Smart, cheap and in control

Not so long ago, a smartphone cost you a big wad of cash or commitment to a contract purchase. But this is changing as cheaper devices grow in appeal, particularly among developing markets. Late last year, Wikipedia founder Jimmy Wales highlighted the trend by replacing his expensive phone with a much cheaper one bought in Kenya. Is this a revolution on our doorstep?

We're not seeing a slowdown in high-end devices. In fact, we've witnessed growth in mid- to high-end segments.

Sharay Shams, Lenovo MEA

To answer that, we need to examine the catalysts for cheap device adoption. A widely held reason is that manufacturers need to make up for lagging high-end phone sales. But this is an oversimplification and - once markets such as the US are removed from context - not entirely true.

"We're not seeing a slowdown in high-end devices," says Sharay Shams, smartphone business lead at Lenovo MEA. "In fact, we've witnessed growth in mid- to high-end segments."

He points to the ongoing role of mobile operators, which subsidise phones through post-paid contracts. Yet this arrangement also acts as a barrier, particularly in markets such as South Africa. To access contracts and subsidies requires a credit check, says Ronald Mapiye, research analyst at Euromonitor International: "With high levels of debt being reported in South Africa, most consumers often find themselves not qualifying for such packages."

This traditional exclusion lies at the heart of cheaper device demands, says Tim Hatt, lead analyst at GSMA Intelligence: "We're seeing the emergence of more and more sub-$100 smartphones, in large part fuelled by the diaspora of Android devices, especially low-cost models from China. This is important because it opens up a new audience, one that is primarily mid and lower income. It also expands the reach of smartphones services, including emerging market development-oriented ones like in health, education and employment."

According to Aditya Rao, associate partner in telecoms advisory in PwC, a service gap has formed among cheaper device users: "There's a void left by Nokia and BlackBerry, which give inexpensive access to smartphone paradigms in prepaid markets, but limit services by failing to plug into dominating ecosystems such as Android."

The proof of this vacuum is readily apparent by the opportunity to fill it. Rao cites India's Micromax as an example. Within five years, the brand went from launch to a 22-percent market share in that country, thanks to aggressive overtures in mid- to low-range devices.

Established manufacturers have noticed this rush and many aim to be 'full range' providers. From Samsung's broadening catalogue to aggressive model pricing by rising stars like Huawei, the industry is as eager to deliver as consumers are to buy ? signs of a maturing industry.

"The process of making and distributing these phones has become very streamlined. There's more headroom for different hardware combinations and applications, so companies are expanding their brands horizontally," says Hatt.

As such, analysts disagree that this will result in a radical redistribution of market share, at least in the foreseeable future. Ultimately the larger players have the advantage of brand cachet.

"In a market like SA, which has a relatively strong post-paid market of 20 percent upwards, mid- and low-range smartphone manufacturers not only need to be cheap, but require strong branding to drive an uptake," says Rao. With such high post-paid numbers, this will be operator-driven: "Operators trusting the mid- and low-range smartphone manufacturers with their post-paid subscribers will play a significant role in enhancing the brand perception of such manufacturers."

Mapiye echoes this: "Despite the economic challenges present, most consumers remain aspirational in terms of brand choice. Any cheaper smartphones introduced to the market would certainly be benchmarked against the well-established brands in terms of features offered and the final price given."

Yet it's not business as usual - mobile operators are as vested in exploiting cheaper devices. With data as the new main revenue source, there's a need to encourage more consumption - and cheaper phones tap into that. South Africa has shockingly low data usage numbers. According to Rao, less than one out of five users engages with app stores, VOIP or other smart services, a proportion even lower among prepaid users.

In response, MTN created the Steppa phone, which retails for around R500. And since smart devices' worth is increasingly derived from their services, cheap hardware lets operators expand their influence through manufacturing, potentially subverting the demotion to 'dumb pipes' for someone else's ecosystem. It also gives an opportunity for outside platforms such as Firefox OS or Tizen to appeal to consumers.

It all points not to wringing hands over sales, but rather new opportunities. Cheaper phones may well herald the start of a true golden age for smart devices, by bringing more consumers into its world of services.

First published in the June 2014 issue of ITWeb Brainstorm magazine.