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MGMT 650B – Consulting Skills for Managers

How can China Unicom use the iPhone to increase 5% of the subscriber market share within 24 months?. MGMT 650B – Consulting Skills for Managers. Presented by Team D: BOHRA, Shilpa Rajesh; CHAN, Yat Hei; LIN, Michelle Lan Yan; MO, Siu Hei; TONG, Sze Man; TSE, Mei Yi Joyce. Table of Contents.

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MGMT 650B – Consulting Skills for Managers

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  1. How can China Unicom use the iPhone to increase 5% of the subscriber market share within 24 months? MGMT 650B – Consulting Skills for Managers Presented by Team D: BOHRA, Shilpa Rajesh; CHAN, Yat Hei; LIN, Michelle Lan Yan; MO, Siu Hei; TONG, Sze Man; TSE, Mei Yi Joyce

  2. Table of Contents Sections • Executive Summary [3] • iPhone Pricing [5] • Killer Message To Represent iPhone [12] • Mid To Long Term Strategy [21] • Our Recommendations [27] Appendix A. Interview Highlight [29] Page

  3. Section 1 Executive Summary

  4. Executive Summary SITUATION China Unicom (“CU” or “Unicom”), being the second largest mobile operator in China as well as globally, is facing a highly competitive market resulting with losing subscriber market share in China every year since 2003. COMPLICATION In August 2009, CU partnered with Apple to launch iPhone 3G in China hoping to regain its subscriber market share. QUESTION How can CU use the iPhone to increase 5% of the subscriber market share within 24 months? ANSWER CU should set competitive pricing on iPhone and associated plans; deliver a clear iPhone message which is most appealing to customers; and set a sustainable strategy to maintain the market shares gained from launching iPhone. RATIONALE • 1. CU should set the competitive pricing which could achieve market penetration • The current iPhone prices are uncompetitive • Potential customers (such as bloggers) think the current price of iPhone is too expensive • Current data pricing is not accepted by most mobile users RATIONALE • CU needs to come up with a “killer” message that represents iPhone to attract more China mobile users considering switching to CU • A clear “killer” message will help CU target the correct market segments and increase its presence • Currently CU has not incorporate iPhone’s features in the message are most appealing to potential Chinese subscribers • There are potential users who would want to switch operator to CU RATIONALE • CU should plan longer term strategies to sustain the market shares gained from iPhone launch • Younger age group, high tech gurus, top management should be CU’s targeted customer segments • Improvement in 2G and 3G network shows increase of subscriptions • From now and beyond 24 months, CU should build and develop its own data platform which can be used on iPhone or any other smart phone which corresponds to the improving “lifestyle” image and subsequently into a premium operator.

  5. Section 2 iPhone Pricing 5

  6. CU’s iPhone pricing are uncompetitive • CU’s iPhone handsets are priced on average 26% higher than Apple Store prices in Hong Kong; 27% higher than grey market prices • We believe the pricing is incorrect. CU may want to target high-end customer segment, but potential users can just buy the phones from grey market or from Hong Kong to sign up with China Mobile instead • We recommend CU to cut 30% of the iPhone retail prices to stay competitive Comparison of iPhone handset costs from grey market, Hong Kong Apple Store and China Unicom Source: www.zol.com.cn, www.apple.com.hk, China Unicom

  7. Cutting prices of iPhone will not hurt profitability • Our sensitivity analysis shows that cutting 30% of retail prices to match grey market prices will defend the market share • Cutting prices will not hurt profitability given the increase in volume • We believe cutting prices by 30% will lead to a 120% increase in sales volume • Total gross profit will increase by 10% as a result Elasticity analysis of price cutting Source: ?? What’s the source of projected saes and increase in sales? Can we say Research estimate? Tim, please send me the table in excel and let me try to do some formatting for it. Thanks.

  8. CU’s upfront payment is too high • Due to the 24 months contract, Unicom’s iPhone users will need to prepay high tariff upfront. Total upfront payment ranges from Rmb 5,999 – 7,999 • Comparing to grey market iPhone where no prepayment is needed, Unicom requires 49% higher payment • We believe this is uncompetitive. We advise Unicom to cancel this requirement. What do you need to pay at the beginning to own an iPhone? Source: www.zol.com.cn, www.apple.com.hk, China Unicom

  9. What do customers think of the data plans? • Out of 300,000 respondents, 42% customers think pricing of China Telecom (“CT”) is more reasonable as compared to 17% of CU’s pricing • This could be due to the fact that CT’s data plan charges is time based instead of the usual byte based, which is more user-friendly % of respondents think pricing of data plan is acceptable Source: Market research report

  10. Reasons for potentially shifting to CU • Prices and promotions is the number one attraction for customers to switch to CU Reasons for potentially shifting to CU Source: Market research report

  11. Bloggers think iPhone prices are expensive • We surveyed bloggers’ initial responses from Chinese discussion forums • They think iPhone are expensive. We recommend Unicom to cut price • Most of the responses were negative. The main issues are: • Affordability concern - “Unicom’s iPhone is way too expensive, I wonder how many people can afford it…(联通版的实在是太贵了啊，有几个人能买的起…)” - Posted by 们领军, 2009-9-29 11:15 • High upfront payment - “The total upfront payment is too high. Those who can afford to pay the upfront prepayment should have already bought iPhone in the grey market. (不管如何实惠，第一次付款的钱数太多。有如此多的钱的人想要iphone的早买了…要是真正的分期付款就好了…)” - Posted by 123.182.171.*, 2009-10-6 22:56 • iPhone in the grey market is cheaper and has WiFi functionality - “Although iPhone sold in the grey market does not have official warranty, I can still have it repaired elsewhere, and the service is pretty good. iPhone sold in the grey market has WiFi functionality and is a lot cheaper than Unicom’s handset plans… (水货iphone坏了吗没人管？ 我这还不错 跟普通手机一样 保修 虽不是全国联保 但免费升级保修什么地 还是没问题的 这样算下来,有比联通多了个wifi 还便宜了许多...)” - Posted by 115.48.237.*, 2009-10-5 23:10 Source: [Name of the Blog]

  12. Bloggers think iPhone prices are expensive (con’t) • Most of the responses were negative. The main issues are (cont’d): • Without WiFi, data cost will be a lot higher - “Without WiFi, you are likely to incur a lot more expensive 3G data charges…(联通3G是没有wifi的… 联通的想上网只能3G...多上会，不好意思，你的手机号会欠费好几百…)”- Posted by吃西红柿番茄, 2009-10-1 19:14 • It is cheaper to buy iPhone in the grey market and join CU’s student plan “I think it is cheaper to buy an iPhone in the grey market and join CU’s student plan… (诚然，现在iphone水货也3700多，加上2年每月126总共要近7000，可是你又没有wifi，怎么和水货竞争。想来想去要么等，要么买部水货手机再办个66套餐合适)” - Posted by 122.194.5.*, 2009-10-3 07:07 • Tariff of CU’s iPhone packages seems to be reasonable “I think the price packages of Unicom’s iPhone are pretty reasonable… Unicom offers flat rate on domestic roaming and long-distance calls which is good. Phones sold in the grey market may be cheaper, but Unicom’s packages are bundled with monthly voice minutes and data. I think Unicom’s iPhone packages are more attractive… (…现在有了联通-wcdma，据说最低 套餐96，关键全国范围接听免费，打电话也不贵，还有那么多增值服务，我觉的挺好。网上说用联通-iPhone要5099元，这可是2年186元的话费 呢… 这样看来iPhone还 是比较合适的)” - Posted by myie2cn, 2009-9-27 20:56 Source: [Name of the Blog]

  13. Section 3 Killer Message for iPhone – A Lifestyle Phone 13

  14. What is the current market visibility of CU as compared to its competitors? • From the Youku.com search, CU and its associated network, advertisement and 3G handsets has lowest hit number of results found • CU needs to increase its presence in the telecommunication market and to increase TV advertisements and promotion for its 3G network and iPhone No. of hits results found on each “Search Words” in Youku.com 2,261 1,128 599 Source: Youku.com

  15. High Speed Network Changing the World Music down load 3G with the World China Unicom currently focuses its TV advertisement message on the functionality of 3G • CU focuses its TV advertisement promotions on the functionality of its 3G network, from high speed connection, video call functions, music download, high speed internet and its corporate advertisement on “Changing the World” Video Function – Connecting People Source: Youku.com

  16. While CU’s competitor, China Telecom has clear messages for its target segments • China Telecom’s target segment: business users and young people • It is easier for the customers to see the image and value in China Telecom Lifestyle Phone for young people with multi-functions Business Users – Connect the business people and CEO from anywhere and anytime Source: Youku.com

  17. CU should deliver the message - “iPhone is a Lifestyle Phone” • CU can leverage on the brand of the iPhone and deliver a clear message to the target customers that iPhone is more than a phone for voice call, it’s a lifestyle phone that can be built into our daily life • iPhone combines three lifestyle functions: iPod + revolutionary mobile phones + breakthrough internet communicator • Steven Jobs, CEO of Apple said that “iPhone is doing 5 years ahead of what other phone” with great design and faster speed Combination of iPod + Phone + Internet Multi-functions – Doing 5 years ahead of other phone Design – “Something wonderful in your hand” Faster Speed - 36% faster than Nokia phone Source: Steve Jobs, CEO of Apple – Introducing the iPhone at

  18. iPhone OPhone China Unicom China Mobile China Telecom Chinese customization   Low handset production costs   Software platforms Apple store Fetion, Monternet, [x] Mobile market Network standard advantage    (Compatible with other popular handsets with 85% of the world) How does iPhone compare with OPhone? • iPhone has unique design, functions and features that OPhone is imitating. • iPhone is selling at a higher price than OPhone • OPhone is more popular phone in China due to it has more localized data platforms installed which iPhone is currently lacked of. iPhone Vs OPhone Source: Brokerage research reports

  19. What do customers think so far? • Out of 300,000 respondents, 47% potential customers are more willing to change to CU than 27% customers prefer CT • This could be due to customers are aware of more popular 3G handsets will only work on CU’s WCMDA network % of respondents willing to switch operator Source: Market research report

  20. Section 4 Strategy 20

  21. Strategy 1 -Target Customer Segments • The customer segment should target the _______age group, high technology gurus, high management employees • From ______ Strategy to target customers in one years time Source: Market research report

  22. Strategy 1 -Targeted Customer Segments • Any more charts/ data for the segment? Strategy to target customers in one years time Source: Market research report

  23. Strategy 2 - Improve its telecommunication network • RMB38.7 billion (US$5.6 billion) has earmarked to develop its 3G business in 2009 but it still has a weak telecommunication network. • At the moment, China Unicom has the least telecommunication ports in China as compared with its competitors. No. of Telecommunication Ports Own By Each China Mobile Operator Source: [ x ]

  24. Improve its telecommunication network • Prior to 2009, CU operated the CDMA network in China. Due to Government’s mandated restructuring, CU was forced to sell the technology to CT. • CT spent Rmb 100 bn to improve its network and to do market campaign. In 9 months, monthly new addition subscribers market share improved from 3.6% to 31.8% • We believe CU can reference the success of CT by spending money to improve its existing GSM/WCDMA network. No. of Monthly New Subscription of CDMA Network in China Source: ??? 24

  25. Strategy 3 - Develop its own unique data platform • The data platform should be a killer weapon against its competitors on data subscription • Referencing to Verizon, a US mobile operator, Verizon wireless developed its own data platform and was introduced in 2008. Being the best amongst US operators and able to achieve “Any App, Any Device”, it is able to sustain a consistent net-adds growth every quarter since 2005. Verizon remained competitive against AT&T which has the exclusivity of selling iPhone. No. of Quarterly Net-adds of Different US Operators Source: Chetan Sharma Consulting 25

  26. Section 5 Our Recommendations 26

  27. Our Recommendations • We believe CU’s pricing of iPhone is unattractive. We recommend CU to cut 20% of the iPhone retail prices to stay competitive. • We think the prepayment of tariff for iPhone packages are unappealing. Upfront prepayment is way too high which is scaring potential users away. We recommend CU to cancel this requirement. • We believe CU to take this opportunity to improve brand image and promote iPhone and its 3G services as “lifestyle” products. Unicom can leverage on the premium image of iPhone to give an impression of providing more than “phone services”. • In our view, CU will eventually lose the exclusive right to sell iPhone in 2 years’ time. Apple has been a tough partner. We believe CU should make this window of opportunity to improve its network, customers experience, as well as strengthen its data application platforms and ally with data content partners. CU can leverage on Apple’s branding to attract premium partners. In addition, CU can learn from Apple’s state-of-the-art technologies. • By doing so, CU will transform into an operator with more advanced data platform, better network, more streamlined customers experience and becoming an operator of choice with advanced technologies. We believe eventually it does not matter whether Unicom still has the iPhone after 2 years.

  28. Appendix 1 Interview Highlight 28

  29. Interview highlights • Tim to draft

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