The Next Growth Engine of the Dynamic Mobile Ecosystem:

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

Frost & Sullivan’s Growth Consulting can assist with your growth strategies

Thejaswi Parameshwaran

Information & Communication Technologies

20, May, 2011

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Today’s Presenters

Thejaswi Parameshwaran, Industry Analyst

Frost & Sullivan

3

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

MobilesMobiles

1. Ultra Low-cost Mobile

Handsets (ULCMHs)

1. Ultra Low-cost Mobile

Handsets (ULCMHs)2. Low- to Medium-cost

Mobile Handsets

(LCMHs)

2. Low- to Medium-cost

Mobile Handsets

(LCMHs)

3. High-cost Mobile

Handsets (HCMH)

3. High-cost Mobile

Handsets (HCMH)

• Price range:

• Less than Rs. 1,500

• Key features include

B&W screen, messaging,

and phone book

• Price range:

• Less than Rs. 1,500

• Key features include

B&W screen, messaging,

and phone book

• Price range:

• Rs. 1,500 to Rs. 2,500

• Key features include

colored screen, FM radio,

and VGA camera

• Price range:

• Rs. 1,500 to Rs. 2,500

• Key features include

colored screen, FM radio,

and VGA camera

• Price range:

• Rs. 2,500 to Rs. 4,000

• Key features include

GPRS, extendible

memory, MP3 player, and

digital camera

• Price range:

• Rs. 2,500 to Rs. 4,000

• Key features include

GPRS, extendible

memory, MP3 player, and

digital camera

4. Smartphones4. Smartphones

• Price range:

• Greater than Rs. 4,000

• Key features include

application installation,

QWERTY keypad/touch

screen, dual SIM, Wi-Fi,

and 3G

• Price range:

• Greater than Rs. 4,000

• Key features include

application installation,

QWERTY keypad/touch

screen, dual SIM, Wi-Fi,

and 3G

•Source: Frost & Sullivan

Mobile Handset Market: Product Segmentation (India), FY 2010

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• MNCs such as Nokia, Samsung, LG, SE, and Motorola predominantly employ in-house-developed OS.

• Nokia uses Symbian as the OS, but other participants employ Java- or Linux-based OS for their feature phones.

• The Taiwanese chipset manufacturer, MediaTek, provides its own OS, Nucleus, with chipsets.

• MNCs use chipsets manufactured by Qualcomm, Infineon, TI, STMicroelectronics, and so on.

• Indian manufacturers predominantly use solutions from MediaTek.

• Chipsets account for about 30 to 40 percent of the total cost of a feature phone.

• OEMs assemble devices incurring the entire BOM.

• Thereafter, they ship them to companies that sell these devices to end customers. Nokia, Samsung, LG, and a few other multinational and local manufacturers manufacture handsets on their own and are the OEMs.

• Feature phones predominantly comprise preloaded applications.

• The cost to the handset manufacturer for these preloaded applications is in the range of 3-4%.

• The preloaded mobile application market was valued at Rs. 580 crores and is expected to grow at a CAGR of 6.9 percent from 2008 to 2012.

Source: Frost & Sullivan

Mobile Handset Market: Mobile Handset Ecosystem (India), FY 2010

• There are three tiers of mobile device distribution in India -from manufacturers to super and zonal distributors and finally to retailers.

• The margins offered by manufacturers to channel partners are different for global brands and Indian manufacturers.

• Global participants pay less and operate in a volume-driven market.

Distribution Channels Key Ecosystem Participant for the Mobile Handset Market

Mobile ApplicationDevelopers

Chipset Manufacturers

Handset Manufacturers

DistributionChannels

OS Developers

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Replacement Market to be the Key Driver for the Mobile Handset Market

Mark

et

Dri

vers

Mark

et

Res

train

ts

1-2 years 3-4 years 5-6 yearsThe emerging replacement market is expected to

account for more than 50 percent of sales in 2011

Increasing mobile network penetration in

rural parts of India

Decreasing price points - Due to increasing

competition, average selling price in 2011 is expected

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

Unequal and high VAT rates in certain states

3G is expected to drive uptake of 3G-

enabled devices

Lack of after-sales service and support

Impact: High Medium Low

Mobile Handset Market: Key Market Drivers and Restraints (India), 2010-2016

Source: Frost & Sullivan analysis.

Regulatory Impacts

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CAGR of 11.8% Expected for the Mobile Handset Market

95.235 104.88

208.362

10.1%

98.7%

0.0

50.0

100.0

150.0

200.0

FY 09 FY 10 FY 16

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Unit Shipment (Million) Unit Grow th Rate

Un

it S

hip

men

t (M

illio

n)

Un

it G

row

th R

ate

Year

83%71%

15%

17%29%

85%

0.00%

50.00%

100.00%

FY09 FY10 FY16

First time buyer Replacement Units

The emerging

replacement

market is

expected to

account for more

than 80 percent

of sales by 2016

•Source: Frost & Sullivan

•Source: Frost & Sullivan

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Trend #1: Emergence Of Indian Manufacturers

Result

Distribution and Retailing

Business Ecosystemof OEMs

Business Opportunity

• 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

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.

• Large number of Indian manufacturers entered the fray in 2010. The number of participants has 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.

• Almost all the Indian manufacturers produce handsets in China, Taiwan, or South Korea and

ship them to India. There are about 150 mobile handset OEMs in China shipping handsets to Indian companies.

• 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

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.

Chipsets and OS

• Local manufacturers are able to procure feature-rich handsets at low price.• Many Indian companies start with operating in one or two states initially and create a pan-India

presence subsequently.• 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.

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Trend #2: Decreasing Price points and Channel Margins

• Inexpensive smartphone chipsets• Inexpensive smartphone chipsets

• Competition between Indian

manufacturers and global

participants

• Competition between Indian

manufacturers and global

participants

Declining Price of

Smartphones

Declining Price of

Smartphones

• Availability of high-quality open-

system OS

• Availability of high-quality open-

system OS

• Opportunity for volume production and distribution• Opportunity for volume production and distribution

Lower Channel MarginsLower Channel Margins

• Participants in the mobile market perceive that distributors can impact the sales of a

brand significantly. Indian manufacturers leveraged on this perception by paying

huge margins to their channel partners to up sell their products.

• Participants in the mobile market perceive that distributors can impact the sales of a

brand significantly. Indian manufacturers leveraged on this perception by paying

huge margins to their channel partners to up sell their products.

• With increasing competition,

the net margin of certain

manufacturers has decreased

to less than 2 percent. Due to

these limited margins, the

Indian mobile market is

expected to witness

consolidation in the immediate

future.

• With increasing competition,

the net margin of certain

manufacturers has decreased

to less than 2 percent. Due to

these limited margins, the

Indian mobile market is

expected to witness

consolidation in the immediate

future.• The primary reason for low channel margins of large global brands such as Nokia

and Samsung is that they depend on volume sales.

• The primary reason for low channel margins of large global brands such as Nokia

and Samsung is that they depend on volume sales.

Source: Frost & Sullivan

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35 to 50 percent is the manufacturing cost

8 to 10 percent on advertising and R&D

16 to 20 percent margin for retailers as well as national and regional distributors

25 to 40 percent net margin for manufacturers

65 to 75 percent is the manufacturing cost

4 to 6 percent on advertising

16 to 21 percent margin for retailers as well as national and regional distributors

5 to 8 percent net margin for manufacturers

Mobile Device Revenue Breakup

SmartphonesFeature Phones

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

• 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.

• 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.

Source: Frost & Sullivan

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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 OS’s 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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• 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. Proprietary OS for their own devices such as iPhone

ii. OS on per shipment royalty basis such as Windows

iii.Open-source OS such as Android and Symbian

• Chipset forms another important value chain component in the smartphone market. Chipset manufacturers follow one of the models listed below:

i. Providing integrated application processors and modems such as Qualcomm

ii. Providing only modems for various technologies such as Infineon

iii.Providing application processors compatible with various modems

• Application forms a 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/independent applications.

• Participants include OS developers, chipset manufacturers, smartphone OEMs, telecom service providers, and independent application developers.

• OEMs help global brands in manufacturing their 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 under its brand.

• Chinese OEMs provide services at low cost and thus, many smartphone participants outsource their manufacturing to them.

Market

Source: Frost & Sullivan

Application Development Community Key for Smartphone Ecosystem

OS VendorsChipsetManufacturers

Application Development Community

OEMs Brand Owners

• The End users using Smartphone's

Smartphone Market: Smartphone Ecosystem (India), FY 2010

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Convergence and Open Source OS’s Key Drivers for Smartphone Market

Mark

et

Dri

vers

Mark

et

Res

train

ts

1-2 years 3-4 years 5-6 yearsIncreased need for converged devices by end consumers

Product innovation - Hardware

technology is increasingly becoming

efficient every year.

Availability of cheaper, look-alike Chinese phones

Increased adoption of smartphone open-source operating systems such as Android and

Symbian by OEMs.

Over 70 percent of the population consumes

only voice services, and data services have

not yet received large scale acceptance.

Lowering of price points

Subsidizing is difficult due to lack of operator-leveraged distribution model

Impact: High Medium Low

Smartphone Market: Key Market Drivers and Restraints (India), 2010-2016

Source: Frost & Sullivan analysis.

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

2.4 2.9

29.4

20.8%

913.8%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY 09 FY 10 FY 16

0.0%

100.0%

200.0%

300.0%

400.0%

500.0%

600.0%

700.0%

800.0%

900.0%

1000.0%

Unit Shipment (Million) Unit Grow th Rate

Un

it S

hip

men

t (M

illio

n)

Un

it G

row

th R

ate

Year

Compound Annual Growth Rate (2010-2016)

39.2%Compound Annual Growth Rate (2010-2016)

39.2%

Explosive growth expected in the Smartphone Segment , the future growth engine of the

mobile market driven by an ecosystem of apps and innovative form factorsExplosive growth expected in the Smartphone Segment , the future growth engine of the

mobile market driven by an ecosystem of apps and innovative form factors

Source: Frost & Sullivan

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Trend #1: Operating System Perception Playing a Key Role in Smartphone Selection

• Android,

iOS,BADA for

netbooks, and

other devices

• Android,

iOS,BADA for

netbooks, and

other devices

• S60, Windows,

and BADA

• S60, Windows,

and BADA

• Android, S60,

WebOS,

Blackberry OS

• Android, S60,

WebOS,

Blackberry OS

• S40, and Java OS

with advanced UI

• S40, and Java OS

with advanced UI

• Nucleus and other

Java-based

feature phone OS

• Nucleus and other

Java-based

feature phone OS

Smartphone Market: Operating System - Perception Mapping (India) FY 2010Smartphone Market: Operating System - Perception Mapping (India) FY 2010

Source: Frost & Sullivan

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

DistributionModels

DistributionModels

Open MarketOpen Market

OperatorLeveraged

OperatorLeveraged

Open Market

• In the open market model, handset manufacturers sell

devices through distributors and retailers.

• Handset manufacturers leverage an open market model

by having strategic partnerships and alliances with large

distributors.

• This can be further classified into

• Modern Trade

• Traditional Retail

• Institutional Sales

• Main participants following open market model in India

are HTC, Nokia, Samsung, LG, and so on.

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

Peri

od

of

Imp

ac

t

Bargaining Power of the Key Participants in Value ChainLow High

Long Term

Short Term

Medium

Medium Term

•Suppliers•Customers•Substitute

Look-alike devices

Tablets

Chipset manufacturers

Source: Frost & Sullivan•New Entrants

Mini notebooksDevice commoditization

Price sensitivity

OS - Open source

New technology with chip vendor

New Indian manufacturers

MTK chips and open-source OS

Price sensitivity

Technological breakthrough

Mini notebooksOS - Open source

Fully developed Chinese ecosystem

High-end mobile phones

Look-alike phones

Multiple choice

Distributor’s power

Fully developed Chinese ecosystem

OS - Open source Price sensitivity

Feature differentiation

Technological breakthrough

Distributor’s power

Smartphone Market: Force Field Analysis of Participants (India), FY 2010

Tablets

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Key Take-Aways

Opportunities Abound!

Opportunities Abound!

• The Smartphone ecosystem

provides growth opportunities for

participants. This market is expected

to witness significant growth with

high profit margins.

• This market space is highly

dynamic, and participants need to

constantly innovate on the OS and

product feature fronts.

• A comprehensive value

proposition, which includes a rich

feature set, a high-performing OS,

and an application ecosystem

that provides end users a better

experience is the key to success

The key strategies for urban market

penetration include sustained

branding effort and improved quality

of products

Provision of innovative products at

affordable price is likely to be the

major driver for growth in the rural

market.

Replacement is likely to help maintain

growth of the Indian mobile market,

even after it nears high level of mobile

penetration.

SMARTPHONES MOBILE HANDSETS

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For Additional Information

Caroline Lewis

Corporate Communications

91.022.6607 2000

Caroline.lewis@frost.com

Thejaswi P

Industry Analyst

Information & Communication Technology Practice

thejaswip@frost.com

Abhishek Chauhan

Senior Consultant

Information & Communication Technology Practice

abhishekc1@frost.com