MGMT 650B – Consulting Skills for Managers

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. We accepts no liability whatsoever with respect to the use of this document or its contents.

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2003 2004 2005 2006 2007 2008 2009 2010 2011

How can China Unicom use the iPhone to increase 5% How can China Unicom use the iPhone to increase 5% of the subscriber market share within 24 months?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

Sections

1. Executive Summary [3]

2. iPhone Pricing [5]

3. Killer Message To Represent iPhone [12]

4. Mid To Long Term Strategy [21]

5. Our Recommendations [27]

Appendix

A. Interview Highlight [29]

Page

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. We accepts no liability whatsoever with respect to the use of this document or its contents. 3

Section 1

Executive Summary


Executive Summary 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.

SITUATION

In August 2009, CU partnered with Apple to launch iPhone 3G in China hoping to regain its subscriber market share.

How can CU use the iPhone to increase 5% of the subscriber market share within 24 months?

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.

1. CU should set the competitive pricing which could achieve market penetration a) The current iPhone prices are uncompetitiveb) Potential customers (such as bloggers) think the current price of iPhone is too expensivec) Current data pricing is not accepted by most mobile users

2. CU needs to come up with a “killer” message that represents iPhone to attract more China mobile users considering switching to CU

a) A clear “killer” message will help CU target the correct market segments and increase its presenceb) Currently CU has not incorporate iPhone’s features in the message are most appealing to potential

Chinese subscribersc) There are potential users who would want to switch operator to CU

3. CU should plan longer term strategies to sustain the market shares gained from iPhone launcha) Younger age group, high tech gurus, top management should be CU’s targeted customer segmentsb) Improvement in 2G and 3G network shows increase of subscriptionsc) 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.

COMPLICATION

QUESTION

ANSWER

RATIONALE

RATIONALE

RATIONALE


Section 2

iPhone Pricing


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

0

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8GB 16GB 32G

RmbGrey market Hong Kong Apple Store China Unicom

Source: www.zol.com.cn, www.apple.com.hk, China Unicom

Comparison of iPhone handset costs from grey market, Hong Kong Apple Store and China Unicom


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

(Rmb) Base case Cutting 10% of retail price Cutting 20% of retail price Cutting 30% of retail priceRetail price 4,999 4,499 3,999 3,499 Cost 2,000 2,000 2,000 2,000 Gross profit 2,999 2,499 1,999 1,499 Gross margin 60.0% 55.5% 50.0% 42.8%Projected sales ('000) 500 550 750 1,100 I ncrease in sales 10.0% 50.0% 120.0%Total gross profit (mn) 1,500 1,375 1,499 1,649 Change in gross profit -8.3% 0.0% 10.0%

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.


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.

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RmbGrey market China Unicom

Source: www.zol.com.cn, www.apple.com.hk, China Unicom

What do you need to pay at the beginning to own an iPhone?


What do customers think of the data plans?

% of respondents think pricing of data plan is acceptable

42%

16%17%

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10%

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30%

40%

50%

60%

CT CU CM

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

Source: Market research report


Prices and promotions is the number one attraction for customers to switch to CU

Reasons for potentially shifting to CU

0% 20% 40% 60% 80%

Don't know / Others

Handsets

Better technology /Data speed

Network / Coverage /Service

Trust the brand

Price / Promotions


Reasons for potentially shifting to CU


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]


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]


Section 3

Killer Message for iPhone – A Lifestyle Phone


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China Unicom China Telcom China Mobile

CU / CT / CM 3G Network Advertisement 3G handsets

What is the current market visibility of CU as compared to its competitors?

No. of hits results found on each “Search Words” in Youku.com

Source: Youku.com

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

599

1,128

2,261


China Unicom currently focuses its TV advertisement message on the functionality of 3G

Video Function – Connecting People

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”

Music download

3G with the

World

Source: Youku.com

High Speed Network Changing the World


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

Business Users – Connect the business people and CEO from anywhere and anytime

Lifestyle Phone for young people with multi-functions

Source: Youku.com


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

Source: Steve Jobs, CEO of Apple – Introducing the iPhone at

Faster Speed - 36% faster than Nokia

phone

Combination of iPod + Phone + Internet

Design – “Something

wonderful in your hand”

Multi-functions – Doing 5 years ahead

of other phone


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

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)

China MobileChina Unicom

iPhone OPhone

China Telecom

Source: Brokerage research reports


What do customers think so far?

47%

27%

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30%

40%

50%

60%

CU CT

% of respondents willing to switch operator

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



Section 4

Strategy


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



Strategy 1 -Targeted Customer Segments Any more charts/ data for the segment?

Strategy to target customers in one years time



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.

Source: [ x ]

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China Mobile China Unicom China Telecom

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No. of Telecommunication Ports Own By Each China Mobile Operator


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.

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CDMA monthly new subs (mn)

Unicom used to own CDMA network

China Telecom bought CDMA network from Unicom and turned it around

No. of Monthly New Subscription of CDMA Network in China

Source: ???


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.

Strategy 3 - Develop its own unique data platform

Source: Chetan Sharma Consulting

No. of Quarterly Net-adds of Different US Operators


Section 5

Our Recommendations


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.


Appendix 1

Interview Highlight


Interview highlights Tim to draft

MGMT 650B – Consulting Skills for Managers

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