Wireless Informatics Forum

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; that’s nearly a quarter of all iPhones sold.

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. In an interview with Bangladeshi magazine, New Age, Nokia’s General Manager for Customer and Market Operations in emerging Asia, admitted that until 1995 as many as 85% of all Nokia’s sold in Bangladesh were sourced from the grey market. The figure, Prem Prakash Chand says, has now dropped to about 40% following nationwide consumer education programs.

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. The market was fuelled by rapid demand for handsets in a geographically disperse country that couldn’t be catered for by official outlets and by high taxes on mobile products. 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.

Since its peak, the Indian government has dropped import duty on many mobile products from about 16% to 4%. Combined with dropping prices from the handset manufacturers the disparity in prices quickly shrank. Handsets, after all, are often bought from the same source, it’s just how they enter a country that determines the street-price. As much as the changes have improved the market share of official devices, the grey market persists, often with varying degrees of strength depending on factors such as local sales taxes. 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.

Routes to market

There are many routes through which grey market devices find their way into a market. Refurbished handsets represent a major share and even reconditioned iPhones can find themselves for sale under the counter at electrical retailers.

Many damaged or defective iPhones are returned to Apple or the mobile operator; in turn these are typically passed to specialist refurbishers. On of the largest refurbishers in the United States, Ohio-based Cellucom Group, receives up to 500 iPhones a week. Many find their way to wholesalers who may unlock them and sell them on, either directly to consumers or to wholesalers and distributors in other countries. From here, a phone can resurface on internet auction sites or market stalls across Asia.

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 high handset churn rate in Europe, the US and the Middle East has even opened up smaller routes to market in the form of recycling schemes.

In a report oreviewing handset recycling schemes, even the GSM Association acknowledged that; “A number of organizations are operating reuse schemes where handsets are refurbished and provided to targeted social groups or supplied to developing markets as low cost handsets. While reuse can provide greater environmental benefits, it does raise other issues such as increased fraud potential, ‘grey market’ phones and the ability of service infrastructure, especially in developing countries, to support the phones.”

Impact on the mobile operator

So what, if any, damage does the grey market for handsets have on the mobile operator? It’s a question that elicits a multitude of responses, from those that believe it’s relatively harmless and an (almost) victimless crime, to those that see it as a weakening of their control over the end-user.

The answer probably lies somewhere in the middle. Certainly, the former is grossly naïve and is representative of the land-grab mentality that welcomes new subscriptions without appreciation of the continued user experience or need to build loyalty.

Support

How, for example, should an operator react if presented with a support enquiry from a user with a non-official handset? Data services such as mobile email can be frighteningly complex to set-up and configure; in fact configuration issues account for almost half of all technical support calls taken by operator customer care channels according to support specialist WDSGlobal. Often, such support calls cannot be effectively resolved, either because of internal policy, or simply because the operator does not have the knowledge available to problem-solve a non-official device. In such cases, the handset returns to the network handicapped and unable to connect to high-margin data services that drive much needed revenue.

If a support call can be resolved, it’s likely that a lack of knowledge about the handset within the operator’s own support infrastructure will lead to a longer than average call handle time, a factor that adds significant cost and instantaneously damages APPU (Average Profit Per User). Surprisingly, many customer care centers are not adequately equipped to log and disseminate information about ‘new’, non-official devices when first presented. This means all subsequent calls are immediately subject to similarly lengthy, and costly, call handle times.

The problem also extends to operators’ SelfServe websites, an increasingly popular way for users to resolve issues without the intervention, or associated cost, of a live agent. SelfServe systems typically guide users through configuration and setup wizards, again defined by a predefined, and pre-populated, list of approved devices. If your handset isn’t listed, chances are you’ll leave without a resolution.

Parity of Services

The handset is increasingly being seen as the interface through which end-users access a range of operator services, from on-device portals through to messaging services and multimedia content. Often, these services are accessed quickly and easily through an operator’s branded firmware variant; from dedicated softkeys (linked to the operator’s portal) to tailored menu-items and bundled applications.

A handset’s firmware sits between the hardware and the application layer, effectively controlling how the handset operates and how services are presented and delivered to the end-users. Operators frequently work with their handset supplier to build their own variants of the standard firmware; this may include branding to the operator’s corporate colors, through to changes in menu structures, messaging clients, bundled applications and even functionality lock-downs.

Handsets present on the network with the manufacturer’s vanilla firmware will of course function correctly but their owners won’t be exposed to many of the operator’s revenue generating services. There is, in effect, no parity of services across an operator’s installed device base.

Handsets presenting vanilla firmware may also find themselves unsupported by the operator or may find that over-the-air configurations sent by the operator fail to install or configure correctly.

Incorrect CRM and CEM systems

In some markets handsets are heavily subsidized and given away at low-cost as part of a bundled contract. It’s not uncommon for users to discard or sell-on the bundled handset and use the SIM card in a handset that’s been unlocked and churned from another network or even a grey market handset. This is particularly common in Europe. Mobile operators without a device detection module within their network may not recognize this switch, leading to incorrect data within Customer Relationship Management (CRM) and Customer Experience Management (CEM) systems. This can result in poorly targeted marketing campaigns; for example, promoting a service not supported by the grey market handset, or incorrect configuration instructions being pushed to the handset.

Damage to profitability and loyalty

Each of these scenarios can have a profound impact not just profitability but also loyalty. The way in which consumers acquire and share handsets has changed and

mobile operators must decide where their support for the end-user ends. A blanket refusal to support users with grey market handsets, on the basis that it breaches the service contract or internal process, serves only to alienate the end-user and potentially limits the use of the handset to lower margin services such as voice. It is, realistically, more likely that operators remain reluctant to support non-official devices simply because the knowledge to do so doesn’t exist within their customer care or device management systems.

Inadequacies within internal systems points to the importance of validated repositories of device information. An obvious case is customer care who must be cognizant of the increasingly fluid nature of handset ownership and breadth of channels through which consumers can source handsets. There must be a balance between managing average call handle times and meeting first time resolution rates, two very important SLAs within the world of customer care, if they are to maintain the profitability of a user. Even an in-network device detection module, which detects a new handset when it registers on the network, is only as good as the database behind it. Without an ability to understand the capabilities of that device and how to provision it, the information is worthless; as it is if the information is left siloed and not shared with the appropriate CRM and CEM systems.

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.