UBS On How A Low-Price Smartphone Will Change Jio, Rivals’ Fortunes

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Trust Jio Infocomm. Ltd.’s plan to bring a $ 50 or $ 3,500 smartphone to market will not only help gain market share at the expense of competitors, but also the 4G penetration and penetration rate, according to UBS Speed ​​up Telecom Sector of India Per User.

According to a research report from UBS, the phone will increase 4G penetration by 15% and increase average industry revenue per user by 5-10% by 2023-24. Jio will gain 400 to 500 basis points of market share if it can maintain device exclusivity for 12 to 18 months.

The impact on Bharti Airtel Ltd. should be moderate, but Vodafone Idea Ltd. could lose 200 basis points of market share, the report said.

Jio is working with Google LLC, which, according to the UBS report, should provide a lighter operating system and Qualcomm for the processors. These two companies acquired 7.73% and 0.15% of the shares in Jio Platforms, respectively.

What’s in it for Jio?

The main motivators for a cheap smartphone, according to UBS, would be to accelerate the migration of 2G and feature phone users to smartphones, expanding ARPU and accelerating market share gains for Jio. This will also help Jio manage the churn in the JioPhone segment. This is one of the main reasons for Jio’s recent slower net additions.

According to the telecommunications regulator, India still has 43 crore 2G subscribers in January. The migration of these users to 4G is a major driver of ARPU and the sector’s revenue growth. With an assumed ARPU of around Rs 55, the user base of 2G subscribers accounts for around 15 to 20% of industry revenue. Increasing the ARPU for these users could result in a significant increase in revenue for the operators, said UBS.

The cheapest smartphones in India are currently priced at $ 90 to $ 100 (6,300 to 7,000 rupees), making it difficult for feature phone users who typically spend $ 20 to 30 per device (1,400 to 2,100 rupees) perform an upgrade, according to UBS. A cheap smartphone would allow at least some of those phone users to upgrade, potentially resulting in a higher ARPU.

There are 5-6 million JioPhone users and they are unlikely to downgrade to feature phones. A UBS survey in 2019 found that they were more satisfied with the handset than other feature phone users. Plus, more than half of JioPhone users wanted to upgrade their next purchase.

UBS has forecast two outcomes of how market shares could change.

Result 1

  • If the low-cost smartphone is not only available for Jio, it will increase the market share from around 37% in the period 2020-21 to around 43% in the period 2023-24.
  • The subscriber shares of Bharti Airtel and Vodafone Idea will fall from 29% and 24% respectively in the period 2020-21 to around 27% and 21% respectively in the period 2023-24.

Result 2

  • If the low-cost smartphone is tied exclusively to Jio, its share will increase to around 45% by 2023-24.
  • Bharti and VIL subscribers will drop to 26% and 20% respectively.

Why losses won’t be a big deal for Jio

According to the report, the manufacturing cost will be higher than the planned sales price of $ 50. and cutting costs will not be easy. Even if Google and Jio develop a lighter operating system, it will be difficult to bring it down to $ 50.

UBS expects Jio to incur subsidy costs of between $ 2 billion and $ 4 billion (Rs 14,000 to Rs 28,000). However, the report states that it makes sense for Reliance to bring a device in this price range to the market and make up for some losses in the process. The potential long-term benefits in the form of accelerated market share gains, an improved subscriber mix, and an increase in ARPU from a faster 2G to 4G migration could cover these costs in about a year or two.

How smartphone manufacturers could react

According to UBS, India’s largest smartphone maker Xiaomi is unlikely to get a $ 50 smartphone because user experience and relative value are of paramount importance than offering a phone based solely on price.

Xiaomi will likely try to increase the average retail price of Indian smartphones to global with higher specification phones. However, if Reliance’s $ 50 phone proves successful, the Chinese company that manufactures in India will lose some of its stake at the low end, UBS said.