iPhone launch in India: Has Apple Dialed the Wrong Number?

India is now the third-largest Smartphone market in the Asia-Pacific

region, after Japan and China. 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. India is the world's fastest-growing
mobile services market: In July, according to TRAI (Telecom Regulatory
Authority of India) 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 and it
can be said that "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.”

It is believed that 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."

Taking such factors into consideration, at midnight on August 22, Apple Inc., an American
multinational corporation, rolled out its iPhone in India and some 20 new countries. But it
didn't roll too far. Few basic reasons for the same can be summarized as follows:-

• Some retail outlets of the two service providers that 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. Rival phone
makers in India were eager to claim victory in the first round
and say they were planning to build on that.

• 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.

• Also, 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 was not a likely scenario, and the
advertising campaign announcing its arrival had been bland and
basic.

• 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 being a price-sensitive market, these levels were
ridiculous.

The reason for such high price of iphone is that, unlike in the U.S. and other countries,
the service providers are not subsidizing the handset in India. 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. But in India, the majority of
consumers use prepaid cards and can easily switch carriers. The economics are not
conducive to subsidizing the phone.

• Additionally, Bharti is asking for a deposit of 5,000 rupees, while Vodafone is

reportedly seeking twice as much.

• Making things worse, India has yet to auction the frequency spectrum required by
mobile operators to start offering 3G, and a formal 3G launch is estimated to take up to
a year. So even the rich, cool dudes who manage to get themselves an iPhone will only be
able to enjoy the low-speed applications that they had access to anyway on their phones
earlier.

However, despite the lack of buzz surrounding the iPhone and other potential hang-ups, some
Wharton faculty saw a clever strategy at work where Apple was "testing the waters" and
getting prospective customers acquainted with its device before a full-scale marketing
assault.

Skimming the Market

Apple can be said to have a smarter strategy for its Indian
iPhone launch than is immediately apparent. If one compares
[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.’ 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.

Apple's India strategy allows for much more flexibility. It lets [the company] learn about
the market in a much cheaper, lower-risk way. Thus, 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.

Also, 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. If one don't [have a
significantly large base], one must go with a skim strategy, because you can't create that market
overnight."

Despite the skim strategy, the company was myopic regarding its competitors and faced a
setback.

• Big names attached to the iPhone gave it high expectations and its price made it a flop.

• The plan was good to take two big players together to enter the market. They thought
about strength but not about weakness.

• A person in India who spends Rs. 31,000 for a product will never stand in a queue.

• The iPhone's price made it only for a niche class, but they can easily get it from
foreign markets.

• Apple didn't consider its rivals in India.

Nokia, Samsung, LG, BlackBerry all launched similar products.

• India is a different market, where companies need to work on strategy. The mind-set of
consumers is far different from that of U.S. consumers.

• Perhaps the company forgot that iPhone is not the only phone that has a touch
screen, music player, 3G, e-mail and all.

Needless to say, Apple (AAPL: Apple Inc) needs to rework its iPhone pricing in India if it
hopes to attract a respectable number of customers in this poor but rapidly growing
economy. Even if it doesn't, other mobile operators and other handset makers probably have
much to gain from the iPhone's launch anyway.

The iPhone's biggest contribution to India will likely be the power of persuasion it brings
along. For every iPhone user flaunting the smart phone's cool features, there could be at least a
dozen others who may want to upgrade their own phones to handsets that offer more features, but
are more modestly priced. And several others may be tempted to explore the world of value-
added services, in addition to voice and text messages.