Digital divide is widening with pricier smartphones

About 200 million Indians are expected to upgrade to smartphones by 2025-26.  (Photo: Mint )
About 200 million Indians are expected to upgrade to smartphones by 2025-26.  (Photo: Mint )


  • The costs of owning a phone have shot up because of higher input expenses and telecom tariff hikes
  • Analysts advocate subsidies to ease transition pains of those looking to upgrade from feature phones. Telcos, device makers and others have to join hands to make phones affordable.

NEW DELHI : Beena, a house help and mother of two, recently wanted to buy a smartphone for her 16-year-old daughter who takes online classes. The family already has a smartphone that everyone shared during the pandemic months. But things are different now. The economy has opened up. All adults in the family, including Beena, can no longer stay at home for long hours.

A laptop would have been ideal for her daughter but this was not something Beena could afford. In fact, she struggled to find a good phone with enough battery to last the whole day—one that suits their pocket. Beena finally sought her employer’s help to buy one for 8,000.

Tough task
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Tough task

Then, there is 21-year-old Naresh who makes a living out of odd jobs. His latest gig is in a south Delhi neighbourhood where he cleans cars. He has been using a hand-me-down (or previously owned) feature phone. “I’m thinking of buying a smartphone, but a good one is not affordable anymore. Maybe I can buy a second hand one, again," he says.

Naresh was considering entry level smartphones from Indian brands such as Lava and Micromax. Now, he is eyeing an used 5.9-inch Redmi Note 5 Pro available online for 6,999.

Naresh and Beena’s predicament is shared by millions of other Indians at the bottom of the country’s socio-economic pyramid. They all aspire for and need better devices but smartphones have become pricier—by as much as 15% over the last year. And we are not done just yet. Prices may shoot up another 10-15% for new launches this month onwards, industry insiders say.

Why are prices rising this fast? Blame it on the Russia-Ukraine crisis, which has further snared global supply-chains struggling to recover from pandemic lows. Input costs needed to assemble smartphones have shot up. There is also a new headwind. China is reeling under a new covid-19 wave, which has resulted in shipping disruptions from Shenzen and Shanghai. Russia and Ukraine are producers of metals and noble gases that are used in the making of smartphone parts; Shenzen is the global hub for electronic components. This has resulted in a perfect storm. Not only have phone launches been delayed, the supply-chain crisis has led to higher freight costs and transportation charges. Some of this inflation would be passed on to consumers by the brands.

Analysts have been quick to point this out. The prices of entry level smartphone have gone up from 7,000 to 10,000, analysts at Goldman Sachs mentions in a note to clients.

“Average selling prices grew 15% in 2021 over 2020. Expect the same this year as well," Navkendar Singh, a research director with market intelligence firm IDC India, says.

Faizal Kawoosa, founder of research firm TechArc, estimates 5-10% increase in prices because of the direct impact of higher input costs. “The other impact will be the weakening rupee against the dollar due to oil prices. This is going to make every import costly, affecting the pricing. We can expect a rise of 8-12% on smartphones in the June quarter," he says.

Not just smartphones, buyers will have to shell out more for other electronic gadgets as well.

“We’re looking at a 5-10% increase in the prices for new models with newer features. But we will not be changing prices of models already in the market," says Vivek Gambhir, chief executive officer at wearables and hearables company Boat.

Meanwhile, the smartphone industry is already experiencing a longer replacement cycle. “The recent rise in smartphone cost has increased the replacement cycle by six-seven months (from 30 months to 36-37 months). This could probably lead to moderation in upgrades to smartphone to about 40 million in 2022 versus about 50 million in 2021," analysts at JM Financial that recently stated.

About 200 million Indians are expected to transition to smartphones by 2025-26.

Ownership costs

Naresh, Beena and those at the bottom of the pyramid will soon face another challenge. The overall cost of owning a smartphone has risen over the past few months due to mobile tariffs going up by an average of 20%.

Mobile phone tariffs are now expected to rise further in 2022-23—service providers Bharti Airtel and Vodafone Idea are planning a second hike after raising tariffs in November last year.

“If tariffs increase, the cost of owning a smartphone will surely increase by 10-15%. Either people will not increase their budget for the device or push for the upgrade sometime later. This can surely impact the digital divide, especially when we have around 300 million feature phone users," says Prachir Singh, a senior research analyst at Counterpoint Research.

Singh adds that some users may also cut down on spending on their second sim. This is likely to impact telecom service providers, particularly those who have lost customers over the past two quarters.

Nevertheless, it is this massive chunk of feature phone users that top carriers–Airtel and Jio–and their internet giant partner Google, are trying to woo into their fold. When they upgrade to a smartphone, it’s a win-win. For the telcos, it implies a chance to generate more revenue from the same user. For Google, this user base can turn into a goldmine as they are the next generation of internet users in the world’s largest open market. The Chinese market is closed for the US-based company.

IDC’s Singh pegs the feature phone user base higher at 400-430 million. The top 15-20% of feature phone users can be migrated to smartphones in the next couple of years if they are given a compelling proposition in the form of an affordable device with use cases that include skill development, education and agriculture, he says.

The sweet spot

What could be the price of that compelling device?

The average retail selling price of a feature phone is below 1,500. Hence, a smartphone should ideally be priced below 3,500 to provide a compelling proposition for feature phone users to upgrade, says Prachir Singh of Counterpoint. “But rising component prices have made it virtually impossible to make a smartphone at this price," she adds.

A senior executive working with an Indian smartphone brand, who didn’t want to be identified, told Mint that any device under 4,000 does not offer full smartphone-like experience and wouldn’t appeal to feature phone users.

“The quality of the build is not great; the material used is not solid; the screen is small; the interface is not the latest Android... the overall feel of any smartphone selling at around 2,500-3,000 is simply not up to the mark. Consumers don’t like such phones, specially not their first smartphone," the executive says.

Can subsidies help?

Meanwhile, for the telcos, upgrading feature phone users will be financially taxing.

This is a time when telcos are preparing for large capital expenditure around 5G testing and upgrade. Incentivising feature phone users to upgrade would entail additional investments in partnerships with ecosystem players and in marketing.

Many sector watchers underlined the high cost of operations to reach feature phone consumers. These consumers would need to touch and feel the device before upgrading—unlike an existing smartphone user who may be comfortable buying online. They may also need smartphone use-case coaching. Affordability, digital literacy, and resistance to learning may all combine to make the segment more challenging to unlock.

How can telcos work around these challenges? Analysts advocate the subsidy route to ease transition pains.

“Encourage upgrade from feature phone to smartphone through loyalty cashbacks and quality network performance," analysts at UBS suggest, noting Airtel’s strategy to get more smartphone users onboard even when the company’s CEO Gopal Vittal has categorically stated that the telco will not take the subsidy route.

IDC’s Singh also believes that subsidies have a pivotal role to play. “Considering the inability to manufacture a good quality smartphone at the price which can appeal to the feature phone base, the subsidy will have to be a combination of hardware and access cost to the consumer," he says.

The telco-Google model, for instance, can help with access; it can help in providing Internet access to consumers in rural areas. Indian handset makers, meanwhile, can partner with telcos to make their smartphones more affordable and accessible while leveraging the benefits of India’s production linked incentive (PLI) scheme to increase cost competitiveness. The PLI scheme is the new fulcrum of ‘Make in India’. It has a triple objective–attract foreign direct investment (FDI), help domestic manufacturers scale up, and make the country globally competitive in exports.

Further, Singh advises a more diverse combination. One where telcos, Google, device brands, and selling channels such as Amazon or Flipkart come together, along with a government subsidy.

“Any combination of partners can come together to make this work in terms of hardware, access, education, reach and distribution, services for this segment," he notes.

In the meantime, Vodafone Idea, which is the only carrier that does not have a partnership with Google in India, said that it was offering consumers 100 monthly cashback for 24 months when 2G users upgrade to a smartphone on the carrier’s network. “In association with Amazon, Vodafone Idea is also offering discounts on a range of smartphones best suited for photography— brands such as Oppo, One Plus, iQOO, Mi," a company spokesperson says. As part of the current IPL season, Vodafone Idea is offering cricket fans a chance to win 74 iPhones for free, as a part of the company’s ‘Fan of the Match’ campaign, the spokesperson adds.

Nevertheless, given where the industry is right now, it may make more sense for the telcos to focus on the higher-paying customers who will migrate to 5G, some experts argue. These customers are also likely to be post-paid users who typically generate more revenues—higher average revenue per user (APRUs) on the network as compared to pre-paid users who are on the opposite end of the ARPU spectrum.

The refurbished way

Let’s circle back to Naresh’s choice of a used smartphone. Given the inflation, and his sweet spot in terms of affordability, this appears a wise choice.

Used smartphones can be refurbished phones. Instead of individuals, refurbished ones are sold by a network, manufacturer or even a retailer who repair and run quality checks before being offered for sale. While it may sound like a non-appealing proposition for the first-time smartphone user, there are many like Naresh who are willing to opt for them.

Here are some numbers. According to an India Cellular & Electronics Association (ICEA)-IDC study on the smartphone re-commerce market, India is the fastest growing market for second-hand smartphones and 90% of the phones sold here are in ‘as-is’ condition, meaning requiring little or no repairs at all. The report highlighted that 78% of the users buying a second hand smartphone have a monthly income of less than 30,000, a key statistic telecom players must take note of.

In 2021, consumers traded 25 million smartphones in the second-hand market, generating a revenue of more than $2.3 billion at an average of $94 or 6,900 per device. This was half the average sale price of a new smartphone being bought the same year. The report estimates the number of such smartphones to rise to 51 million by 2025 equaling $4.6 billion in revenue as an industry.

Clearly, there’s a strong case for considering this option for stakeholders looking to bridge the digital divide.

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