Micromax hopes for stronger foothold with new unit YU Televentures

On the afternoon of January 13, YU Televentures began selling its first smartphone - Yureka - on online retailer Amazon's India site. The phone was showcased almost three weeks earlier, and the Micromax unit had been heavily advertising the device. It had received 300,000 registrations for the 10,000 handsets on offer. The sale got over in three seconds and the site crashed due to heavy traffic.

Although YU is celebrating the success of its first online flash sale, the launch raises multiple questions that the company hasn't been able to convincingly answer. Why does Micromax need to set up a separate unit to launch a new product? Why doesn't the new product have Micromax branding? And, why isn't the smartphone being sold in Micromax's retail stores?

Rahul Sharma, one of four co-founders of Micromax and the brain behind YU, explains the rationale behind the new brand. Sharma says he is looking at building an ecosystem of devices that can be customised by the buyer and that offer a bunch of Internet-based services to customers. The Yureka is the first device of this ecosystem and will be followed by other devices like wearable gadgets that will connect to almost every electronic equipment, he says.

Analysts, however, say the Yureka, if it succeeds, could hurt its parent. This is because Micromax users could shift to the Yureka, which is available at Rs 8,999 but offers better specifications than many Micromax smartphones in the same price segment. "The fact that Micromax had to introduce another brand shows how weak the parent brand is. YU will cannibalise their own brand," says Sanchit Vir Gogia, Chief Analyst and CEO of Greyhound Research.

Micromax has come a long way since it started selling mobile phones in 2007. Its cheap feature phones and low-cost smartphones helped it wrest market share from multinational companies such as Nokia, and fattened its top and bottom lines. The company reported revenue of Rs 7,141 crore and net profit of Rs 284 crore in 2013/14, according to the Registrar of Companies. But demand for feature phones is now declining while smartphone sales have been surging as consumer behaviour shifts and more people access the Internet to shop online and use applications like Facebook and WhatsApp. In the July-to-September quarter of 2014, nearly a third of the 72.5 million mobiles sold in India were smartphones, according to research firm IDC. The average smartphone price is between Rs 7,500 and Rs 8,100.

Although Micromax has emerged as India's second-largest smartphone player after Samsung, it isn't really known for top-quality products. Sharma says he felt it needed more than brand Micromax to take on growing competition in the smartphone segment, and decided to launch a new venture. He now spends all his time with YU, where no Micromax executive is involved, and has let Micromax to be run by the other founders and management led by CEO Vineet Taneja, who previously headed Samsung India's mobile division, and Chairman Sanjay Kapoor, Bharti Airtel's former India CEO.

Is Sharma getting out of Micromax for good? He refutes such speculation. "This (YU) is part of Micromax? It is a 100 per cent subsidiary of Micromax," he says. Sharma says he is Micromax's representative in YU. Micromax, in which Sharma has a 19.58 per cent stake, owns 98.98 per cent of YU.

Growing Competition

What prompted Sharma to think about a new venture was the changing dynamics of the mobile-phone industry that has led to the decline of companies including Nokia. "It's a sad story," he says, referring to the fall of the Finnish handset maker that once dominated the global mobile-phone industry. Threat from rapidly expanding Chinese handset makers such as Lenovo, Gionee and Xiaomi made matters worse - even global giants such as Samsung are feeling the heat. "Technocrats have written them [Samsung] off. They have hit a wall," he says.

Micromax is vulnerable, too, and will likely remain so. This is because users of Micromax's flagship Canvas series of smartphones could shift to YU devices while the parent company will continue to face the Chinese in the same price bracket. Moreover, YU does not pose any threat to the likes of Samsung and Apple, which mostly sell more high-end phones.

The Chinese companies mainly use the Google Android operating system with some customised tweaks and sell their smartphones at highly competitive prices. This hurts Micromax mainly in two ways. One, it uses the stock Android system in its smartphones and so offers no differentiation to buyers. And two, it has limited room to cut prices because it mostly imports handsets from China.

Until about two years ago Chinese phones were considered cheap, both in terms of price and quality. But Gionee, Huawei, ZTE, Lenovo (which bought Motorola from Google), and Xiaomi have changed that perception. Arvind K. Vohra, Gionee India's head, says Chinese companies have filled the gap between the Indian players, which were offering low-priced phones, and expensive MNC brands that have high specifications. Gionee launched phones that were costlier than Indian brands but matched MNCs' specifications at lower prices. It now sells between 325,000 and 375,000 phones a month in India, and expects to cross Rs2,500 crore in revenue in 2014/15. "Micromax is losing because of [low] quality. Samsung is losing because of [high] price," says Vohra.

Analysts agree. "In 3G and 4G handsets, Chinese companies have doubled their share in India in a year's time," says Karan Thakkar, Senior Market Analyst for Client Devices at IDC, referring to third- and fourth-generation technologies that allow faster Internet access. "In terms of percentage, the Chinese are growing faster than the Indians."

Growing use of 3G and 4G technologies means telecom operators are depending more on data consumption, rather than on voice and text messages, to boost their revenues. "Every Windows device is fundamentally a data-centric device. We are not in the voice-centric business. So every time an operator wants to turn on their Windows device, their data usage on that customer is substantially higher than they would get from any different platform," says Chakrapani Gollapali, Country General Manager for the consumer channels group at the India arm of Microsoft, which now owns Nokia's handset business.

Delhi to Silicon Valley

To look for a suitable partner who could help him in the new venture, Sharma travelled to the West, especially to Silicon Valley, multiple times. On one such trip about a year ago, at a cafe in Palo Alto, California, he met with Kirt McMaster, CEO of Cyanogen Inc, which provides an operating system based on the Android platform that allows customisation. Soon after, Micromax set up YU to roll out new devices that it hoped would fill up the gap that the parent company could not. YU has since hired 200 developers in Bangalore to work on software development.

YU stands for You and Us, indicating that the company would work with its customers to customise their phones according to their tastes and preferences. Yureka offers features that allow customers to start using all applications, even games, from the stage they left in their previous YU device. The company will tie up with online retailers, airlines, hotels and offer reference-based services. Customers will also get door-step servicing. "If you have to address all these issues, you need to have a new brand or a sub-brand," says Sharma.

This is where Cyanogen comes in. Cyanogen has 9,000 developers and Xiaomi's initial user interface was based on this platform. Another Chinese start-up, OnePlus, also launched its flagship mobile phone One on this platform. This, however, led to a dispute between Micromax and OnePlus. The Indian company sought to stop the sale of OnePlus One in the country, alleging that the latter was infringing on its right to exclusively sell Cyanogen-powered devices. The Delhi High Court has allowed OnePlus to sell its devices in India saying that the One, which sells for Rs21,999, does not compete in the same price segment as the Yureka. McMaster, the Cyanogen CEO, clarifies the company's stand. "Micromax is an exclusive partnership. We won't be working with any other OEM (original equipment manufacturer) except Micromax. We are doing all the software services for the devices, all of the OS and all the services integration."

Not everyone is bullish on the Cyanogen. Gogia of Greyhound Research says Cyanogen is installed on only 12 million devices worldwide. "A normal user does not even know what a Cyanogen is," he says. IDC's Thakkar, however, believes Yureka is an answer to the entry of the Chinese brands. "I don't think they are making money on Yureka. They are trying to target the tech-savvy user," he says.

Online-Only Model

To sell Yureka, Sharma picked up the online-only model from Motorola and Xiaomi. Motorola started selling Moto G exclusively on e-commerce site Flipkart in February 2014. It has sold more than 300,000 units since then. On July 22 last year, Xiaomi began selling its phones on Flipkart. It offered 10,000 Mi3 phones that came with specifications one would normally find in more expensive devices. The phones got sold in 39 minutes and the site crashed multiple times due to heavy traffic. The second sale a week later got over in 2.4 seconds. Xiaomi has expanded its reach to 1,000 towns and cities in India, and now sells 60,000 to 100,000 handsets a week.

Manu Jain, Head of Xiaomi India, says the company's products are better than Indian brands. Its first set of Indian buyers included tech enthusiasts and IT professionals. "They have become our brand ambassadors. We rely on word-of-mouth marketing," he says. "The second set of customers is from smaller cities who would otherwise buy a local handset, who have a particular budget in mind. They want to extract the maximum value for that money."

The advantages of the online-only sales model are its potential to grow sales rapidly and low cost of distribution. Xiaomi, for instance, saves about 15 to 20 per cent of distribution cost by selling handsets only online. Growth of e-commerce is another reason why phone makers are entering into exclusive tie-ups with these retailers. About 15 to 20 per cent of mobiles in India are now sold through e-commerce websites, compared with almost nil five years ago. Flash sales also get a lot of attention on social media. "There is always a mad rush and a lot of people do not get the phone. People who get it start talking about it on social media and it creates a lot of buzz," says Arun Prabhudesai, Founder and Chief Editor of Trak.in, a technology blog.

After YU's first sale, Prabhudesai wrote in his blog that the company likely sold only 3,000 handsets at the offer price of Rs 8,999 and the remaining were perhaps sold at Rs12,999. He wrote that Yureka attracted 300,000 registrations because it offers better specifications than phones available for Rs 14,000. "They had said they will put up 10,000 phones; however, there were only 3,000 phones. They fooled people," he wrote. The company declined to comment on the differential pricing.

But if flash sales and selling only online meant success, there would be many more successful brands. "Everybody thinks this is doable. How much successful will these players be, we will have to see. It is not about the channel, but more about the product," says Amit Boni, General Manager at Motorola India.

Sharma is unperturbed. "This [the criticism] has been happening since we started. The moment we started (Micromax), 114 players started after us... And since we are online, we are going to be competitive in pricing too," he says. YU, he adds, will play an important role in helping Micromax achieve its goal of becoming one to the world's top five mobile-phone makers. "This [YU] will add a lot of numbers. This will be icing on the cake."