8 billion of all active handsets will fall under the USD 100 price band by 2015.
Further, Evalueserve estimates the global handset demand to rise to approximately 2.58 billion in 2015, with the replacement market4 accounting for approximately 94% of the gross demand. This
change in buying behaviour will be driven by two factors””rapid commoditisation of the mobile handset with progressively reducing price points and higher propensity to switch handset models, particularly in the massmarket segment due to the low cost of switching.
The dominant replacement market and lower handset Average Selling Price (ASP) will force handset manufacturers to improvise and innovate to stay competitive.
Decelerating Subscriber Growth Low-income Economies
Coming to the Fore
Mobile telephony is nearing the end of an accelerated growth phase after a decade of rapid advancements.
Evalueserve estimates the global mobile subscriber base to increase from 5.3 billion in 2010 to 6.8 billion in 2015. Approximately 1.6 billion new subscribers are expected to be added during 2010 2015; however, the net additions will decline from 544 million in 2010 to 147 million in 2015, growing by a mere 2.2% in 2015.
The -LMI’ economies are expected to capture more than 50% of the global mobile subscriber market.
Evalueserve estimates the -LMI’ economies to account for about 84% of subscriber additions between 2010 and 2015.
In 2009, the average global mobile penetration rates were estimated at about 70%. However, there is considerable difference in penetration rates between nations with different income levels. -HI’ developed
economies had an estimated 120% mobile penetration, while -LMI’ countries had a mobile penetration of 58%. According to International Telecommunication Union (ITU) estimates, despite lower mobile penetration rates, -LMI’ markets report a high mobile to fixed line ratio of 29:1 as opposed to the 5:1 ratio recorded in -HI’ countries.
The trend of higher demand of mobile phones over fixed line in lower middle income countries as well as the high penetration of mobile phones in -HI’ countries justifies the explosive growth of mobile telephony within this segment of the communications services. Further, the increasing demand of mobile telephony in -LMI’ countries, supported by low-cost handsets, will drive the future growth of this segment.
Reducing ASP to Fit Consumer’s Wallet The overall sales of costly handsets is likely to decline as the -LMI’ developing economies, such as China and India, start to dominate the marketplace, increasing their contribution to the global mobile subscriber base from 20% in 2005 to approximately 30% in 2009.
This is substantiated by the decline in the ASP of handsets sold by major manufacturers. According to Evalueserve analysis, Nokia, the largest handset manufacturer, recorded an approximately 39% fall in its
ASP between 2005 and 2009. Similarly, Samsung’s handset ASP declined by approximately 33% over the period.
Evalueserve estimates the ASP of handsets to decline to USD 68 by 2015. Further, approximately 70% (4,788 million) of all the active handsets globally would cost under USD 100 by 2015.
Handset Demand Driven by Replacement Market
With the declining subscriber additions, the demand for replacement handsets is expected to become the key driver for the handset market. Evalueserve estimates the share of handset replacement demand to the
overall handset demand to increase from 73% (1.46 billion) in 2010 to 94% (2.43 billion) in 2015. During the period, the gross handset demand is expected to increase from 2.0 billion in 2010 to 2.58 billion by 2015 at a CAGR of 5.1%.
Fading Attractiveness of Secondary Market
Evalueserve estimates that about 33% (665 million) of the gross handset demand in 2010 will be met by the secondary handset market.5 However, the attractiveness of the secondary handset market is expected to decline, reducing the contribution of this market to the gross handset demand to 22% (556 million) in 2015.
The decline in the secondary market will be a result of multiple market forces.
“¢ Decreasing cost arbitrage ASP is declining across the board, reducing the difference between a new branded phone and a phone purchased from the secondary market, effectively removing a key motivator for a secondary purchase.
“¢ Regulatory evolution Fake handsets generally have an invalid International Mobile Equipment Identity (IMEI) number and tend to copy designs from well-known models. As regulations tighten, invalid
IMEI phones will be increasingly debarred from networks. Further, as countries such as China continue with the crackdown on counterfeit phones, the problem will be addressed, to an extent, at the source.
The Dual SIM Handset Effect
The Dual SIM feature, initially popularised by handsets emerging from China and Korea, gained mainstream handset manufacturer’s attention with the launch of the Samsung DuoS in 2007. Since then, global and
regional players have tried to capitalise on the trend.
The key driver for the rapid market adoption of Dual SIM handsets is the high ratio of pre-paid versus postpaid subscriptions across the major high-growth markets such as China, India and Africa. For example, as of
March 2010, 95% of the Indian mobile base holds a pre-paid connection (source: TRAI). This allows the average Dual SIM handset user to effectively create a tailor-made plan that utilises the best features of both
Evalueserve estimates the Dual SIM handset demand to account for 7% (169 million) of the global handset demand by 2015.
Handset Differentiation Reducing to a Blur
As the market evolves over the next five years, two clear trends will emerge””Smartphones6 with welldefined third-party application development ecosystems and powerful hardware””are expected to double their market share from 14% in 2010 to 30% in 2015. This demand will be largely driven by the reducing ASP of the smartphones as well as the growing disassociation of the mobile phone with voice.
At the diametric opposite end of the handset consumption ecosystem, basic handsets,7 priced at an average of USD 20 30 and offering only basic functions such as voice and SMS, will also more than double its
With constant handset enhancements becoming a norm and ASPs declining drastically, the distinction between the Smartphone and Feature Phone8 categories will be blurred. Smartphones and basic handsets are expected to squeeze the feature phones from both ends, largely polarising the market between the two extreme ends of the handset market, making the feature phone the casualty of the new market dynamics.