August 12, 2011

Some Advice for the Makers of White Box Phones (and the rest of us too)

By Michael de Souza, VP Media

Walk into a handset store in the popular shopping mall ITC Roxy Mas in Jakarta or District 1 in Saigon and there's a very good chance you'll find rarely heard of makes being sold alongside the international mass-market brands.  Some phones, though, like the Blueberry and ti-phone, have a familiar ring to them.

These generic 'white-box' phones are selling just about as well – sometimes better – than their big-name competitors and they now offer the same features, and then some, at a cheaper price.

Telecom carriers and brand-name manufacturers are taking a big hit, but if the no-name upstarts are to survive and flourish, they should take a few tips from the likes of the iPhone and Samsung. Otherwise, they'll be knocked off the block by the next company that can slice a penny off the cost of a chip or screen.

Background: White Boxes Are In

It's no secret that white box phones are cheap (US$50 to $100) and have been winning market share for some time. Generic handsets – taken as a group – are the market leader in Vietnam and hold the second and third largest stakes in several other markets. Just take a look at these stats:

  • Vietnam: 40% (Nokia is in second place with 39%.)
  • Indonesia (21%, second largest)
  • India (12%, third largest)
  • Kenya (11.5% third largest)
  • Philippines (11.5%, second largest)
White box handsets today have bigger screens, full QWERTY keypads and processors that can handle most multimedia content. In fact, a consumer can buy a generic phone that can do everything an iPhone or Blackberry can do at a fraction of the price . . . and without having sign a 24-month contract with a telecom carrier.

The user experience can be glitchy at times and is honestly not as good as that of an iPhone, but these generic handsets have additional advantages. Some phones, for example, offer slots for duel SIM cards so a consumer can have more than one active number at a time, a feature that mainstream handsets have shied away from in order to avoid upsetting the telecom companies.

Who Makes the White Boxes?
There are three main categories of players here:

  • Chip manufacturers – like MTK in Taiwan and Spreadtrum in China -- who build the processors that power smartphones. They make A LOT of these and produce each processor for as little as USD 2-3 each.
  • Vertically integrated manufacturers, who build and spec entire handsets (buying key components from likes of MTK and Spreadtrum)
  • Retail brands that spec white box handsets and brand them (like Maxis in Malaysia or Nexian, an Indonesian company that was recently bought by India's Spice Mobile). Their key offers are own-OS phones retailing for USD30-50 each and Android-OS phones that cost about USD100.
Often, the white box manufacturer wills send a glorified salesperson to a carrier, who will specify a price point and the required features (say $55 for xxx thousand handsets with 3G, a certain screen and processor, etc.). The phones are then made based on that order rather than the other way around. The manufacturer very quickly sources the parts and fullfils the purchase order.

Impact on the Industry

Major players like Nokia and RIM are losing market share . . . a fact reflected in their share prices. Nokia shares are down nearly 60% since mid-February; RIM is off 68%. But if you look at our stats, it's definitely not game-over. Nokia is still the biggest player in most markets.

The white box business model also poses a real threat to telecom carriers. Until now, the two have built a strong symbiotic relationship. Carriers subsidise the cost of premium handsets – driving up demand for the phones – while securing the loyalty of customers who sign 12 and 24-month contracts. But cheap quality handsets turn this model upside down.

It's worth nothing meanwhile that Samsung is reading the market well. True, the share price of Samsung Electronics is off (28% since mid-January) but the company's smartphone sales grew by 51% in the second quarter of the year and it's one of the top two handset makers in 7 of 10 of BuzzCity's top markets. 

Samsung is setting the right price points and choosing attractive feature sets in developing markets. The Android-powered Galaxy S2 also competes head-to-head with the iPhone in developed countries. And in both cases, Samsung is using attractive content and services to develop a relationship with consumers.

There’s a wave of demand for data meanwhile as users take advantage of the full capabilities of their handsets. New market segments are now accessing multimedia content, browsing the internet and checking email from their phones. This increased consumer usage of course opens up new opportunities for marketing and advertisers.

Lessons for White Box Manufacturers

While competing mainly on price has been a successful strategy to date for white box manufacturers, it's a risky strategy and one that will fail in the long term (which in today's mobile industry arrives sooner than you think). Margins are raser thin, so as soon as another company comes along that can shave a penny or two off the component prices, you're history.

So if White Box #1 is going to thrive – and not fall to White Box #2 – it is going to need to build user loyalty by offering BRANDED SERVICES and CONTENT. Manufacturers should study their markets to learn consumer interests, which they can monetise through content sales and relevant offerings.

This is nothing new. Branded services fueled the success of today's best-known brands. Blackberry took instant messaging, which had been around for 15 years, created a walled garden and gave people code numbers. It became cool to BB Message. Apple has taken video messaging, called it Face Time and it's considered revolutionary.

And all of the major players offer content stores. Apple has iTunes, Nokia - the Ovi Store and Android – the Android Market.

Most people now treat handsets like a PC: apps are more important than the device and consumers want to be able to customise their phones.

The Last Word

The mobile industry is changing before our eyes. Twelve months ago, you couldn't have predicted that Nokia would be in the trouble it's in now. Change is accelerating and it would be foolish to predict a year in advance. But if today's white box makers want to thrive, they need to grow up and become brands. And by moving towards the mid-tier market and offering a range of features, it appears some players are already headed in this direction.