Hoping to push deeper into emerging markets, the world's largest mobile operator, Vodafone Group, is taking a page from the Nokia and Motorola songbook. On May 21, Vodafone executives announced in London that the company is rolling out its own line of ultra-low-cost handsets. To be built by a Chinese partner, the GSM-standard phones will carry the Vodafone brand name and sell for $25 to $45, depending on locale.

With its unexpected move, Vodafone becomes the first carrier to introduce its own phones intended specifically for customers in developing countries. Until now most so-called "private-label" devices resold by operators have been aimed at the high end of the market. "[These] will be the lowest priced GSM products ever," crowed Jens Schulte-Bockum, Vodafone's global director of terminals, at the event.

True enough, but Vodafone could have a tough time getting its newfangled devices into the hands of consumers. For one thing, it faces stiff competition from the likes of Nokia, Motorola, and Sony Ericsson, all of which market their own inexpensive models and already have a big head start in markets such as Africa, South Asia, and Latin America.

Dealing With Saturation

Adding pressure, in February the GSM Assn., an industry trade group that represents scores of mobile operators around the world, made its latest award in a series of tender offers designed to drive inexpensive handsets into developing economies. This time South Korean giant LG Electronics was selected to supply millions of cheap, third-generation (3G) phones to a dozen carriers who have signed up for the plan. (Motorola has won several earlier bids for second-generation handsets, while Nokia largely sat out the program.)

Yet despite the crowded field, Vodafone sees value in getting devices bearing its name into the hands of new buyers. It's all part of the Newbury (England) company's two-year-old strategic push to fuel growth by moving into emerging markets. With markets near saturation in the developed West and Asia, Vodafone has little choice but to expand elsewhere.

Over the last three years the British giant has shed businesses in mature markets such as Sweden, while acquiring operators in Romania, Turkey, and most recently India, with the $11 billion-plus takeover of Hutchinson Essar. Within the company, the India deal is seen as especially important. "It's a game-changing deal," says Schulte-Bockum.

Turning on a Dime

But Vodafone lacks brand awareness in markets such as India, so it's hoping that selling phones carrying its own moniker will bolster its image and visibility among first-time buyers. Despite a relatively late market entry, the company argues it can compete successfully against Nokia and others, selling "double-digit millions" of the candy bar-shaped phones over the next three years.

Made by Chinese up-and-comer ZTE Corp., the initial lineup of GSM phones includes a monochrome-screen model called the 125 and a color-screen version called the 225. Both should start shipping in the next week to Egypt, Tanzania, South Africa, and Romania. Vodafone says it's also working with French electronics giant Sagem on later additions to the lineup. Keeping the price down is the key. "Every 10 cents we take prices down on these products extends the reach of mobile telephony in these markets," Schulte-Bockum says.

Selling inexpensive handsets pre-loaded with Vodafone software also is a camel's nose in the tent to boost usage of mobile services. Like most carriers, Vodafone still gets the vast majority of its revenues from good, old-fashioned voice calls and text messages. But it sees opportunities, even in the developing world, to sell other wireless applications such as mobile banking.

The Challenge of Distribution

In February, for instance, Vodafone joined forces with Citigroup to launch a Vodafone-branded money-transfer service that runs over handsets. The service is now up and running in Kenya via Vodafone affiliate Safaricom. Similar offerings have big potential in countries where many people lack bank accounts and often receive remittances from friends and family abroad. According to the World Bank, money transfers to developing nations have increased from $147 billion in 2001 to $268 billion in 2006.

"These are exactly the kinds of new services operators should be going after in emerging markets," says Carolina Milanesi, research director at market researcher Gartner in Egham, England.

Still, analysts are skeptical about the likely success of Vodafone's handsets. One big challenge is distribution. Nokia has spent years building presence on the ground to ensure that its line of low-cost phones make it into the hands of emerging-market consumers, many of whom live in rural areas with poor infrastructure and few if any retail outlets.

Changing the Sales Model

"Vodafone has the product, but not necessarily the brand and distribution," says Neil Mawston, associate director of market researcher Strategy Analytics in Milton Keynes, England. "And distribution will be their biggest challenge."

That's because emerging markets tend to rely on a completely different sales model. In the U.S. and much of Western Europe, upwards of 90 percent of handsets are sold via operators or operator-linked stores. But in China, by comparison, carriers account for only about 5 percent of cell phone distribution, says Mawston. The rest happens via independent retailers -- often just mom-and-pop stores.

Reaching deep into countries to develop relationships with such stores requires deep-pockets marketing spending and years of steady effort. Nokia, more than any other company, has managed to accomplish that in booming markets such as China and India. "Nokia is way ahead of anyone else in reaching consumers through these retailers," says Mawston.

Sweet Spot for Buyers

Vodafone's other problem is more subtle. No doubt low price is essential in emerging markets, where a handset can be the most expensive item a poor consumer has ever purchased. But for that very reason, buying name brands acquires significant importance. Analysts concede that Vodafone is a known entity -- but global mega-brands like Nokia and Motorola have even more pulling power.

"In these markets the brand is a very important part of what a mobile phone represents; it's how people express themselves," says Gartner's Milanesi. In India, she notes, buyers sometimes shy away from the lowest-price model "because they don't want their family and friends to think that's all they can afford." Milanesi reckons the sweet spot for "aspirational," low-cost phones in emerging markets is around $50 to $70.