Handset providers play an important role in Chinas 3G ecosystem. Intensifying competition in the market requires handset providers to develop partnership strategies with operators that leverage their core competencies. We have identified three potential paths that operators and handset providers could follow.
Competition between handset providers is intensifying in China. White-label handset providers have driven gross margins per unit from nearly $90 in 2004 to less than $1.50 now. Meanwhile, more domestic and international players have joined the market; f or example, Lenovo recently launched its own smartphone, and RIM has announced a partnership with China Telecom.
Some handset providers have focused on volume, while others are carving out higher-margin positions. Providers need to set up appropriate partnerships to execute these strategies, and have recently tended to opt for one or a combination of the following.
Path I: supporting operator requirements
In this scenario, the operators control the user interface and pre-install their own value-added services. In return, the handset providers gain commitments to minimum device purchases and the ability to leverage the operators sales networks. All Chinas operators have adopted partnership strategies of this kind for 3G handsets; for example, Lenovo has teamed up with China Unicom to launch LePhone, a smartphone aimed at the iPhones target segment and pre-installed with China Unicom applications.
Path II: handsets as consumer electronic devices
In this case, handset providers cooperate with content and application providers. Certain special-featured devices will be popular in specific segments; for example, music devices such as Sony Ericssons music handsets. In some cases handset providers have partnered with vertical Internet portals; for example, Nokia has teamed up with www.tudou.com, a popular online video website, to launch a handset with a pre-installed widget for Tudous video services. This strategy creates differentiation and a selling point for attracting users in targeted segments. It has already seen some success, particularly in the youth segment, attracting young people who want access to these websites on the move.
Path III: handsets as application platforms
Here handset providers act as an enabler, and establish an open platform for third-party developers; Apple, RIM, and Nokia have all taken this path. However, this strategy can be risky due to conflict with telcos. All of the mainland Chinese operators have launched their own application stores, which compete with handset-based offers.
While China Mobile was able to negotiate a partnership agreement with Nokia that favored its own application store, the operators leverage is partly due to aggressive handset subsidies that will be expensive to maintain. Chinese operators are reluctant to become bitpipes, but with handset providers expanding control of the user interface, it is hard to imagine them reversing this trend.
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