Our 3Q10 market share document has caused a bit of excitement as it appeared that we changed our methodology on how we track white-box sales. Our methodology has NOT changed but the market HAS.
In recent trips in China and Russia and through our continued discussions with key players in the white-box value chain we were able to validate some of the changes that this market has undergone over the past year. These resulted in more aggressive volume sales expectations for 2010 than we originally forecast. It also meant that we had to revise our 1Q and 2Q 2010 market sizing. We were also able to verify that our assessment of the white-box market for 2009 was correct and no restatement is required.
The main question many have is: how is it possible for these companies to ramp up production so fast over a year? Well, this is not what really happened. What happened is that manufacturing did grow but the main reason for the high growth is more linked to the change in business model than a massive spike in end-user demand. From our research 70% percent of white-box phones sold in 2009 were sold in the black market or with fake IMEI numbers. We do not account for such sales in our numbers the same as we do not account for refurbished phones or stolen phones. In 2010, this trend has reversed as governments have cracked down on illegal sales and IMEIs hence 70% of white-box sales are legal sales. This is where the perceived “growth” is coming from!!!
Many of the smaller companies that were doing illegal business in 2009 moved to other consumer electronics or went out of business. The market today has seen some vendors such as G’Five, Micromax, BBK, OPPO, i-Mobile and CSL that have grown their presence outside of China and into markets such as South-East Asia, India, Russia, the Middle East and Africa and Latin America. Sales are also going through tier 2 retailers and distributors rather than leveraging the smaller, less regulated channels. This allows for their products to be much more visible to consumers than in the past.
Other changes we have seen in the market:
– Quality has improved, as it is the larger companies that drive sales. This lowered the volume of casualty units compared to 2009.
– The devices sold are more mid-tier devices than ultra-low cost. Features such as dual and triple SIM, resistive touch screens and QWERTY keyboards are easy to find in white-box vendors’ portfolios.
– Improvement in the distribution channel are helping lowering inventory as run time for the products getting to market was lowered from around 10 weeks in 2009 to 5/6 weeks in 2010.
– Larger players are offering customer support and warranty on the devices which makes them much more attractive to consumers as it lowers the risk of buying and unknown brand.
International availability and increased visibility for consumers means that users who have in the past turned to a second hand device now are opting for a white-box device instead. This is why it is not strictly correct to look at the sales volume this year over last year and think of it as growth. What we see is an increase in addressable market from users moving from second hand and illegal devices to the legitimate. Looking at our installed base (IB) number would give you a better idea of the underlying trend as second hand devices have been counted in our IB number.
We believe that accounting for white-box is key as it shows the real demand and opportunity that tier one vendors as well as communication service provider and ecosystem owners have. As a vendor you might decide to walk away from a low-margin business but you need to be conscious of the risk you are running in the long term as these users upgrade to higher end devices. As a CSP, these devices lower the entry barrier not only to voice users but also to data users as these devices transition to 3G technology. As an ecosystem owner, you need to think about the opportunity these devices offer in expanding your user base but also the risk on your brand of what might be a compromised experience.
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