The great Indian mobile revolution is all set to move to the rural part of the country, with handset

manufacturers gearing up to come out with market-specific products to acquire maximum share. The next
big opportunity for telcos will be in the hinterland where two-thirds of the country's 1.17 bn population lives.

As of March 31, 2008, the rural tele density in the country stood at just 9.2% vis-à-vis the urban tele
density at 65.9%, according to the Association of Unified Telecom Service Providers of India (AUSPI).
Figuratively, the all-India rural wireless subscriber base stood at 62.2 crore, while the all-India urban
wireless subscriber base stood at 198 crore. Also, Uttar Pradesh (including Uttranchal) boasts of the
maximum rural wireless subscriber base at 8.5 crore, followed by Maharashtra with a subscriber base of 5.4
crore. Clearly, now the focus has shifted from a small increase in tele density to reach a critical mass in rural
areas that have access to and affordability of telecom services.

There are many factors driving handset manufacturers and operators to the rural market. Though India is
emerging as one of the biggest telecom markets, metros and tier-2 cities are already reaching saturation
point. Hence, companies have no option but to explore newer markets to sustain the growth. As of now,
India is adding around 8 mn subscribers a month, and in July 2008 the country added 9 mn subscribers.

Falling handset prices along with services available at extremely competitive prices have made mobility
accessible to the lower strata of the society, which has mostly remained untapped. Handsets are available
for as less as Rs 1,000, and affordable prepaid packages are making mobility very tempting for the mass
market.

Another driver for this market is that the Department of Telecom is planning to launch the
second phase of mobile phone expansion covering around 2 lakh villages. About 11,000
additional towers will be installed under the scheme to cover habitats with population of
500. The details of the scheme are being worked out and locations of the towers are being
identified.

Under phase-I of the scheme, about 7,900 towers will be installed in 500 districts spread
over 27 states. The state-owned BSNL will be installing over 6,000 towers. The setting up
and managing of these infrastructure services started in June 2007, with subsidy support
from the Universal Service Obligation Fund (USOF) of DoT.

It is believed that of the next 250 mn users who will go mobile in the future, as many as 100 mn are likely
to come from the rural parts of the country. As of now, rural mobile subscribers account for close to 25% of
the total mobile user base in the country. However, there are many challenges associated with expansion in
the rural segment as well. It is an extremely price-sensitive market and the requirements are going to be
vastly different from the urban market.

Recently, an Ernst & Young-FICCI study said that low income and geographical variance pose difficulties for
network layout, as well as for setting up of distribution channels in remote areas. Apart from that low ARPU
generated by rural customers does not immediately offset return on investment and revenue for rural outlay
for private operators.

Possibly, the most crucial element in catering to the rural market is pricing. The rural market is believed to
be extremely price conscious. Thus, affordability is a major plank for handset manufacturers, most of whom
believe that pricing is going to be crucial to tap first-time buyers in the rural segment. "Affordability is one of
the key factors, and our effort will be in the direction of making our products more accessible to rural
consumers, be it easier finance or pricing itself," says Sunil Dutt, country head, Samsung Mobile Business.

However, it is not just pricing, handset manufacturers would also have to come out with features that would
appeal to the rural segment. "One of the major challenges for handset companies is that they have to have
an understanding of a model that responds to user needs. It is not just pricing. Rural India is also looking for
features, that are specific to their needs. For instance, Nokia 1100, one of the best selling Nokia model was
specifically targeted at the rural segment with long battery life and came with a torch. Hence, it is
imperative that manufacturers have to understand the needs of the rural segment," says Anshul Gupta,
principal analyst with Gartner.
There is another issue facing handset manufacturers-features that appeal to an urban user are not likely to
appeal to the rural India. "Contrary to popular belief, price is not the only driver for rural users. They seek a
value for money proposition. In most cases the demand emerging from the rural market is of sturdy
handsets that have strong battery life. Also, voice and easy text messaging are other essential and
important features in an entry-level phone," says Devinder Kishore, director marketing, Nokia India.

In fact, some players like LG have decided not to play the price game. "Though the scope of hi-end phones
in the rural market is less, our strategy is oriented toward growth as income levels and prosperity are on the
rise in rural India," says Anil Arora of LG.

Lloyd Mathias, senior director, sales and distribution, India & South West Asia at Motorola Mobile Devices
supports this: "First time consumers are not just looking for a low-priced handset, but a phone that meets
their daily needs. Today, the mobile phone is fast evolving into a ubiquitous tool performing multiple tasks.
Our entry-level market strategy seeks to address the very needs of an aspiring Indian consumer for whom
affordability and features are essential, without compromising on style and design." Motorola has tied up
with Bharti TeleTech as its national distributor, and their products are available through 20,000 outlets in
the country.

Though many players say that pricing is just one of the factors, the prices of the handsets are continuously
falling, making mobility more appealing. Moreover, the customers are looking at total cost of ownership.
"Handset manufacturers have to come out with features which are specific to the needs of the rural
consumer. Basically, affordability, access, and availability are going to play a key role," says Naresh
Priyadarshi, head of Synovate Business Consulting India.

Spice recently introduced a handset priced at just Rs 800. LG has the Bullet series phones targeted at this
segment. LG has also recently launched the KP106B catering the rural segment. This basic phone is targeted
at high capacity users with high talktime requirements, and also supports the best-in-class battery.

Motorola, on the other hand, has its Motoyuva series, Motoflip W220, Motoflip W375, and Motorola W218.
The company has come out with features targeted at the rural segment like Hinglish predictive text input,
Hindu calendar, Indian wallpaper, Hindi texting, phonebook storage, and vernacular languages, which it
believes are likely to appeal to the rustic part of the country.

Distribution Roadblocks
Analysts and experts believe that the distributor model that handset companies use might have to be
reworked or enhanced to reach the hinterland of the country. The main challenge in distribution would be
reaching the rural population and developing an efficient channel strategy. An associated challenge is also to
educate the masses about the handsets and its advantages. Tying up with key opinion leaders and players
like ITC e-Choupal or DSCL Kissan Sagar might also play a key role.

To reduce the cost of total mobility, it is important for manufacturers to work in tandem with operators. And
bundled schemes are likely to become the order of the day in this scenario. "Handset manufacturers would
have to work in tandem with operators to reach out to new subscribers in the rural market. This is mainly
because the consumer is looking at total cost of owning a mobile, and bundled schemes become very
important in this scenario," says Priyadarshi of Synovate.

Bundling is essential for the rural market as they would desire a mobile phone with connection and talktime
to ensure a complete package. This is also required since prepaid is likely to be the norm in this segment, so
the consumer would be looking at total cost of ownership rather than just the cost of the handset or service
provider.

Bundling is inevitable since the rural populationsees it as a key value proposition. Bundling also makes
business sense since due to decreased ARPU realizations, companies will like to reduce their spending. This
way, handset manufacturers, as well as telecom companies could pass on the benefits to the customers in
rural areas.

There are other advantages as well. Both handset manufacturers as well as telecom companies will be able
to take advantage of each others distribution network, to ensure a higher market penetration. Lesser-known
handset manufacturers will also get an opportunity to garner higher sales on account of brand image of
renowned service providers.

"Nokia has always been at the forefront as far as extending affordability to consumers in concerned. As part
of our strategy, we essentially look at maximizing customer value by reducing the total cost of ownership for
consumers. We will continue working with operators and the government to drive down the cost of mobility,
thereby making it affordable, and bring the benefits of mobile communication to the Indian consumers,"
says Devinder Kishore, director marketing at Nokia India.

Handset manufacturers like LG and Samsung might have an advantage over other players since they
already have a presence through their other products in the rural segment. The brand recall for these
companies would be higher in rural India than Nokia, Sony Ericsson, and Motorola.

"LG has been very aggressive in the rural market with products like Sampoorna TV being a complete hit in
this segment. Also, these companies have a distribution network in place to leverage on as a competitive
advantage," says Priyadarshi of Synovate.

There might be other factors in favor of companies that already have a substantial network in the rural
segment. Brand loyalty in rural population is much higher than in urban population, and word of mouth
publicity holds high potential. New entrants in the rural market will have to start from scratch to build a user
base where companies like LG and Samsung already have a user base and a trust factor among the
population due to reliability of their products.

Samsung has recently strengthened its distribution network in the country by appointing SSK and Link as its
distributors for mobile sales in the Western and Eastern part of the country, respectively. The company
already has Telemart and United Telelinks as its distributor in the Northern and Southern parts of the
country.

Most handset manufacturers have already started using alternate distribution channels to get in touch with
prospective customers. "We are targeting alternate distribution networks to reach the rural market, which is
the next growth area for the mobile industry. We are also looking at tying up with local co-operatives to
push handset sales in the rural segment. Samsung recently tied up with the Indian Farmers Fertilizer Co-
operative (IFFCO) for rural telephony, which will take our handsets to the countryside. We will use IFFCO's
co-operative network for marketing our handsets. The handsets will be especially beneficial for accessing
commodity prices to agricultural inputs, among other benefits," says Dutt of Samsung.

However, this might be difficult for handset companies since both FMCG and the pharma industry are high-
margin businesses, and they can afford to have their own distribution network in rural areas. The margins
are not very high for handset manufacturers. The report however suggests that collaboration with FMCG and
the pharma industry will yield a much better result for handset players, as well as for operators.

Nokia has a partnership with HCL for distribution of its phones. Last year the company also decided to start
its own distribution efforts, and has set up a number of concept stores in metros and tier-1 cities. The
company is planning to come out with a slew of measures to make its brand stronger in the current year.
"Making our products, as well as services available in rural India is our key focus this year. As of now there
are 130,000 mobile outlets in the country, out of which 75,000 are Nokia brand outlets," says D
Shivakumar, VP and MD of Nokia India?.

Nokia was probably one of the earliest to realize the potential of the rural market in the country. The
company started the Rural Van project about two years back. The van forms a traveling retail and
distribution center designed to improve awareness of the benefits of mobility.

"In addition to increasing our existing fleet of Rural Vans, we are also planning to reach out to villages
across India to showcase the relevant product portfolio and solutions to demystify the use of mobile
technology," says Kishore.

Nokia is also looking at microfinance as a major initiative to increase mobile penetration in the country. The
company is currently running pilots and trials to gauge consumer response in select markets and will soon
come out with specific offerings to make buying a mobile phone more affordable. Nokia has one of the
largest distribution networks in the country, and offers support for nine Indian languages. The company is
also providing agriculture-based solutions catering to the vast farmer community in India. It is working with
a host of content providers and has started programs for farmers, which include providing solutions from
information on market prices agricultures products, weather updates, and financing options.

Smaller players like Meridian Mobiles are also planning to tweak their distribution channel to cater to the
rural segment of the market. "We are expanding our distribution network in a large manner to reach out to
rural customers and facilitate them both in terms of products and services. For this we are also in the
process of recruiting 100 strong channel partners in different areas," says Rajiv Khanna, CEO, India,
Meridian Mobiles.

The VAS Angle

Experts and analysts believe that VAS will not be the driving force in the short term. Voice and mobility will
drive the market. However, in the medium-to-long term, voice-based VAS, especially those relating to
entertainment and ringtones, will form an important source of revenue for telecom companies.

Vernacular content in all likelihood will become a key differentiating factor in the Indian rural market. As
companies enter the innermost areas of the hinterland, where the proportion of population understanding
English is negligible, the true value of vernacular languages will emerge. A beginning will have to be made
from tier-3 cities and semi-urban towns to gain a deeper understanding of the rural market.

"VAS will definitely be the driving factor, but what is important is the end-offering customized to appeal to
the target segment. It is very important to understand the needs of the rural population to ensure that the
services are aligned on those lines. Vernacular content is already a differentiating factor, considering the
wide language diversity in the rural population which a lot of handset manufacturers are already exploiting,"
says Priyadarshi.

Since the rural market is extremely price sensitive, it is likely that the volume economics will come into play
and VAS providers will offer applications in small denominations. Language and ease-of-use are going to be
major concerns.

Handset manufacturers have already started working on specific content for the masses. "Nokia is working
with a host of content providers, and we have kick-started a program for farmers, including solutions
ranging from providing information on market prices for agricultural products, to weather updates and
financing options," says Kishore.

The rural revolution is all set to b