The 3G and 4G spectrum auction finally took place in April after many delays, and all the mobile network operators (MNOs) have managed to obtain a license, whether for 3G, 4G or as in the case of Zong, for both.

While the rollout is now in progress, the Pakistan Telecommunications Authority (PTA) and the Government have long been criticised for not holding the auction sooner considering that other South Asian countries had 3G as early as 2007 (Nepal) and 2009 (India), and even Afghanistan and Bangladesh managed to beat Pakistan by launching 3G services in 2012 and 2013 respectively.

Yet the fact of the matter is that the Pakistani market has been slow in preparing for 3G. There are at least three prerequisites for a 3G ready market: low priced 3G handsets (i.e. cheap 3G ready smartphones); the presence of several handset manufacturers or OEMs (this helps to drive down handset prices); and consumer awareness and usage of data services (i.e. uptake of mobile internet).

Even as late as 2012, most of these factors were still in their infancy. Introducing 3G into such an unprepared market would have been a colossal waste of money for the MNOs who have spent millions of dollars to obtain the spectrum license and to put the requisite infrastructure in place. These companies will no doubt be anxious to increase 3G penetration as quickly as possible in order to eventually ensure a return on their investment.

It is very safe to say (although the MNOs may be loath to admit it) that it is the developments in the handsets market that have had the most significant impact on expediting Pakistan’s race towards 3G. It would be equally accurate to say that it will be the handset manufacturers working with the MNOs and a few other stakeholders that will drive 3G growth in the future.

The developments in the Pakistani handset market are not without precedent: The Pakistani handsets market has evolved drastically in the last five years. But these changes to a large extent mirror the developments in the global and other South Asian markets.

Take the once great Nokia. According to the research firm Gartner, its market share in terms of global sales slipped from 19.1% in 2012 to 13.9% in 2013. Although Nokia still comes in at number two in the overall handset manufacturers’ rankings, this is mainly because of its feature phones business. The company no longer figures in the top five smartphone brand rankings and has been bought out by Microsoft. The once-popular Motorola posted losses of $1.03 billion last year; the company was sold first to Google and then to Chinese smartphone manufacturer, Lenovo. Similarly, BlackBerry posted a loss of $5.4 billion in the first nine months of 2013 and although RIM has tried hard to push the Z10, sales have been sluggish.

These handset giants have been overtaken by Samsung. According to Gartner, Samsung sold 450 million handsets in 2013 (twice as many as Nokia) of which more than 300 million units were smartphones, giving them a 31.1% share of the global smartphone market. Apple is number two in the smartphone market, while Huawei, LG and Lenovo are in the third, fourth and fifth positions, displacing Nokia, HTC and BlackBerry.

Similarly, while Nokia and Samsung enjoy healthy market share in the Subcontinent, other brands are fast gaining ground. In India, for example, local brands such as Karbonn, Lava, Micromax and Zen, which sell cheaper phones, are expected to drive the next phase of mobile penetration. In Bangladesh, a local brand called Symphony which sells Chinese manufactured phones, has 40% of the market share in terms of feature phones and is in the number two position in terms of smartphone sales after Samsung.

The 80% under $80 Pakistani handsets market: With over 136 million mobile users and a tele-density of 77.9% (Source: PTA), Pakistan is an extremely attractive market for handset manufacturers. The telco price wars of 2005 and beyond ensured that the price of a mobile connection was reduced significantly, however a dearth of players in the handsets category meant that until two years ago, feature-rich handsets were very expensive.

On the other hand, a research by German firm, GfK revealed that Pakistan is an 80% under $80 market, which means that phones priced at $80 (Rs 8000) or less account for 80% of handset sales. Prior to 2009, although it was possible to buy basic feature phones for under Rs 8000, more sophisticated smartphones were out of the reach of the majority of Pakistanis.

This is when QMobile entered the market. At first, this brand, which imports handsets from China and sells them under its own brand name, was considered an upstart and consumers were unconvinced about its quality. But with concerted marketing campaigns, QMobile managed to change perceptions and attitudes towards low cost, feature rich smartphones, selling them at a fraction of the cost of Nokia and Samsung. While Samsung has managed to retain a segment of highly brand conscious smartphone buyers, Nokia floundered under the pressure.

Industry experts agree that QMobile has done more to increase smartphone penetration in Pakistan than any other handset brand. QMobile now claims to be the largest seller of smartphones and feature phones in the country, selling 250,000 of the total 375,000 smartphones sold in Pakistan every month. While industry experts may not agree with the actual figures, they don’t doubt the claims in principle.

Nokia still retains a significant portion of the feature phone market share, but its former market leadership position is lost (some say for good). In a very real sense, QMobile with its success, managed to show other handset manufacturers that it was possible to compete with the giants and win. Not only did the company create the category of low priced smartphones, it also created awareness about smartphones in segments of telecom customers where it didn’t previously exist. This paved the way for other local players such as Voice by United Mobile, Megagate and Dany, to enter the market. From the international market, Chinese firms Huawei and ZTE, both of which have long provided infrastructural and backbone support to the Pakistani telecom sector are now eager to capture a share of the handsets market with Huawei pursuing a very aggressive strategy in terms of smartphones.

Then there are the others: Gfive, Haier, HTC, LG, Motorola and of course Apple (through grey imports) and BlackBerry. Some market watchers say that as demand for 3G ready handsets increases, Apple and Lenovo may also officially enter the Pakistani market. Clearly, Pakistan has managed to build up a critical mass of handset players and this is crucial for a 3G ready market.

Feature phones form the bulk of the market but smartphone penetration is increasing rapidly: According to Gartner, smartphones outsold feature phones for the first time in 2013 in the international market, accounting for 53.6% of total sales. While this has yet to happen in Pakistan, Zeeshan Pervaiz Akhtar, CEO, QMobile says that the smartphones segment nearly doubled in the space of one year: from nine percent in 2012 to 17% in 2013. However, this growth needs to be put into the context of the overall market.

Statistics about Pakistan’s handsets market are generally based on two types of figures: total imports (all handsets are imported as Pakistan does not have any manufacturing facilities) and total sales per month. However, these figures will vary significantly depending on who you talk to. A huge influx of grey imports also makes it difficult to come by accurate figures.

According to Ejaz Hassan, Director, Voice at United Mobile, the annual value of the market is about Rs 70 billion. To this Akhtar adds that about 2.2 million phones are sold every month, of which 375,000 are smartphones while the rest are feature phones. The assumption of course is that despite low volumes, the value of smartphone sales is far greater than that of feature phones. The issue, however is that while it is possible to estimate a sales value for smartphones (one telecom expert puts it at Rs 4.2 billion a month which would work out to just over Rs 50 billion a year), it seems to be nearly impossible to do the same for feature phones.

The ratio of smartphones to feature phones is yet another contentious area. According to QMobile it is 83% feature phones to 17% smartphones; Huawei puts the figures at 70:30; whereas one independent telecom expert says it is 88:12.

Despite the profusion of facts and figures, three things are very clear: Pakistan’s feature phone market is saturated; the smartphone market is growing rapidly; and thirdly, the smartphone segment offers huge potential for growth.

Handset manufacturers and mobile network operators have worked together in 2013: The most obvious reason for increased smartphone penetration in 2013 is that the handset manufacturers and the MNOs have been preparing the general public for 3G, but it is perhaps too simplistic an explanation for the increased telecom activity.

With the launch and popularity of voice and messaging apps such as Skype, Viber and Whatsapp, voice and SMS have fallen drastically, and as Akhtar puts it, “phone usage has started changing from voice and text centric to data centric.”

For MNOs, driving data usage has been a key objective of their strategy not only to prepare people for 3G, but to increase ARPU. One telecom analyst says that a data user’s ARPU is nearly 25 to 30% more than that of a customer who only uses voice and text, making it imperative for MNOs to cash in on the opportunity.

However when data was first introduced in Pakistan, uptake was extremely slow. At that point (around 2010), about 90% of telco revenues were still derived from voice and MNOs were not pushed about driving mobile internet usage. However, as alternate services began to eat into voice revenues, the MNOs realised that increased data usage was the only way to ensure profitability.

The first move was to reduce data prices and bundle up mobile internet with voice and SMS in order to generate trial. In tandem (and because of the popularity of the Android platform), handset brands and manufacturers introduced low cost Android smartphones which began to overtake Nokia, BlackBerry and the iPhone. As the competition in the handsets market increased with aggressive marketing campaigns by most of the major players, partnerships between mobile network operators and handset manufacturers were almost a natural step in order to popularise data usage, increase smartphone penetration and to give customers a more value added proposition in a market where MNOs in particular and handsets manufacturers in general were both losing real product differentiation.

These partnerships have gathered steam in the last six months (to the extent that all new smartphones are now offered as a package deal with some form of free data services), and have had a significant impact in making Pakistan a 3G ready market.

On the handsets side, smartphone penetration has increased rapidly. Fraz Malik Khan, Head of Marketing, Terminal Device, Huawei says: “In 2010, Pakistan imported under 5000 smartphones a month. In 2012, when Android handsets were properly introduced, we were probably importing 10,000 smartphones a month, and now we are at over 300,000 a month.”

In tandem will this data penetration has also increased significantly. According to Aamer Manzoor, Head of Data and Devices, Mobilink, “Out of 30 million internet users in Pakistan, 15 to 20 million are accessing the internet through their phone. This is really significant because even broadband penetration is only at three to 3.5 million users.”

The handsets category is set to evolve quickly in a 3G market: Manzoor says Mobilink will be focusing on increasing 3G penetration for two years, while value extraction (i.e. the impact on ARPU) will come later. He also says that high net worth customers (those who buy smartphones of $200 and above) will be the early adopters but the “eventual market will be the common man.”

Consequently, Mobilink is planning to focus its 3G packages and plans on two segments within the handsets market: users who buy phones under $100 (low-end smartphone users), and those who buy phones within the $100-200 range (mid-level users). This strategy, expected to be followed by most MNOs will have implications on how smartphone usage and penetration evolves in a 3G environment.

Akhtar says 3G enabled low-cost handsets will play a pivotal role in encouraging data usage, but that QMobile’s strategy is to provide 3G ready handsets at every price point.

“In the $110 and above range, all of our handsets are 3G ready; in the under $100 range, we have selected a few models and made them 3G ready. Additionally we are planning to launch 3G ready handsets in the under $80 range and we will be the only manufacturer to do so.”

While many brands and manufacturers will either want to cater to all consumer segments, there are others like Huawei which want to focus on high net worth customers. For the last few months the company has been actively pushing handsets like the G610 and 6700 which fall in the over $200 range because according to Khan, Huawei wants to focus on young and high end executives.

Regardless of their respective strategies, all the handset manufacturers agree that the smartphone segment is set to grow exponentially in a 3G market. Akhtar believes that smartphones will constitute 30% of the handsets category by the end of 2014 and 50% by 2015. Khan is even more optimistic predicting that the current 70:30 ratio of feature phones to smartphones ratio will flip over in the next two years.

Increased marketing spend for awareness building campaigns, introducing 3G ready smartphones, and more value added offers as a result of deeper relationships between handset manufacturers and MNOs, will play a big role in bringing about the increased penetration.

The objectives, from the handset brands’ and manufacturers’ point of view will be to switch feature phone using customers to smartphones; or to get smartphone users to a) switch to a 3G ready smartphone (most smartphones sold before 2013 are unlikely to be 3G ready), b) buy a more expensive smartphone, or c) replace their smartphone within a shorter period of time.

Independent telecom expert, Yasmin Malik, believes that as smartphone replacement rates come down to 14-15 months, these (barely) used smartphones will create a market of their own. “Feature phone users will have the option of switching to a new feature phone or to buy a used smartphone.”

None of this means that the feature phones will disappear altogether. In fact, as Malik says, 3G will be inaccessible to about 70% of the population who still don’t know how to use basic internet on their phones and will not be able to afford 3G services. Akhtar adds that there is still a huge market for $30 (or less) phones and although this segment will slowly lose some of its share to smartphones it will remain in place for at least the next three to four years. However, as 3G coverage is unlikely to ever be available in every part of Pakistan, at least some segments of the population will always use feature phones, although these phones may increasingly resemble smartphones.

Two other devices that have seen limited growth so far but are likely to evolve are tablets and phablets. Industry watchers estimate that there are probably about 250,000 tablets in circulation in Pakistan at present. But tablets are set to become cheaper (QMobile’s cheapest offering is for Rs 12,000) and handset manufacturers are eager to offer a wider range of choices. Additionally, handset manufacturers and MNOs will also team up to launch 3G ready tablets (Mobilink and Samsung launched a series of 3G tabs shortly after the spectrum auction). Therefore 2014 may well be as Akhtar puts it, “the year of the tablet and the smartphone”.

The phablets market will also see growth with brands like Dany, HP and Samsung actively promoting them but industry experts believe that because of the large size of the screen (over five inches), this will always remain a niche market.

Another area that may see some growth is that of 4G enabled smartphones. Experts estimate that there are currently only 100,000 to 125,000 4G smartphones in the market. When the spectrum auction took place on April 23, and Zong was the only MNO to obtain a 4G license (along with a 3G one), it seemed unlikely that the company would launch 4G services immediately with experts predicting that it would focus on 3G first. However, Warid’s recent petition to the PTA to allow it to use its available spectrum for 4G could mean that these services will be launched in the near future and this will impact the 4G smartphones market.

Even in a 3G environment, increasing smartphone penetration will not be smooth sailing: Despite the extreme optimism exhibited by handset brands and manufacturers, there will be some challenges to smartphone growth.

Firstly, the 3G rollout will occur slowly and in phases. According to the minimum licensing requirements, the PTA expects MNOs to roll out 3G services in Islamabad, Karachi, Lahore, Peshawar and Quetta before January 2015 and in another 10 cities (a minimum of two in each province) by October 2015. However, as one telecom expert explains, this does not mean that the entire city will have 3G coverage and for the first few years, 2.5G and 3G will exist side by side even in the large cities. Therefore, while smartphone penetration will increase as a result of the rollout, it may not go up to 30% of the total handsets market by the end of the year as the handset manufacturers predict.

Handset brands and manufacturers will also have some challenges of their own to deal with, the greatest of which may well be providing good after sales services. Although QMobile has successfully captured the largest share of the smartphones market, customers complain that the phones are not always sturdy and after sales service is shoddy. Similar complaints are leveled against Voice. This is an area where international handset manufacturers such as Huawei, Nokia and Samsung have a distinct advantage over local brands, and as a recent campaign by Advance Telecom (official distributors of Nokia) extolling the virtues of Nokia handsets over Chinese-made ones, demonstrated, they are planning to use that advantage to drive their own sales. While Chinese-made phones may have gained greater acceptability in Pakistan, local brands will have to pay closer attention to after sales service.

Local brands and international manufacturers will also have to compete against grey market imports in both feature phone and increasingly in the smartphones category.

Finally, the fluctuating dollar rate will also continue to pose problems for this import-driven industry, and in this context, the local brands are hoping that the government will consider making provisions so that they can start manufacturing handsets locally.

However, in the final tally, the handsets category is all set to grow. An industry that works on the principal of planned obsolescence (handsets are designed with a limited useful life), is always going to thrive so long as its products are essential to customers, however throwing 3G into the mix only means that the boom will occur faster.