Wireless Informatics Forum

I’m currently working on a story for the next issue of WIF Magazine looking at the grey market for handsets and what, if any, damage it does to mobile operator business models.

It’s been an interesting exercise. It seems that while the demand for low-cost grey market handsets has declined, it’s increasingly being fuelled by a demand for higher-end, aspirational devices.

I wanted to share the bones of my piece below / this is very much work in progress!

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Just a week after its official launch in the United States, where it was locked to the T-Mobile network, it was reported that the Android-powered G1 handset was appearing for sale on the streets of Beijing.

Despite a hefty US$580 price tag, and the necessity for Chinese owners to contact T-Mobile US for an unlock code, the appearance of the handset some 6000 miles away from ‘home’ shouldn’t come as too much of a surprise.

Like the iPhone before it, the G1’s rapid appearance outside of official distribution channels, demonstrates the high-end of the grey-market for mobile phones and accessories. This isn’t a grey market driven exclusively by price sensitivities, but by desirability. Indeed it is now estimated that over one million iPhones have been unlocked and sold through unofficial channels.

The market for such devices typically doesn’t take long to develop. Even in the case of the iPhone, whose distribution is religiously maintained by Apple and its chosen network partners, it was only a matter of weeks before the device began appearing in the electronics districts of Beijing and other major Asian cities. Most other devices, primarily from major manufacturers such as Nokia, are readily available through no-name distribution companies who often ship containers of product into countries under the radar of local customs and import tax officials.

Of course the problem isn’t limited to high-end, aspirational devices, nor is it new. The ‘public-face’ of the grey market handset industry can still be found in highstreets and markets across many Asian and African countries.

India is where many observers look to when assessing the grey market. At it’s grey-market peak in 2001, it was estimated that 89% of all mobile handsets in circulation where purchased outside of official channels. A steady supply of handsets, many refurbished models from South East Asia and the Middle East and many smuggled into the country, helped to meet demand and allowed handsets to be sold for between 20-40% less than their ‘official’ counterparts. Higher-end handsets saw price differences of up to 70%. It was a problem that cost the Indian government many millions of dollars in lost revenue and delayed the entry of handset manufacturers entering the market with official aftersales programs.

Nationally, several million handsets are still sold through the grey-market each year; many are high-end devices sourced from Europe and not yet available in the country, others are smuggled in from tax-free Dubai.

Most of the major handset manufacturers have, in the last few years, launched dedicated programs to introduce low-cost handsets into emerging markets. The availability of cheap(er) handsets from the manufacturers, a growing number of official retail outlets in geographically dispersed regions and lowered import taxes means that in many cases its now not worth sourcing a low-end device on the grey market. To adapt, the grey market has geared itself around feature-phones and higher end devices that may not be available locally.

Many European dealers now view Asia and Africa as a convenient dumping ground for unsold stock. Highly subsidized and frequently replaced, the European handset is cheap and prevalent. Dealers constantly battle to manage their stock and anticipate consumer demand. Outdated models (in reality less than 12 months old) frequently find their way onto the grey market.

The grey market for handsets has evolved. We no longer see market shares of 90% largely thanks to the evolution of low-cost components and import taxes being managed to lower the price disparity between the official and unofficial channels. Instead, focus is shifting to the aspirational characteristics of the handset and the desire for consumers to acquire high-end devices at a lower price point or even devices that are not even officially available in their home countries. Such factors have even brought the grey-market to North America and Europe. And while the penetration of these handsets has declined, their user base now includes early adopters and power users; all of which are socially influential, revenue generating and networked. To ignore them seems a lost opportunity indeed.

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The article is still work in progress, and I’m currently researching what, if any, damage the grey market does to mobile operators. All things going to plan, the next issue of the magazine will be available in January.