'Unbundled' handsets a lucrative business

Mobile telecom service providers are up against a new problem -- unidentified operators have been found to take out subsidised handsets from their 'bundled' connections and ship them to overseas markets at significantly higher prices.

Telecom industry executives and handset retailers confirmed the existence of this practice. One telecom company recently hired KPMG to assess the damage.

"We found that the illegal trade ran into several crores," said Deepankar Sanwalka, the head of the professional service firm's forensic services.

Most "bundled" packages are priced below Rs 2,000 and come with a handset and a SIM card. Typically, the handset carries a subsidy that the operator hopes to recover from the subscriber over a period of time.

Dealers buy these packages in bulk, activate the SIM card for a short while (so that the operator counts it as a live connection), remove the card and sell the handset to aggregators, who, in turn, tag a higher price to it and then ship it out to Dubai, Hong Kong, Singapore and even some countries in Latin America, where handset prices are much higher than in India.

Such bundled connections are aimed at the bottom of the market and have played a vital role in making the country the fastest-growing market in the world with around 9 million new subscribers every month. All told, the country has close to 300 mobile subscribers, the largest after China. The number is expected to rise to 500 million by 2010.

Estimates of the number of handsets being siphoned off the networks vary, but ballpark figures suggest it could range between 150,000 and 200,000 every month or between 1.8 million and 2.4 million handsets annually. Reckoning the average cost of the phone at Rs 750, the value of such handsets is pegged at Rs 11-15 crore a month.

Trade experts said the practice was more prevalent in CDMA phones rather than GSM ones which tend to carry lower subsidies. "CDMA handsets are more expensive than GSM, therefore the margins are higher," a distributor added.

Until two years ago, the subsidy per bundled CDMA handset was 20-25 per cent. Since then, the subsidy has fallen, but it is still high enough for aggregators to buy the handsets in bulk and then ship them to overseas markets. There are nearly 2,000 CDMA devices available globally across 275 operators spread over 102 countries and an estimated 463 million subscribers.

Reliance Communications and Tata Teleservices are the dominant CDMA networks in India. Both networks acquired over a million users in August this year. Reliance has a total wireless user base of around 45.5 million, while Tata Tele has over 27.5 million such users. 

In the mid-1990s, when mobile telephony services had just taken off in India, handsets taken out of bundled packages overseas were smuggled into India. In a little over a decade, the flow of that trade has reversed.