Apple's prospects in India

April 28, 2016

In the Q&A after Apple’s Q2 2016 earnings call, Tim Cook answered a question on India in detail.

Katy Huberty asked:

[I] appreciate the optimism around longer term iPhone unit growth, but with developed-market penetration in anywhere from 60 to 80 percent, the growth is going to have to come from new markets. You talked about India, can you just spend a little bit more time on that market? What are some of the hurdles you have to overcome for that to be a larger part of the business? When should we expect Apple to have more distribution, and specifically your own stores, in that country?

In his answer, Tim Cook first refuted the “growth has to come from new markets” argument:

… With our worldwide share, there’s still quite a bit of room in the developed markets as well.

and then talked about what Apple thinks of the Indian market:

And from an India point of view, if you look at India — and each country has a different story, a bit — the things that have held not only us back, perhaps, but some others as well, is that the LTE roll-out with India just really begins this year. And so we’ll begin to see some really good networks coming on in India. That will unleash the power and capability of the iPhone in a way that an older network, 2.5G or even some 3G networks, would not do. And so the infrastructure is one key one, and the second one is building the channel out.

Unlike the U.S. as an example, where the carriers in the U.S. sell the vast majority of phones that are sold in the United States, in India the carriers in general sell virtually no phones. And so it’s out in retail, and retail is many, many different small shops, and so we’ve been in the process — we’ve got something we’ve just started in the last few weeks — we’ve been working in India for a couple of years, or more, but we’ve been working with great energy over the last 18 months or so, and I’m encouraged by the results that we’re beginning to see there, and we believe there’s a lot, lot more there.

It is already the third-largest smartphone market in the world, but because the smartphones that are working there are low-end primarily because of the network and the economics, the market potential has not been as great there, but I sort of view India is where China was maybe 7-10 years ago, from that point of view. And I think there’s a really great opportunity there.

I think Tim Cook’s outlook on the Indian market is a little too optimistic.

Firstly, iPhone sales in India were never really hampered by the unavailability of LTE (or 4G as they call it here in India). Anyone who can afford an iPhone in India has access to a fast broadband internet either at home or at work, probably both. The LTE rollout speeded up only this year here in India (earlier, only one network operator, Airtel, offered LTE), but LTE support is a standard feature among high-end devices being sold here for a while. At present, LTE is supported by even sub-$150 devices from big brands. The spread of LTE in India is not going to suddenly make iPhones more desirable, nor is there any significant upgrade cycle coming because of LTE.

Second, Tim Cook says there are “many, many different small shops” in India, but I doubt those shops can contribute much to iPhone sales. Most of the potential iPhone owners are in the cities, where Apple has been partnering with premium resellers – retail outlets that try to give an Apple-Store-ish feel.

I have no guesses on what Apple might have started regarding retail in the “last few weeks”. As to what happened in the “last 18 months”, Kunal Dua of NDTV hazards a guess:

Interestingly, Cook highlighted the company’s increased focus on India in the last 18 months, a timeline that is more or less in line with the increased flexibility that Apple partners have had recently in terms of selling the iPhone below the official MRP [Maximum Retail Price], a standard practice for the rest of the industry.

Third, India is indeed looking a bit like how China was in 2005 in terms of GDP per capita, but India has far less number of people who can afford an iPhone than China does. The addressable market for Apple in India is tiny, and is growing quite slowly ¹. Of that, those who can afford the current year flagship will constitute a minuscule number compared to China.

As Ben Thompson explains:

[In China] a relatively small number of individuals have an outsized share of income, but, because China is so huge, the absolute number of high income individuals is quite large.

India, on the hand, is just about as large as China, but has a very different economic profile.

…

The average [income] is lower and there are fewer outliers, which mean many fewer people are in iPhone territory.

It doesn’t help that iPhone’s launch prices in India are some of the highest in the world. Also, India’s smartphone market is already dominated by Android handsets, so many apps and services launch Android-first, and sometimes stay Android-only.

India does have a market for premium smartphones, but it’s quite small. India can be a good potential market for previous-year iPhones and for refurbished iPhones, and Apple is making efforts on both fronts. Given this scenario, from Apple’s perspective, India isn’t like the China opportunity at all.