Ronnie05's Blog

A business case for Nokia’s Rs.500 ($10) phone

Posted in Mobile Devices and Company Updates by Manas Ganguly on February 9, 2010

Reports suggest that Nokia readies a made in India Rs.500 ($10) phone for showing in the Mobile World Congress (Barcelona)

In 2004, Nokia changed the rules of the mobile handhelds game by launching the Nokia 1100. The Nokia 1100 was a true “fortune at the bottom of pyramid” waiting to happen for Nokia. This opened up Asian markets and Nokia took unassailable positions in emerging markets. The rules of the game changed to cost of ownership formulas for the less privileged. Mobiles became the common man’s device. Combined with falling tariffs, the Nokia 1100 was the start of the Telecom revolution in Afro-Asian countries. The Mobile was a now a device available to 60% of the world population.

A few years later, Motorola tried to change the rules of the game by introducing the F115. The thought was that the ultra low cost F115 would redefine the market for Motorola which was already doing well (remember the Razrs and Slivers?). However the move backfired for Motorola and they were stuck with escalating inventories and the decline is well documented.

Now after 4 years, Nokia under pressure from cheap OEM brands will attempt to redefine the market with a $10 phone. I am assuming that this phone will be a basic communication device only: No frills, no extras. It is also safe to assume that Nokia will have to bet on huge volumes on such costs and razor sharp margins. I am expecting a 1” or even lesser screen. Here’s a critical analysis of what such a device means for Nokia and Industry as a whole:

1. There is a considerable risk in such high volumes. This is a bet Nokia “must win”. The product and its launch cannot afford failure. A few News reports mention this to be a “limited edition” effort. A rs.500 limited edition effort actually doesnot make any sense apart from a few PR releases.
2. Again Nokia “goes alone”. No eco-system or Telecom operator partnerships. Nokia had a few partnerships with operators but this effort is clearly in line with Nokia core thought of doing it alone on big projects.
3. Nokia actually competes with itself in this category. The seconds market of Nokia is what it is trying to cannibalize in order to promote its customer base.
4. One thought that flashes my mind is a reverse logistics system that could reuse old Nokia phones exchanged for new Nokia handsets. Clearly, this is not considered as a viable option in the African and Asian markets by Nokia.
5. Nokia also faces a threat from “Zero cost” handsets. OEMs and Telecom operators are mulling the viability of a Zero Cost/Free Lifetime Call options on handsets for luring subscribers.
6. Nokia is steadily building a platform, Nokia Life Tools for services to the rural economy. This platform is gathering strength. The Rs.500 basic phone may drive this effort. The Rs.500 device may also be subsidized by the service charges in the long term.
7. By my estimates, the minimum costs of manufacturing a basic device is $12. Assuming a total expense of $5 on other incidentals (Marketing, Logistics, Overheads etc), Nokia would take an initial hit of $7 (~Rs.350).
8. If the Nokia Life Tools ARPU is Rs.35-40 per month ($.8-.9 per month), the break even would be 10 months or so. (These are very basic calculations, but knowing the minds behind the initiative, this Math looks to be the rational driving the effort)

My final thoughts on the Rs.500 Nokia Phone is that the first launch is likely to be a Pilot (hence the Limited edition release). Nokia would study the sales of the device and the distribution of its services through the phone. The cost of the phone would initially be a negative for Nokia but increasing absorption of its Nokia Life Tools services may provide the platform to subsidize the costs. I guess we will have to wait and watch this one.

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