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Pyramid Points Microsoft - Nokia & iPhone 5c: What Do They Mean for Smartphone Trends in Emerging Markets? September 17, 2013 Is the Arab World Ready for OTT Video? September 13, 2013 Turk Telekom bid for Digiturk is a strategic gamble August 2, 2013 Before and After the App Store: The Changing Fortunes of Mobile Operators July 24, 2013 In 4G Auction in Colombia, New Entrants Responded to Government Efforts to Foster Competition July 15, 2013 Telefonica sale in Central America does not point to regional repositioning June 5, 2013 Emerging markets to drive cellular M2M May 22, 2013 Orange plans MVNOs to address new markets May 9, 2013 What Apple needs to do to make China its No. 1 market April 24, 2013 Chinese Regulator Opens Up to MVNOs March 15, 2013 CDNs Offer New OTT Revenue Hope February 20, 2013 Airtel Rethinks Its African Approach February 12, 2013 France Telecom Intensifies Activities in Africa February 5, 2013 Telefonica Climbs the Mobile Value Chain February 4, 2013 Argentina and Chile Become Smart(phone) Markets January 15, 2013 Smart Home Services Promise New Revenue January 11, 2013 Broadband Demand Stimulation Is Key to Growth December 19, 2012 Sources: Pyramid Research Smartphone Forecast, 2Q2013 The above projections assume that the global smartphone ASP (average selling price) will gradually decline from the current $214 to $166 in 2018. It also assumes that this number will be below $100 across the poorest countries in the emerging world. The general consensus, however, is that in order for the next 2bn people to be connected to the Internet via smartphones in the next five years, the price of these devices should fall to around $50. This relatively hard to reach target is attainable if more competition is injected into the emerging market smartphone space and the current dominance of Android based phones is disrupted. We believe that iPhone 5c will not (and is not meant to) compete against Android based smartphones and increase emerging markets smartphone adoption rates; on the contrary, Apples and Brightstars recently signed buy-back & trade-in partnership and Microsofts acquisition of Nokia have a potential to do so.

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Microsoft - Nokia & iPhone 5c: What Do They Mean for Smartphone Trends in Emerging Markets?
September 17, 2013 Microsoft has recently announced the acquisition of Nokias Devices and Services division for $7 billion. The acquisition will come into effect in 1Q2014 upon regulatory approval. The event was followed by Apples long awaited launch of a cheaper iPhone model, iPhone 5c, last week. In this Pyramid Point, we examine the effect that the two events will have on the smartphone adoption in emerging markets. 2013 is the first year in which smartphone sales will trump those of feature phones. We project that out of 1.8 billion handsets that will be sold to end-users, almost 1 billion will be smartphones. The gap between smartphones and feature phones will continue to widen, with smartphones expected to account for 73% of the total handset sell-through in 2018. In dollar terms, this means that the cumulative global smartphone related opportunity adds up to $1.55 trillion in the period between 2013 and 2018. Emerging markets will be the driving force behind the global smartphone sales growth, with 70% of total smartphone sales originating in this part of the world in 2018. Exhibit 1: Smartphone sell-through projections, 2012-2018 SMARTPHONE AND FEATURE PHONE UNIT SELL-THROUGH, 2012-2018

Thematic Reports From Digital Content to M-Wallets: M-Payment Strategies for Operators Cellular M2M Connections: An Analysis of Growth Drivers, Market Segments and Operator Approaches South Africa Telecom Market Forecast How Latin American Telcos Are Tackling the SME Cloud Opportunity How NGNs Enable Advanced Telco Services More Reports

Telecom Insiders Middle East and North Africa: Broadband Growth and Local Content Boosting OTT Video Convergence in Developed Asia Pacific: Operator Strategies Move beyond Bundling to VAS Multiple Mobile Identities Strategies: Dual-SIM Phones, Virtual Numbers and Offers for Travelers Africa: Mobile Financial Services Business Models Evolve with Regulations, Consumer Needs and Economic Environment Latin America Operators Turn to Multiplay Packages and Bundles as Market Intensifies More Insiders

SMARTPHONE UNIT SELL-THROUGH SHARE IN EMERGING AND DEVELOPED MARKETS, 2012-2018

Country Intelligence Reports Romania: Convergent Services to Thrive with the Regulatory Push for MVNOs Venezuela: 3G Networks to Dominate in 2014, but Major 4G Deployments Await Auction Spain: Telecom Market Declines, but MVNO Growth and LTE Deployments Offer Hope Slovakia: Fixed and Mobile Data Network Expansion to Drive Telecom Market Growth Cameroon: 3G Licensing and New MVNO to Boost Competition and Mobile Data Revenue More CIRs

Market Forecasts Fixed Communications Forecast

iPhone 5c "c" stands for "caro," "muy caro" * After the launch of the two new iPhone devices, Apple's shares fell more than 5%, with the share price ending at $467.25 at midday Wednesday. The decline is mostly attributed to the high price of the less expensive version, the iPhone 5c, which while slightly cheaper than the 5s model, is still too expensive for most smartphone customers in emerging markets. The device will address the high to middle-end of the demand at best, and not the first-time smartphone buyers. We expect the first-time smartphone buyers across most of the emerging world to be willing to set aside a maximum of $250 for a new smartphone in 2013-2014. Beyond this timeframe, potential first-time smartphone buyers will increasingly comprise very low-income mobile users who will have much lower budgets for a new smartphone. Exhibit 2 provides an overview of some currently available smartphones across the emerging world, which we believe are more appropriate for price sensitive mobile users in emerging markets. We have also included iPhone 5c in the table for the purpose of comparison.

Fixed Operator Marketshare Mobile Operator KPI Mobile Data Smartphone Media More Forecasts

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LATAM Operators Warm Up to Spectrum Sharing December 11, 2012 Telcos Compete for Global Enterprise Cloud Business December 6, 2012 OTT and IPTV Integration Increasingly Popular November 27, 2012

Exhibit 2: Select emerging market smartphones v. Apple iPhone 5c Apple iPhone 5c, iOS US: US$549 and US$649 retail price for 16GB and 32GB versions respectively in the US, or $99/$199 on a 24 month contract. China: Retail price of 4,488 yuan (US$730)

Huawei 4Africa, WP

Kenya: KES 15,999 (US$190) on Safaricom, with 500 MB of data included.

ZTE Open & Alcatel One Touch Fire, Firefox OS

Colombia: 199,000 (US$104) pesos on prepaid, or 99,900 ($52) pesos postpaid with 39,900 ($21) pesos plan.

Samsung Galaxy Y, Android

Venezuela available for 1.580 bolvares (US$251) on prepaid.

Nokia Lumia 520, WP

Mexico: $2499 (US$191) prepaid (Movistar Mexico) or free on $599 monthly plan (US$46).

Xiaomi MI-2, Android

China: Retail price of 1999 RMB (US$315)

Coolpad S8720, Android

China: Retail price of 1050 RMB (US$168)

Micromax A1156 Canvas HD, Android

India: Retail price of 13049 INR (US$248).

Note: We have chosen to compare both global aspirational brands, such as Samsung or Nokia, as well as some locally popular brands, such as Xiao Mi, Coolpad and Micromax, against Apples iPhone 5c. In analyzed cases, the retail price of the emerging market smartphones is more than 2 or 3 times lower than that of iPhone 5c. While the specifications vary across different models, some of the smartphones we have chosen to compare are high-spec ones. The most expensive one (and still much cheaper than iPhone 5c), Xiaomi MI-2, features CPU Quad-core 1.5GHz, its memory is 2GB RAM&16GB ROM, and battery capacity 2000mAh. At the time of its launch in mid-2012, it was the worlds first quad-core smartphone featuring Qualcomms Snapdragon8064 processor. Sources: Pyramid Research and OEMs

While Apple is most certainly aware of the immense emerging market smartphone opportunity, its strategy is based on a tightly controlled growth and primary focus on margins (which explains why its long-awaited budget version of iPhone is everything but an affordable smartphone). At this point in time, it doesnt appear that Apple is interested in targeting the untapped segment of the demand in emerging markets i.e. the future first-time smartphone buyers. Instead of pursuing volume by launching a truly inexpensive iPhone for low-end smartphone and current feature users, Apple is hoping to increase its share of smartphone sales in emerging markets by addressing high-end Chinese customers. Apples new deal with China Mobile will indeed result in improved position of Apple in emerging markets, albeit within the existing smartphone clientele and not the prospective smartphone users as the iPhone 5c will retail at $730 (4,488 Yuan). In other words, we dont expect that the launch of iPhone 5c will have an effect on overall smartphone adoption rate in emerging markets. However, it is important to note that Apples presence in the emerging world will not be limited to the sales of iPhone 5c only. While the launch of iPhone 5c will be inconsequential for smartphone penetration in emerging markets, the recently announced buy-back and trade-in deal between Apple and Brightstar may have a pronounced role. Via a Brightstar administered buy-back program, Apple will allow its users in the developed world to sell back their old iPhone models in Apple stores. Those will then be refurbished and placed onto secondary markets (read: emerging markets) where Brightstar has strong position in distribution value chain. The price of these refurbished, older iPhone models will be much more in line with the disposable incomes of the first-time smartphone buyers in the emerging world. While the sales of refurbished handsets will not have much effect on the official smartphone sell-through figures of Apple, they are still likely to connect millions of new smartphone customers to the Internet, many of them for the first time. In our upcoming report: Smartphone

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Strategies: How Devices Can Revitalize the Role of Operators in the Mobile Ecosystem we discuss buy-back and tradein business strategy and its implications on mobile operators business in more detail.

Microsofts acquisition of Nokia provides a reason for cautious optimism As mentioned above, a couple of weeks ago, Microsoft has announced the acquisition of Nokias Devices and Services division for c. $7bn. The news sent MSFTs shares down 4.6% to $31.88, while Nokia's share price rose 45%. The deal came after the two have worked as close partners since 2011 when Nokia announced its transition from the burning platform of Symbian to exclusive focus on Windows Phone (WP). The partnership brought about a number of changes, particularly in the way that Nokia runs its business, but hasnt improved Nokias or MSFTs position in the smartphone space. The combination of MSFTs ambitions and financial profile and Nokias technology and brand, experience and distribution network in emerging markets has the potential to both improve the position of WP and Nokia in the smartphone arena and drive faster smartphone adoption in the emerging world. MSFT, despite its still strong position in the desktop space, is having a hard time conquering the mobile arena. WP market share, while improving in some regions, is still a single digit on the global level. With mobile devices sales having already overtaken desktop PC sales, MSFT has to improve its position in the mobile and consumer markets in order to stay relevant in the Internet connectivity market. Thus, with the acquisition of Nokia, MSFTs key ambition will be to gain market share in mobile, with revenues and profit margins from smartphone sales being only a secondary priority for the software (and now hardware too) giant for now. Given the currently low smartphone penetration in emerging markets, even the late bloomers in the mobile world still have a chance to significantly improve their market share in the next five years; however, they need to accept a high volume and low profit margin game characteristic for this part of the world. We believe that this is the exact market strategy that MSFT will implement. Upon the acquisition of Nokia, MSFT is likely to provide much support (read: $) to the development of the lower-end Nokia Lumia line and allow for further price reductions in the Nokias smartphone portfolio. With total cash stockpile that amounts to $77 billion and annual revenue of over $78 billion, MSFT surely has the muscle to make this happen. While MSFT has the ambition and the strong financials to support the expansion of WP across emerging markets, what Nokia brings to the equation is a still reasonably strong brand in this part of the world and, more importantly, among the relevant target market; Nokias feature phone sales amounted to 53.7 million units in Q2 only and the first-time smartphone buyer of tomorrow is the feature phone user of today. Furthermore, the strong presence of Nokias brand across retail outlets in Africa and Middle East, Latin America and emerging Asia will be a significant asset to MSFT too. Having a strong physical presence across local stores is more important for an emerging market brand than that of developed markets. This is because, due to their low disposable incomes, customers in emerging markets diligently compare products (quality and price) across different local stores; also they often have special financing arrangements made with the owners of their local stores. Nokia still has a strong distribution network and direct relationships with mom and pop stores in emerging markets, as well as strong ties with mobile operators (which are expected to start taking a more pronounced role in smartphone distribution value chain across emerging markets); all this will compensate for the weak presence of MSFTs brand and products in these regions. The bottom line is: With MSFTs support, Nokias low-end smartphone portfolio is likely to grow faster and become more affordable. More variety in the low-end smartphone offering in emerging markets, and increased competition in this space can result in faster decline in smartphone ASP and thus faster smartphone adoption rates. However, its important to mention that MSFTs success in the mobile space of emerging markets wont come without many a problem waiting to be resolved, despite the recent acquisition of Nokia. First of all, the weak point, which goes beyond opportunities that the acquisition of Nokia creates, and which MSFT is yet to address in an effective manner, is the involvement of developers in the WP ecosystem. The current low scale of WP does not provide much incentive for key developers to invest significant resources into developing WP apps. New emerging market smartphone customers will have very specific needs for applications and services. If MSFT cannot attract developers to address those needs, its smartphones will fall short of emerging market customers expectations. Secondly, Google (who also has a hardware manufacturer under its roof) and Samsung, eager to strengthen software and services element of its business, will not sit idly and watch MSFT take their share of emerging market smartphone opportunity away the war of the mobile giants, in which MSFT lost most battles to date, is only going to become fiercer. Finally, there is an abundance of new comers in the mobile arena who have ambitions to break Androids rule of the emerging market smartphone space Mozilla and Ubuntu (Canonical) are just some of the names that come to mind. ___________ * "caro" means expensive in Spanish

Stela Bokun, Senior Analyst

Related resources: Pyramid Smartphone Forecasts Forecasts updated quarterly Offered as a subscription with quarterly updates or as a one-off resource, the Smartphone Forecasts provide annual sellthrough of total mobile handsets and smartphones for five historical years and five forecast years. Smartphone sell-through is segmented by the top 10 vendors (including country-specific vendors) as well as by operating system, network generation, replacement sales and more. ASPs and total revenues by device category are also provided. Granular data is provided for each of more than 50 countries as well as in regional packs for Latin America, Africa & the Middle East, Asia Pacific, Europe and North America. Research in Focus: Smartphones Research in Focus: Smartphones is offered Quarterly Research in Focus: Smartphones report helps clients analyze and keep track of handset, smartphone and gray market handset sell-through trends by country, vendor and region. This comprehensive report also details the OS competitive landscape and revenue and ASP trends. This series also provides eight-year historical data and projections on smartphones for 14 markets around the world.

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