During a July 24, 2012 analysts' call, Apple
(NASDAQ:AAPL) CEO Tim Cook had this to say about India:
You know of course I love India, but I believe that Apple has some higher potential in the intermediate term in some other countries…We have business there, that business is growing, but the sort of the multilayer distribution there really adds to the cost of getting products to market.
As of September 2012, Apple’s share of the smartphone market in India was a meager 1.2%. Because the company cannot sell through its own retail stores in the country, it has to work through the “multilayer distribution” system whereby Apple’s products are sold through third-party retailers. By 2012, competitor Samsung
(PINK:SSNLF) had established an efficient, effective chain of retail distribution, solidifying its 42.5% market share.
But today's news tells a different story.
IDC released official numbers today for Q4 2012, showing that Apple controlled a full 15.2% of the smartphone market in India, second only to Samsung’s 38.8% share, a decrease for Samsung. In Q3 2012, Apple was not even in the top five. For further context around the shifting field, BlackBerry
(NASDAQ:BBRY), formerly known as Research In Motion, held 12.8% of the market in 2010 and it only held 5.9% in 2012.
So what happened? How did Apple gain so much traction so quickly? A few different forces can be credited: The market for smartphones in India is expanding rapidly, Apple started to get smart about distribution, and the company’s iTunes service launched in December.
Smartphones Spreading Through India
Though the majority of phones in India are so-called “feature phones” (in other words, they’re not smart), the market is still big and will continue to grow rapidly. Smartphones made up only 6.5% of handsets in India as of September 2012, but that number will grow substantially. Google
(NASDAQ:GOOG) predicts that India will add 200 million Internet users to its current 100 million users by 2014, and smartphones are a strong vehicle for connectivity in the country.
Moreover, the Federation of Indian Chambers of Commerce and Industry and KPMG International estimated in March 2012 that the number of smartphones in India would reach 24 million by the end of 2012, and the number would reach 58 million in 2013. By 2016, the estimate for the number of smartphones in India is 264 million, marking a 10-fold increase in four years. With the market growing so rapidly, such stark shifts in market share make sense.
Despite the costs associated with third-party distribution, Apple will continue to have opportunities to expand its market share in India during the next decade, given the fact that the Boston Consulting Group has forecasted that overall consumer spending in India would quadruple to $3.6 trillion by 2020. As a higher end phone producer, Apple will benefit from heightened consumer discretionary spending.
The Problem of Distribution in India
From early on, the market leader, Samsung, worked much better with the third-party distribution system in India. As the company does not have its own retail outlets anywhere, it already has a grasp on how to best manage distribution chains. Apple, with its Apple Stores springing up globally, had more work to do and more money to spend. Moreover, Samsung’s phones cover a wider array of the market, ranging from the equivalent of $130 to $700, while an iPhone 4 costs around the equivalent of $470
and can go for even more than that.
Apple has carefully honed its distribution by working more with smaller, independently owned retailers. Perhaps more importantly, Apple made a deal in late 2012 with Redington
(NSE:REDINGTON), the world’s largest supply chain solution provider in emerging markets. Since then, Redington has been responsible for 70% of all of Apple’s Indian sales. Obviously the deal was designed to benefit both parties.
The Importance of iTunes
Also driving Apple’s growth in India is the proliferation of iTunes. The company launched the service in December 2012 and it has been gaining traction ever since, thanks in part to discounts that are favorable to the Indian market, with some songs as low as 15 rupees ($.28) for download. According to Siddhatha Roy, the CPO of Hungama Digital Media Entertainment, “Apple kept the Indian consumer in mind when determining their pricing here…India is just starting on the digital commerce space, and this will likely serve as an entry into a lot of other products for Apple.”
Though back in July Tim Cook said that other countries had higher intermediate potential than India, Apple has definitely put a lot of effort into its iTunes effort in the country. Across Africa and Latin America, iTunes only take payment in the form of US dollars; in India, it takes rupees. On top of that, India is only one of four countries -- the others being Indonesia, Turkey, and Russia -- where Apple rents and sells movies on iTunes.
Jumping from not even being in the top five in Q3 2012 to a solid second place in Q4 2012, Apple has definitely made a serious stride into the difficult smartphone market in India. With predictions for smartphone use to increase 10-fold by 2016, the next few years will be crucial for Apple, Samsung, and the rest of its competitors to grow and solidify their positions in the rapidly shifting market.
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