The Great Smartphone Contract Quandary in India

 

In India, the phone contract system – in which you get a device from the operator at a concessional price and commit to a certain payment and connection for a period of time – has never really been popular, in spite of the best attempts of operators (Reliance even offered an iPhone at zero cash down payment a few years ago). There are many reasons for this. The lack of a proper credit system and great chances of abuse made Indian telecom operators always wary of taking liability for phones. Then the telecom regulator in India, i.e., TRAI, has always emphasized on selling a SIM card as acquiring a subscriber, so naturally, almost all telecom operators were focussed on selling more SIM cards to make it appear as though they were gaining more subscribers. Third, the intensity of competition and the low ARPU always made it impossible for telecom operators to have any kind of significant overhead.

contract-phones-india

Buying a phone in India and subscribing to telecom services have generally been two separate processes in India. Most people buy phones by paying the full price upfront and then just insert the SIM card of whichever operator they want to use on their smartphone or mobile phone. This is a key reason why dual SIM smartphones and mobile phones are so popular in India while the same is non-existent in the US, where the operator controls both the supply of handsets as well as telecom services. RIL seemed to have cracked the operator-bundled-phone equation when its CDMA network was launched in India, but after the initial euphoria died down, the vast majority of smartphones and mobile phones sold in India were sold separately from telecom services.

JioPhone – the operator contract era returns?

The JioPhone has, however, regenerated interest in the contract system in India. Jio made a high profile announcement in its 2017 RIL AGM where it had declared that the JioPhone would be available for free “effectively.” JioPhone users needed to make a deposit of just Rs 1500 for the device, which was lower than its alleged cost, but would need to stick with Jio for three years. And just as carriers in the US applied an Early Termination Fee if the user were to leave the network before the contract was completed, Jio had similar penalties which it would deduct from the security deposit of Rs 1500.

The JioPhone is basically an implementation of the contract system of US in India but for a low end “pseudo” smartphone instead of a high-end one. Which begs the question: can the contract system be extended to high-end devices as well?

JioPhone_net-neutrality

The chances are slim. And for a good reason. What many ignore while comparing the Indian and US telecom sector is the vast difference in ARPU. While US carriers sell iPhones and other high-end phones for a relatively low down payment, that does not mean the carrier is taking a loss. Often the contract would be designed in such a manner that the remaining cost of the phone could be divided over 24 months.

Relation between ARPU and device cost

t-mobile-iphone

The image above is from T-Mobile’s website whereby the price of a 32 GB iPhone 7 Plus on an Equipment Instalment Plan, a.k.a monthly plan, is USD 46 down payment and USD 27 per month for 24 months which makes it a grand total of USD 694, which is in the vicinity of what an unlocked 32 GB iPhone 7 Plus costs up front.

This may seem expensive to the average Indian but is not all that expensive for the average American. The cost of an unlimited plan from T-Mobile for a single user inclusive of taxes is around USD 70 and the device costs USD 27 per month which means that the telecom service cost (USD 70 unlimited single line plan) to device cost (USD 26 per month for 32GB iPhone 7 Plus) ratio is around 2.6:1 which means for every dollar that the average T-Mobile user spends on the device costs every month, they spend 2.6 times more on telecom service costs.


Now let’s apply the same situation to India. Currently, telecom prices in India are at an all-time low and for the sake of this article, let us just assume that going forward, the average price of an unlimited plan in India is Rs 300 per month. In such a scenario, a 32 GB iPhone 7 Plus would require monthly payments of Rs 1625 per month. Remember that the telecom service to device price ratio in the US is 2.6:1. However the same ratio becomes extremely skewed in India where the telecom service to device price ratio in the case of a 32 GB iPhone 7Plus would be 0.184 or in other words for every rupee spent on device costs, the average Indian consumer would spend 0.18 times on telecom services cost.

Good for low end, bad math at high end

And this is why I do not expect operators to offer high-end models at much lower prices in bundled offers soon. The price of telecom services in India is so low that bundling the monthly payments of a high-end smartphone with monthly telecom charges automatically makes the device’s price stand out. Anyone who can do basic math can easily figure out that telecom operators in India who bundle high-end devices with telecom services are not providing any meaningful discount at all. Buying the device on EMI and paying for telecom services separately would be just as cost effective. What’s more, buying on EMI, gives you the opportunity to switch operators at any time.

jiophone

But even though India’s ARPU is low, it is still enough to make bundling with low end “pseudo” smartphones look like a worthwhile saving. Which is exactly what Jio is doing with the JioPhone. Let us apply the same ratio that exists in the US here. The JioPhone has a mandatory minimum recharge of Rs 1500Rs every year or Rs 4500 over the period of the contract. Remember, in the US, people pay 2.6 times more for telecom services than they pay for device costs.
Applying the same 1:2.6 ratio to the JioPhone, we can come to the conclusion that if a JioPhone user makes a recharge of Rs 4500 over three years then he or she is paying approximately Rs 1730 for the device. This fits perfectly well with the Rs 1500 security deposit that Jio takes for the phone.

At the end of the day, bundling or contracts makes sense from a money-saving perspective only when the telecom service costs exceed the device costs by a decent margin. This is generally a function of the ratio between telecom service costs and device costs. In India, the ARPU is too low to make bundling or contracts with high-end smartphones seem worthwhile or money saving. However, the ARPU is also just high enough to make bundling with devices like the JioPhone seem like a fantastic value for money proposition.

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