Normally I don’t receive any calls early in the morning. So when I received one yesterday from my  cousin in Jammu, I knew something interesting was up.  He immediately asked me if I knew anything about a $4 smartphone and whether the news is really true or not, a bell rang in my ear immediately. Though the discussion was mostly restricted to price, there is something more than just price:

What we know so far :

• Freedom 251 is an offering from a Noida-based company in India, Ringing Bells, established in 2015.
• The company has a small product portfolio including feature phones, a power bank and smartphones.
• A few days ago it launched what it claims to be the cheapest LTE device in the country, the Smart 101, which retails for as little as $45.
• The Freedom 251 will be launched at INR 251 ($4), allowing the company to claim it’s the world’s most affordable smartphone.
• In terms of specs it is a 3G smartphone running Android Lollipop with a 1.3 GHz quad core processor and a screen size of 4 inches.
• It also sports a 3.2 /0.3 MP back and front camera with 8 GB internal memory (expandable upto 32GB) and 1GB RAM with a battery of 1450 mAH
• It comes with a one year warranty across a network of 650 service centers across the country.

But is it really worth the hype? I doubt it:

• In the last 24 hours or so we have seen a series of endless updates on social media ranging from a server crash, to re-branding, to delivery time, to BOM cost, to the co-founders’ profile.

• Amidst all the hype, if we look at broader picture I believe this is not going to have any say in changing the smartphone landscape in India.

• First of all it doesn’t look like a sustainable business model at all. Smartphones with similar specs are available in the market currently starting from $30 and above. So in all probability this phone is heavily subsidized by the company itself which, means a subsidy burden of $20-$25 or so per device taking in all possible scenarios ( from market price, to local assembling cost advantage and others).

• Now the issue I have with subsidy is that it always creates a fake demand (look into the endless virtual queues of people lining up to buy this phone even if it is not a necessity for them).

Fake demand?

• Based on our (Counterpoint’s) research, on average around 12 million feature phones are being sold every month in India.

• Now let us say  this 12 million is a potential target market for Ringing Bells. Going by its mode of distribution and even mode of payment  how many of these 12 million potential buyers woke up at 6 AM today to buy this device? Rather I bet most of them woke-up at their normal hour to start their daily chores.

• So all the hype around clicks per second and sales seems like nothing but fake demand by the people who are just curious to try their hands on this device. This makes me wonder to actually look into the mission and vision of the company.

• As we track market closely we can estimate that the so-called demand can easily result in 1.5-2 Million orders in one quarter, without a single product being shipped out of premises until June 2016.

• So one can look into two ways – a loss of $20/device which is close to $40 Mn loss (INR 260 Cr) or a surplus of $8 Mn ( INR 52 Cr) until the delivery time of 3 months (as the mode of payment is entirely prepaid).

• So the biggest challenge for the company will start from Q3 when it starts shipping products and as we co-relate the smartphone industry to “Hotel California” where barriers to entry  are lower than ever, but barriers to exit are high – so you can enter any time you like but it’s very difficult to leave.

To sum up: Where do we go from here?

To conclude we don’t think it is a sustainable business model in current smartphone scenario. Even if it is a marketing ploy, it is likely to backfire in a big way. I think the big disconnect here is inability to understand the diverse set of end users and their needs, which are more inclined towards “value for money” instead of “cheap”. The industry has many examples of companies that have expended huge amounts of time and money chasing the notion of the lowest cost smartphone without success – for example Mozilla’s Firefox strategy for smartphones.

It is true that a massive shift in India is happening from feature phones to smartphones. But that shift brings with it a level of expectation – expectation of consuming content, expectation of watching videos and listening to music and hence drives the need for decent hardware performance. To accommodate these requirements, the industry has reached a certain level of  price point — currently $50-$60. Packing something similar in a $4 product is just not possible now.

It could in fact prove to be a dis-service to the smartphone segment, rather than bringing people on to the smartphone platform, as there is a high chance that target users shift back to feature phones after a horrible first time smartphone experience.