Unlimited Potential, Base of the Pyramid and Emerging Markets

[a long post]

Economist 20090926issuecov The Economist magazine recently published (Sept. 26, 2009) a “Special Report on Telecoms in Emerging Markets”.

While the headline is a bit misleading, the 14 page report covers much more ground than just ‘mobile money’ The Economist makes a very strong case that the balance of power and innovation has shifted form the developed world to the developing world.  I would very much recommend reading the article from start to finish but in the mean time these are the key points I gleaned from the article.

First and foremost, Why are mobile phones so important and impactful in the developing world? As the Economist states

… being able to make and receive phone calls is so important to people that even the very poor are prepared to pay for it. In places with bad roads, unreliable postal services, few trains and parlous landlines, mobile phones can substitute for travel, allow quicker and easier access to information on prices, enable traders to reach wider markets, boost entrepreneurship and generally make it easier to do business. A study by the World Resources Institute found that as developing-world incomes rise, household spending on mobile phones grows faster than spending on energy, water or indeed anything else.

Jeffrey Sachs, author of  “The End of Poverty  has stated “ mobile devices are the single most transformative tool for development”?  It is unclear if mobile telephony adoption drives economic development or is a consequence of economic development. I expect the truth is somewhere in the middle. So why have we seen this incredible uptake of mobile phones in the developing world in the first decade of the new century?

The Economist identifies a number of drivers.

  1. Mobile telephony is well established in the developed world with both device and network equipment standards fully developed and in production.
  2. Economies of scale – the first networks could be profitable just by catering  to the very wealthy
  3. The use of prepaid systems that allow for very low entry costs. The  systems were already in place in the developed world and could be transferred to developing countries.
  4. Leveraging microfinance and mobile phones – the village operator.
  5. Liberalization of telephony markets. The contrast between the political stability of Ethiopia and Somalia is striking yet the mobile teledensity in Ethiopia is  3.5% while Somalia with no functioning government and a completely unregulated telecoms market, the mobile teledensity is 7.9%.

The Economist has included a videograph that describes benefits of mobile telephony to the developing world.

Besides it’s economic impact, mobile telephony has also become a tool for political and social change. Examples include; identifying human rights violations , electioneering (easy access to candidate profiles), election monitoring, crisis and disaster management, allowing anonymous discussions of politics and corruption and monitoring transactions that are open to bribery.

Three Major Trends

  1. Rise of influential dominant home grown operators
  2. Increasing influence and impact of Chinese network equipment operators – Huawei and ZTE
  3. Development of new services – very different versus the developed world

Taking each in turn…

Rise of influential dominant home grown operators

In the developing world ARPU is typically in single digits while in the developed world ARPU ranges from $30 – $60 per month. This has caused operators in developing countries to focus on reducing their operational cost for both networks and servicing customers. The “Indian Model” is used as a catchall name for the resulting innovations.

Outsourcing is the key component allowing a concentration on marketing and strategy and shares the risk of an exploding subscriber base.

"All of Bharti’s information-technology (IT) operations are outsourced to IBM; the running of its mobile network is handled by Ericsson and Nokia Siemens Networks (NSN); and customer care is outsourced to IBM and a group of Indian firms."

This is further extended to infrastructure sharing such as cell towers.

Other components of the Indian Model include inexpensive lifetime phones, reducing the number of active cell sites during off peak times, incenting usage during off peak even to the point of adjusting the cost of calls every hour, in each network cell, depending on the level of usage, paperless pre-paid top ups, ‘green’ cell sites and borderless roaming of adjacent countries.

Emergence of Huawei and ZTE as major players

 

"The two Chinese firms’ global market share is still relatively small, but their impact on telecoms has been colossal. Together they have driven down costs and brought about consolidation across the industry. Having offered discounts of as much as 50%, they were in large part responsible for the mergers in 2006 between Alcatel and Lucent and the network-equipment arms of Nokia and Siemens, and the collapse in January 2009 of Nortel and the sale of many of its assets to Ericsson." 

In 2008 ZTE and Huawei had 18% of global market share including their stranglehold on the Chinese market. They have two significant advantages in the wireless-equipment market: much cheaper labour and settled standards. They have also been innovative and have become the leaders in software configurable base stations for example.

They also have a set of challenges. TD-SCDMA (the mandated 3G standard for China Mobile) has siphoned resources away from other efforts. The standard has not been accepted outside of China, diluting their efforts in the 4G arena. Both firms are also weak in services  making participation in outsourcing opportunities such as described in the the Indian Model above quite difficult.

Development of new services

Mobile telephony services have the potential of revolutionizing the way people work and interact in the developing world. While it is not the world-wide-web it is a web of services that can address a wide swathe of issues facing primarily poor and rural dominated economies.

One of the best examples cited is the Grameen Foundation’s “Application Laboratory” in Uganda. grameen Launched by Grameen, Google and MTN in June. There are three different types of applications on the site.

  1. Agriculture
  2. Weather
  3. Health

They all share a common theme – they are very focused and inexpensive.

The report also includes other examples such as Reuters Market Lite (India) for  farm prices, as well as www.12582.com (run by China Mobile) that sends farmers information about planting techniques, pest management and market prices. Perhaps the most surprising application was identifying counterfeit drugs (in some countries this can be as high as 80%) use scratch off numbers on the pill containers and then using SMS to verify (Ghana).

However, money transfer is the service with the most easily quantified benefit. It began initially as airtime being a surrogate for money but has now expanded to allow actual money transferred. This has allowed the "unbanked" to participate in financial transactions.

  • M-PESA (Kenya) is most successful with 7m out of a population of 38m participate

    "In rural households that have adopted mobile money, incomes have increased by 5-30%, according to Olga Morawczynski, an ethnographer at the University of Edinburgh who has studied M-PESA in detail."

There is also a unintended benefit, money associated with your phone  can act as a ‘rainy day fund’ for absorbing emergencies. While it is sometimes unclear where mobile banking ends and regular banking begins, Banks are now linking up with mobile companies as opposed to fighting them.

Future – Rise of Mobile Broadband

Mobile teledensity worldwide is approaching 100% over the next decade and in 2011 mobile internet users pass broadband internet. This represents a great opportunity to provide internet access to everyone who wants it.  There is a real need for universal access  both mobile and internet.

The argument is whether it is better to approach internet access from a top down vs. bottom up approach. The $100 laptop is a good example of the top down approach improving education and economic development follows, while mobile phones take the opposite bottoms up approach improve economic well being allowing for affordable education. It looks as if bottoms up has won out.

Of course nothing beats individual initiative – http://www.boingboing.net/2009/09/29/the-boy-who-harnesse.html

Sorry, this has been so long but there is a lot of good stuff in the article and it is well worth reading. Like to finish with a quote from the article.

 

"In the grand scheme of telecoms history, mobile phones have made a bigger difference to the lives of more people, more quickly, than any previous technology. They have spread the fastest and proved the easiest and cheapest to adopt. It is now clear that the long process of connecting everyone on Earth to a global telecommunications network, which began with the invention of the telegraph in 1791, is on the verge of being completed. Mobile phones will have done more than anything else to advance the democratisation of telecoms, and all the advantages that come with it."

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