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The iPhone Paradox of India’s Middle Class

Photographer: Brent Lewin/Bloomberg

An advertisement for the Apple Inc. iPhone 4 is displayed in a store in Connaught Place in New Delhi, India, on Feb. 23, 2013. Close

An advertisement for the Apple Inc. iPhone 4 is displayed in a store in Connaught Place... Read More

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Photographer: Brent Lewin/Bloomberg

An advertisement for the Apple Inc. iPhone 4 is displayed in a store in Connaught Place in New Delhi, India, on Feb. 23, 2013.

High-end electronics makers face a big riddle in India: How do you serve a massive group of people that wants to buy your products but is nowhere close to being able to afford them? The correct answer could be lucrative.

Research firm IDC estimates that India's share of the global smartphone market will grow from 3 percent today to 10 percent in 2017, when some 1.5 billion units are expected to ship around the world. That would make the country the No. 3 market behind China and the U.S. India is currently ranked sixth.

“It is important to understand the Indian economic pyramid,” Ravi Venkatesan, the former chairman of Microsoft India, said in an interview on Bloomberg Radio. “The big economic opportunity is in the middle, but it is a very, very hard market to crack."

He explained that mobile companies need to drastically change their approach to these consumers.

"So what you need to do is come up with stuff that is dramatically more affordable -- think: smartphones at $50, cell phone calls at 1 cent a minute," Venkatesan said. "And that takes innovation.”

Samsung Electronics and Apple, the world’s top two smartphone makers, have very different approaches to emerging markets such as India. Samsung makes a wide variety of Android-based models, from the low end to the flagship Galaxy S4. That has helped the Korean electronics giant become the top smartphone maker in India in the last quarter of 2012, according to IDC.

On the other hand, Apple releases one new model of the iPhone a year, and the latest is always top-of-the-line. Resellers offer older versions of the iPhone for cheaper, but Apple lacks support from some mobile carriers in India. For the most part, Indians haven’t been biting. Apple doesn’t even place in the country’s top five smartphone vendors, which include no-names such as Micromax and Karbonn.

Apple has taken steps in India recently to bolster the iPhone there. It’s selling iTunes music at a discount and taking out ads in national Indian newspapers offering interest-free payment plans, trade-in offers and discounted service agreements, Bloomberg Businessweek reported. Apple is also working on a cheaper iPhone, people familiar with the plans said earlier this year.

Apple’s iPhone problem in India isn’t new, but it becomes more pressing as the smartphone revolution makes its way to the country, which has the world’s second-biggest population. And it’s not solely Apple’s problem. In a Bloomberg View editorial, Venkatesan said that the obstacles in India’s market could bite Dell, Intel, Hewlett-Packard, Sony and even Microsoft, his former employer.

“Always a difficult market, India has lately become even more challenging,” wrote Venkatesan, the author of "Conquering the Chaos: Win in India, Win Everywhere." “Companies that decide to pass on India, however, are making a big mistake.”

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