Prepaid mobile airtime retailing as a path to microentrepreneurship

Over-the-Air Airtime Distribution as a path to micro-entrepreneurship: A study of Globe AutoloadMAX and Smart Load in the Philippines Kellogg School of Management Makiko Yamashita David Zarraga Amy Ng SEEK 956: Social Entrepreneurship in the Developing World Professor Annette Krauss Spring 2008 Executive Summary ............................................................................................................................................ 1 I. Introduction ..................................................................................................................................................... 1 A. Scope of the paper and methodology ....................................................................................................... 1 B. Population demographics and poverty levels shape businesses in the Philippines .............................. 1 1. Income levels and distribution as compared to Southeast Asian countries ................................. 1 2. Profile of the poverty situation and the BoP segment in the Philippines ..................................... 2 3. Informal and formal economy participants of the Philippines ..................................................... 3 II. Doing Business in the Philippine Mobile Telecommunications Industry ................................................. 3 A. Deregulation has slowly increased access to fixed line telecommunications ........................................ 3 B. Mobile penetration has accelerated due to mass market targeting ....................................................... 4 C. Smart Communications and Globe Telecom are major industry players ............................................ 4 D. Prepaid users overtake postpaid users .................................................................................................... 4 E. SMS takes over the mobile communications network ............................................................................ 5 III. Product Strategy: Over-the-air airtime distribution ................................................................................ 5 A. The Product................................................................................................................................................ 6 1. OTA transaction mechanisms deliver benefits throughout the value chain ..................................... 6 2. Family Trees take the place of expensive credit checks ..................................................................... 6 3. Small denominations and fixed margins enable simple product solutions ....................................... 6 B. Distribution becomes accessible to BoP ................................................................................................... 7 C. Marketing and promotions encourage technology adoption and lock-in ............................................. 7 1. Above-the-line advertising builds top-of-mind recall in mass-market segments ............................. 7 2. Point-of-sale collateral materials support fast inventory turnover ................................................... 8 3. SMS broadcasts reach subscribers cost effectively ............................................................................. 8 4. Product Innovations and Promotions keep consumers loyal ............................................................. 8 D. Results indicate that all parties win ......................................................................................................... 9 1. Market Penetration shows strong numbers in retailer network ....................................................... 9 2. Revenues to Carriers represent a significant portion of the business ............................................... 9 3. Revenues to Retailers augment monthly income ................................................................................ 9 IV. Mini-Cases provide a qualitative backdrop to the industry ................................................................... 10 A. Natividad Santos triples her monthly income which helps pay for basic expenses ........................... 11 B. Joseph Tumalip adds a virtual storefront while working his full-time job ........................................ 11 C. Arlene Rasonable reinvests her profits into additional inventory to achieve growth ....................... 11 D. Arnel Dimaunahan chooses a prime spot with abundant foot traffic to set up shop ......................... 11 V. Impact Assessment and Analysis ................................................................................................................ 12 A. Philippine subsistence and poverty thresholds as a metric .................................................................. 13 B. Economic impact analysis allows for gap comparisons ........................................................................ 14 1. Comparison with income thresholds shows benefits for the poorest households ........................... 14 2. Moving up the income ladder becomes possible ............................................................................... 15 C. Accessibility assessment is crucial to determining the long-term impact ........................................... 16 D. Sustainability can be measured by entrepreneurial actions ................................................................ 17 VI. Recommendations ...................................................................................................................................... 18 A. Regulations encouraging mobile banking penetration may boost access for BoP ............................. 18 B. Tracking retailer data can attract NGO support.................................................................................. 18 C. Training and establishing a retailer’s trade association will improve adoption ................................ 18 Appendix............................................................................................................................................................ 19 Appendix A. The OTA Distribution Network Family Tree: .................................................................... 19 Appendix B. How to become a Globe OTA airtime dealer ....................................................................... 19 Appendix C. Advertising posters, ads ........................................................................................................ 20 Appendix D. Computation and assumptions for revenue calculations .................................................... 21 Appendix E. Direct Telecom Device Ownership and GDP per capita in Asia ........................................ 22 Appendix F. Perceived Impact of Direct Telecom Access ........................................................................ 22 Appendix G. Survey Methodology and Questions..................................................................................... 22 This page intentionally left blank. Executive Summary In the Philippines, two mobile telephone carriers have developed an Over-the-air (OTA) product that has created better access to Information and Communications Technology (ICT) for individuals in the informal economy at the bottom of the pyramid (BoP). While reducing the BoP penalty for such individuals does not seem to be the main driver for such for-profit ventures, serving the attractive majority of the population does. Innovative product offerings allow BoP consumers to gain access to shared services through sachet marketing, creating affordability. The population density of the OTA retailer network allows BoP consumers quick access to mobile airtime. The OTA distribution channel allows BoP consumers to overcome barriers to access related to an inability to meet a credit check, reach potential business consumers or access relevant information for their businesses. Studies have linked access to ICT services to a positive impact on economic growth and development.i In a recent study of ICT effects on the BoP in five countries, individuals in the Philippines positively agreed that access to ICT improved their ability to partake in efficient daily activities, act in emergencies, maintain family and social relations, and earn or save financially through transactions via the mobile phone.ii I. Introduction A. Scope of the paper and methodology Over-the-air (OTA) airtime distribution is an innovation in mobile telecommunications first developed and implemented in the Philippines in 2003. This technology allows carriers to dispense with the use of physical prepaid airtime cards by enabling electronic airtime transfers from one mobile phone to another. This platform has created a network of distributors, dealers and sub-dealers whose start-up capital requires only the purchase of a mobile phone, a dealer SIM card and airtime inventory. This technology, marketed as Globe AutoloadMAX and Smart Load, can facilitate micro-entrepreneurship at the bottom of the pyramid due to its extremely low cost of capital requirements, decent returns, small airtime stock-keeping units (SKUs) and the ubiquity of the mobile phone within the Philippine context. This paper aims to study Globe AutoloadMAX and Smart Load through the lens of social enterprise and will determine, if possible, the impact that this micro-entrepreneurship venture has on the BoP. To achieve this, we will analyze the existing distribution network and the financial impact of the product on the mobile carriers‟ bottom line. To augment our use of market and product data, we will utilize qualitative feedback obtained from surveys conducted among a very small sample of Philippine OTA airtime retailers. Globe Telecom and Smart Communications were not willing to provide proprietary, product-specific data for this paper. Instead, we have had to rely on publicly-available data and information provided by industry insiders and former managers of both carriers familiar with the OTA airtime distribution product. B. Population demographics and poverty levels shape businesses in the Philippines 1. Income levels and distribution as compared to Southeast Asian countries The Philippines is a country of 92.7 million people and growing at 1.7 % per year, above the world average of 1.2%.iii Its economy has been growing fast with an average growth rate of 5% since 2001 and 7% for 2007 alone. Despite recent steady economic growth, GDP per capita remains low at $3,300 in 2007. The country‟s GDP is comparable with Indonesia and Vietnam but is significantly lower than Thailand‟s or Sri Lanka‟s, indicating significant economic inequality as shown by its 2006 Gini coefficient of 45.8. Considering the Gini coefficients in many developed countries range from 25 to 35, the income in Philippines is distributed quite unequally. However, surprisingly enough this unequal distribution of income is similar to that found in the United Sates, whose Gini coefficient similarly is 45. 2. Profile of the poverty situation and the BoP segment in the Philippines The country defines the annual per capita poverty threshold at 15,057 pesos ($347), which translates to less than $1 of income per day. 27.6 million people or 32% of the population fall under the nation‟s official poverty line. iv This further indicates that the healthy level of economic growth has not benefited the poor. The subsistence threshold in 2006 was 10,025 pesos ($231), indicating the minimum level of income required for an individual to meet the basic nutritional needs. 11% of population falls under this threshold. For an average family of five, the poverty threshold is at 6,274 pesos ($144), while the food threshold is at 4,177 pesos ($96). See Figure 1 for one interpretation of the BoP population. Figure 1. Philippine BoP Population Source: Jose Jesus F. Roces and Asuncion M. Sebastian "Marketing to the Have-Less: A Viable Business Strategy." Asia Institute of Management. 2005. According to the UN, poverty reduction in Philippines has been much slower than in its neighboring countries including Indonesia, Thailand, Vietnam and China. Those countries experienced higher levels of poverty incidence than the Philippines but have successfully managed to reduce the level of poverty and inequality over recent years. About half the country‟s population live in rural areas, with 80% of the poor comprising the majority of rural dwellers. Many of these are engaged in agriculture as a main and often only income source. One third of the country‟s poor live in the Autonomous Region in Muslim Mindanao (ARMM), Bicol, Eastern Visayas and Western Mindanao.v Consisting of 7,100 islands in the Pacific and extending 1,800 km from north to south, the Philippines faces many challenges, geographic, political and cultural, contributing to the persistent poverty in the country. That 2 includes the long-term economic decline, political instability and a fiscal policy that favors large and capital intensive industry over small enterprises.vi The Philippine government, working with the International Fund for Agricultural Development and other partners set the Medium-term Development Plan (2004-2010) that has the eradication of poverty as its primary aim. Under this umbrella initiative, innovative initiatives driven by independent NGOs and the private sector have flourished. For example, the Hapinoy project pioneered by private company Microventure, Inc. supports thousands of local mom-and pop (“sari-sari” or “various,” referring to the wide range of dry goods and basic necessities sold by such stores) stores by enabling them to increase profit margins and providing an opportunity to expand their business through capital provision and training.vii 3. Informal and formal economy participants of the Philippines As represented by over 600,000 sari-sari stores in Philippines, the county‟s informal economy is enormous. According to ILO, 65% of the country‟s total work force can be found in the informal sector. This indicates that the formal sector has not grown enough to provide sustainable employment opportunities. Therefore, the motivation for most micro-entrepreneurs is to earn a sufficient living not just for themselves but for their employees, making entrepreneurship a necessity, not just a choice. Such entrepreneurs and workers at the BoP have little education, are unskilled and have little access to capital. They tend to work long hours with minimum labor protection and without a set minimum wage, overtime pay, or social security.viii In this environment – high levels of poverty coupled with unequal income distribution within an informal economic sector – the development of a reliable and affordable mobile communication system has played a significant role. Low-priced SMS services offered by major mobile carriers changed the way people communicate both in urban and rural areas, for both wealthy and poor subscribers. This paper will examine how mobile communication impacted the poor and informal segment by tapping the talents of hundreds of thousands of informal sector participants through a high-tech airtime distribution platform in the Philippines. II. Doing Business in the Philippine Mobile Telecommunications Industry A. Deregulation has slowly increased access to fixed line telecommunications The Philippine telecommunications industry was born in 1928, when the Philippine Long Distance Telephone Company (PLDT) was founded by the US-based General Telephone and Electronics Corporation (GTE) during the period of American colonial rule. PLDT was privately held until 1967, when GTE was forced by President Ferdinand Marcos to sell PLDT to cronies. During the Marcos dictatorship, PLDT assumed a „Universal Service Obligation‟ (USO) which granted them a monopoly of the industry. The industry languished along with most economic sectors during this period. Fixed-line telephone penetration was so bad that in 1988, two years after Marcos was deposed, only 600,000 telephone lines were available for the use of 65 million Filipinos. Eighty percent of these lines were to be found within the National Capital Region of Metro Manila, which left most of the country‟s 1,600 municipalities without access to basic telephone services. It was only through the Public Telecommunications Policy Act of 1993 that 3 the PLDT monopoly was finally dissolved and the industry opened to new service providers. Despite the entry of 5 other companies however, penetration rates were still disappointing. As of 2007, only 2.9 million fixed lines are considered active, a penetration rate of only 3.2%. ix B. Mobile penetration has accelerated due to mass market targeting The absence of a reliable fixed-line telephone network gave rise to the Philippine mobile telecommunications industry, which began in 1991 when the Pilipino Telecommunications Company (Piltel), as a subsidiary of PLDT, established a cellular network based on the analog AMPS standard. As of 2007, the Philippines had a mobile phone penetration rate of 60%, x similar to industry estimates of US mobile penetration. (See Appendix E) The success of mobile phones in the Philippines has largely been due to the mass-market thrust of Smart Communications, whose product strategy has been aimed at courting the low-middle and lower income consumers, the largest market segments in the country. Globe Telecom, initially focused on the high-revenue middle- and upper-income segments, has done a good job following Smart‟s lead and is second in the market overall. A common strategy focused on access and affordability that relies on prepaid billing, low-denomination airtime SKUs and extensive distribution networks has allowed both Globe and Smart to achieve record industry growth from a total of about 23 million subscribers in 2004 to 53 million users last year. This accessibility is greatly enhanced by the affordability of handsets and services due to a healthy „gray market‟ xi dominated by second-hand phones and affordable voice and SMS packages for both prepaid and postpaid users. C. Smart Communications and Globe Telecom are major industry players The Philippine mobile landscape is dominated by two carriers: Smart Communications with over 30 million subscribersxii and Globe Telecom with their 20.3 million users.xiii A third player, Sun Cellular owned by the Digital Telecommunications Company (Digitel) is far behind with an estimated 3 million subscribers as of 2007. Smart Communications is the market leader with a 57% share, due to its focus on serving mass-market segments. Smart‟s network currently covers all but 13 of the 1,600 municipalities in the Philippines, enabling access to their cellular service almost anywhere in the country. Despite entering the market later than Globe Telecom, Smart has raced far ahead by introducing innovations targeting lower-income segments of the country. Smart was the first Philippine carrier to introduce prepaid billing, the first to launch a sub-brand exclusively targeting the massmarket and the first to introduce a peer-to-peer airtime sharing mechanism. By the strategic use of technology, Smart has been able to expand the accessibility and affordability of its mobile service to all income levels in the country. Upon launching its GSM service in 1994, Globe surged ahead in the fledgling Philippine mobile industry by offering quality postpaid mobile voice and SMS service to the middle- and upper-income market. From the very start, Globe positioned itself as a premium brand and established its reputation by owning the subscribers with the greater willingness to pay for mobile service. However, Globe quickly lost its leadership position to Smart and its mass-market approach. Since Smart‟s entry into the industry, Globe has generally adopted a „smart follower‟ approach with regard to product innovation. This belated focus on mass-market segments and has allowed Globe to remain very competitive with Smart in recent years. D. Prepaid users overtake postpaid users 4 A typical postpaid mobile service contract requires the user to pay a fixed fee at the end of each month for the use of the mobile service. The majority of Filipinos fail to qualify for postpaid contracts because income typically comes from informal sources, which is difficult to document and measure in a credit check. In addition, the price points of the different service packages may be too high for the average Filipino pocket. In order to avoid bad debt risk and lower the cost of consumer entry, the Philippine mobile user environment is predominantly prepaid. In 2007, Globe reported that only 3.5% of their subscribers were on postpaid contracts, with the remainder on prepaid. The numbers for Smart were even smaller for postpaid: only 1.5% of their base were on postpaid contracts. The flexibility of the prepaid concept has been enhanced in the Philippines by the introduction of airtime „reload‟ cards in small denominations. Prior to the introduction of peerto-peer airtime sharing and distribution in 2003, prepaid subscribers could „reload‟ airtime into his or her phone for as little as 25 pesos (USD0.60) via physical plastic cards. Thanks to flexible prepaid accounts, affordable airtime and low-priced mobile communication services such as SMS, mobile phone use has become ubiquitous at all levels of Philippine society. E. SMS takes over the mobile communications network The lack of landline penetration opened the doors for mobile communications in the Philippines. However, mobile‟s tipping point came when a little-used feature of GSM technology was discovered by Globe subscribers in the mid-1990s soon after the carrier entered the market. Shortly after Globe introduced its GSM service in 1994, users were purely on postpaid accounts, which were used exclusively for voice calls. These subscribers eventually passed on their phones (and the corresponding phone line) to their children, while they activated new lines for themselves. These budget-conscious students, who were made to pay for their mobile usage by their parents, eventually discovered a way to save on expensive voice calls by utilizing a free, little-known feature called Short Messaging Service (SMS). Globe, unaware of the value of SMS, had not thought to charge for SMS usage until millions of messages were clogging its network, requiring system upgrades. For several years, all of Globe‟s subscribers had free rein to learn about, and adapt to, SMS usage, which resulted in the explosion of „texting‟ in the Philippines. Eventually, Globe introduced a charge of 1 peso (USD 0.024) per SMS sent, without charging anything to the recipient of an SMS message. An SMS remains at the same price point today, although large discounts are given through the purchase of „pure-text‟ prepaid airtime, in which users can only use the airtime for SMS messaging. Voice calls, on the other hand, now cost 8 pesos a minute,xiv further driving the business case for SMS use for both postpaid and prepaid users. In 2007, the average Smart subscriber sent about 650 text messages a month – almost 22 text messages a day!xv III. Product Strategy: Over-the-air airtime distribution In May 2003, Smart introduced the latest innovation to hit the Philippine mobile industry through their Smart Load product. Globe followed in November 2003 with Globe AutoloadMAX. These products, collectively called over-the-air (OTA) airtime distribution, is a means of reloading airtime onto a prepaid handset without requiring the use of a physical prepaid reload card. This revolutionary innovation has transformed the industry at its grassroots, since it allows Globe and Smart to distribute airtime through a more extensive „virtual‟ network of dealers and sub-dealers who are connected to the carriers only through their handsets. 5 A. The Product 1. OTA transaction mechanisms deliver benefits throughout the value chain OTA airtime distribution is made possible by an electronic airtime sharing platform that allows a subscriber, using his or her phone, to authorize the carrier to pass on airtime to a second subscriber while billing the first subscriber for the airtime. This transaction is conducted without the need for a physical interaction between the first subscriber and the carrier, thanks to SMS messaging. This eliminated the need for prepaid cards, which accounted for a significant portion of the costs of prepaid airtime. Furthermore, monitoring and tracking airtime sales transactions has become infinitely easier because the entire value chain up to the customer is captured electronically, from airtime inventory replenishment to recording airtime sales transactions. 2. Family Treesxvi take the place of expensive credit checks This basic concept was expanded for AutloadMAX and Smart Load by applying it within a distribution channel framework. OTA airtime retailers are grouped into „family trees‟ with a territory distributor from Globe or Smart at the head of each tree. These distributors typically have pre-existing relationships with the carriers, since they sell physical prepaid cards and have a record of good standing with the company. Each distributor is sold a „starter kit‟ that comes with a special distributor SIM card xvii and initial airtime inventory, which costs between P500 to P1,500 (USD 12.00 to 36.00).xviii This distributor starter kit comes with its equivalent in airtime inventory, a corresponding amount of airtime for personal use, and the distributor SIM card worth P100. The small start-up investment required paled in comparison to the requirements for distributors selling plastic prepaid reload cards, since retailers shouldered the cost of physical storage and delivery of the cards to key cities nationwide. Each distributor is then assigned sub-distributors within the geographic area covered by each distributor. This network of distributors and sub-distributors are then assigned dealers who have applied for starter kits at Globe or Smart retail locations around the country by simply giving their name and address. xix It is the responsibility of the specific distributor or subdistributor to meet with the dealer-applicant for the actual purchase of the starter kit. Dealers then can sell starter kits to sub-dealers, thereby increasing the reach of the distributor‟s network of retailers, since this process does not require a sub-dealer to go to a Globe or Smart retail center. In order to incentivize the various branches of this network, sub-distributors, dealers and sub-dealers can only purchase airtime inventory from their „parent‟ distributor, sub-distributor or dealer, thereby assuring a steady revenue stream to the „parent‟ retailer if his or her sub-dealers are productive. Furthermore, trade credit is not allowed, and everyone, from distributors down to the sub-dealers, purchases airtime inventory up-front and in cash. One important factor to consider is that sub-dealers do NOT need to go directly to a physical retail outlet to purchase a start-up kit. They can approach a friend or relative who is a dealer (or sub-dealer) and purchase a kit from them. Their dealer SIM card will come preconfigured with the necessary information regarding their „parent‟ dealer or sub-dealer, making it a simple process to activate their SIM and begin selling airtime. Removing the requirement for sub-dealers to physically register at Globe or Smart retail centers allows the OTA airtime distribution model to really take off. 3. Small denominations and fixed margins enable simple product solutions 6 For Globe AutoloadMAX, a minimum P10 (USD 0.24) airtime purchase is required. However, provided the minimum requirement of P10 is met, purchases can be made in 1-peso increments (USD 0.024) up to P150 (USD3.57). xx Smart Load, on the other hand, enabled purchases in slightly larger denominations at fixed intervals: P15 (USD 0.36), P30 (USD 0.72), P60 (USD1.43), P115 (USD 2.74) and P200 (USD 4.76). xxi Clearly, AutoloadMAX allows greater customer spending flexibility and is a more attractive solution, although Smart‟s much larger prepaid subscriber base will generate bigger overall revenues. Globe OTA airtime retailers earn a 14% margin on OTA airtime sales, while Smart retailers pocket 15% of the retail price. B. Distribution becomes accessible to BoP Thanks to the „family tree‟ electronic distribution network, OTA airtime distribution has achieved fantastic penetration. By making airtime more accessible, Globe and Smart have made regular mobile phone usage possible for their 50-plus million prepaid users. As of 2007, Globe reported 610,000 active AutoloadMAX retailers xxii while Smart claimed 800,000 by the third quarter of 2006 xxiii . However, both carriers claim that mom-and-pop retail outlets („sari-sari‟ storesxxiv) comprise a huge chunk of their OTA airtime distribution networks, with Smart saying that 90% of their network was composed of „sari-sari‟ stores and micro-entrepreneurs as of 2006. If this is true, then about 720,000 „sari-sari‟ stores are Smart Load retailers. Furthermore, we can probably safely assume that many of these „sari-sari‟ stores sell both Globe AutoloadMAX and Smart Load, in order to maximize the revenues from airtime selling. However, Globe only has 610,000 retailers in their network. Assuming that Globe also has a network mix of „sari-sari‟ stores at 90% (or 540,000) then we can also assume that there are 540,000 „sari-sari‟ retailers of both Globe and Smart airtime who are „double counted‟ in the separate computations of Globe and Smart. Thus, it may be safe to conclude that there are a total of about 870,000 xxv OTA airtime retailers in total within the Philippines, or 1 retailer for ever 60 prepaid subscribers. C. Marketing and promotions encourage technology adoption and lock-in Marketing and promotions are crucial elements in the overall product strategy of Globe and Smart for their OTA airtime distribution products, and their spending reflects this attitude. In Globe‟s 2007 annual report, the company reported monthly subscriber acquisition costsxxvi for the prepaid market of P71 for the Globe Handyphone prepaid brand and P87 for the Touch Mobile brand. For the same period, Smart reported spending P63 per prepaid subscriber for marketing related expenses. This translates into a monthly marketing spend of P373 million for Smart, and about P350 million for Globe,xxvii or a total of about P4.5 billion (USD 105 million) in annual selling, advertising and promotional spend for each company. Although it is difficult to determine how much of this budget is allocated specifically for OTA airtime distribution, it is safe to assume that any and all marketing expenditures by Globe and Smart ultimately build up the equity of each brand to the benefit of airtime retailers. Globe and Smart employ four common strategies to market and promote their respective OTA airtime distribution products: 1. Above-the-line advertising builds top-of-mind recall in mass-market segments Globe and Smart are consistently among the largest purchasers of advertising space on television, print (billboards, newspapers and magazines) and radio, and typically spend significant amounts to support new product launches and product-based promotions and raffles. 7 Both Globe AutoloadMAX and Smart Load received significant advertising support during their launch periods in 2003. Continued advertising support, although much less in peso terms, is constant and aims to build top-of-mind recall especially among the mass-market segments which comprise the majority of prepaid subscribers. 2. Point-of-sale collateral materials support fast inventory turnover OTA airtime retailers are also supported by point-of-sale marketing materials such as posters, which Globe and Smart provide for free to announce the retailer‟s capability of handling electronic reloads. For the estimated 600,000 mom-and-pop retailers (called „sari-sari‟ stores in Filipino, which means „various things‟ in English), these posters are a big draw for sales, especially since airtime is an extremely fast-moving consumer good. An example cited by a case study on Globe AutoloadMAX conducted by Computerworld in 2006 illustrates the speed of airtime turnover even at the „sari-sari‟ level, helped along by point-of-sale material: “There are days when (Emerita) Narioxxviii can‟t sell a bottle of soda or a can of luncheon meat or even a sachet of shampoo. But orders for cell phone load, even when she went home to Bicol for a vacation, followed her and swamped her mobile phone inbox.xxix” 3. SMS broadcasts reach subscribers cost effectively In support of traditional advertising initiatives, Philippine mobile carriers also employ mass text messages to their subscriber bases to promote specific promotions or new product introductions. Although regulated by anti-spam regulations, these „SMS broadcast messages‟ are still frequently, though more responsibly, used by both Smart and Globe. Both carriers use this channel to directly communicate news about Smart Load or Globe AutoloadMAX promotions, discounts or new product offerings. More importantly, the carriers can send different messages to the prepaid subscriber base and to the base of OTA airtime retailers, allowing them to disseminate retailer-only information in a quick, reliable and very inexpensive manner. Messages are typically limited to between 160 and 480 characters, so announcements typically are short and easy to understand. Although the frequency of messages is something that the carriers monitor closely to avoid irritating their subscribers, this method allows both Globe and Smart to instantly reach all their relevant customers and retailers while spending virtually nothing. One example in which SMS broadcasts were used was in the launch of Smart‟s 25/8 bucket pricing program.xxx To promote this unlimited text and call plan among its OTA airtime retailers, Smart sent a message to their 800,000 retailers explaining the basics of the product. xxxi In a country where internet use is very low (and unlikely among mom-and-pop retailers), sending a text message is an inexpensive and reliable method of channel communications, which Philippine mobile carriers use to their advantage. 4. Product Innovations and Promotions keep consumers loyal New product introductions and promotions are utilized by both Globe and Smart to keep their users loyal and lower subscriber churn rates. xxxii Because of the low cost of switching networks for prepaid usersxxxiii and the presence of „SIM-swapping‟ promotions,xxxiv both Globe and Smart must continuously introduce improved or creatively discounted versions of their textand-call prepaid products. Furthermore, promotions in the form of raffle prizes or freebies help encourage new and existing subscribers to purchase the carrier‟s prepaid SIM card or airtime, increasing new subscriber additions or airtime consumption. Almost every day, national 8 newspapers carry several different promotions, either launched by the carriers themselves or cobranded by a partner company, which offer subscribers discounts, freebies or chances to win in government-approved raffle draws and promotions. A striking example cited in both companies‟ annual reports is the introduction of all-text airtime, available over the OTA distribution networks of both Smart and Globe. This special kind of airtime, typically in P10, P20 and P30 denominations or greater, limits the prepaid subscriber to text messaging services only. This limitation allows the subscriber to use his or her phone for a longer period of time, since 10 pesos worth of airtime, if used for a voice call, will only last for 1 minute. However, if used exclusively for texting, 10 pesos can allow the subscriber to send at least 10 messages, and receive an unlimited number of messages in return, for as long as there is at least 1 peso worth of airtime in that subscriber‟s account. This cost-effective airtime product improvement must have had prepaid subscribers running to the nearest OTA airtime retailer, illustrating the effectiveness of this tactic to boost airtime sales. D. Results indicate that all parties win 1. Market Penetration shows strong numbers in retailer network As of their 2007 annual report, Globe reports 610,000 AutoloadMAX retailers, xxxv reflecting a drop of 190,000 retailers from the information provided in the Computerworld Case Study in 2006, which listed 800,000 retailers. The writers of this study suspect that the 2007 number represents the results of an audit of inactive dealer SIM cards, i.e., dealer SIM cards that were sold and activated but eventually ceased registering airtime sales after a certain period. The most recent numbers for Smart, on the other hand, are from a July 2006 interview with Ramon Isberto, Head of Public Affairs for Smart Communications, in which he says that Smart‟s network is about 800,000 strong.xxxvi 2. Revenues to Carriers represent a significant portion of the business In 2004, which represent the most recent data that the writers could gather, both Smart and Globe reported that OTA airtime distribution accounted for 62% and 61% of total airtime sales, respectively. In the absence of data for total airtime sales, we have arrived at what we feel is a reasonable and conservative estimate of revenues generated by the OTA airtime distribution products for Globe and Smart. Based on 2007 estimates which are detailed in Appendix D, Globe and Smart generated gross annual airtime revenues of P30 billion (USD0.714 billion) and P51 billion (USD1.2 billion) through AutloadMAX and Smart Load, respectively. These revenue numbers were generated by P35 billion (USD 0.83 billion) and P60 billion (USD 1.42 billion) in yearly OTA airtime sales. These amounts represent 54% of Globe‟s reported P56 billion in annual cellular service revenues for 2007 and 59% of Smart‟s cellular service revenues of P86 billion for the same period. Clearly, this innovative electronic distribution channel has taken over as the backbone of Globe‟s and Smart‟s airtime channel strategy in the 4 years since these products were introduced. 3. Revenues to Retailers augment monthly income Of the P35 billion in gross annual sales generated by Globe AutoloadMAX retailers, P4.9 billion (USD 116 million) were retained by these retailers as their 14% commission. Each of Globe’s 610,000 retailers would therefore take home an average of P8,055 (USD192) a year, 9 or P671 (USD16) a month, which means that a Globe AutoloadMAX retailer should sell about P780 worth of airtime a day to be within the average range. On the other hand, Smart Load retailers retained yearly airtime profits of P9.03 billion (USD213 million) based on their 15% commission, translating into yearly revenues of P11,287 (USD269) per retailer, or P941 (USD22) per month, which translates to about P1,100 worth of airtime sales a day. One factor that we can include into this mix to measure the revenue impact generated by OTA airtime distribution is the incidence of „sari-sari‟ stores selling BOTH Globe AutoloadMAX and Smart Load. It is highly likely that „sari-sari‟ stores which carry one product also carry the other, to make the most of their physical retail location. Given the low cost of becoming a sub-dealer, „sari-sari‟ store proprietors can quickly save up enough capital to be a retailer of both Globe and Smart airtime. In 2006, Smart claimed that 90% of their 800,000 retailers were „microbusinesses,‟ referring to both individual and „sari-sari‟ store airtime retailers, which would mean that about 720,000 of Smart‟s retailers are small-scale enterprises, many of whom would be from the BoP. This is quite possible, given that Unilever estimates that there are between 600,000 – 700,000 „sari-sari‟ stores in the Philippines.xxxvii Assuming that most of these „sari-sari‟ retailers also carry Globe AutoloadMAX, we may safely assume that about 90% of all „sari-sari‟ stores, 540,000 in all, sell BOTH AutoloadMAX and Smart Load, thereby generating average net profits of about P1,600 (USD 38) a month or P19,200 (USD 457) a year per ‘sari-sari’ store. A computation of revenue to carriers and retailers from the OTA airtime distribution product is presented in detail in Appendix D, while a summary of results is displayed below. Exhibit 1 OTA Airtime Distribution: Results Globe Smart Combined Number of 610,000 800,000 870,000 Retailers Total OTA $833 million $1,420 million $2,253 million airtime sales Total Revenue to Carrier Total Revenue to Retailer Network Average Annual Revenue Per Retailer $716 million $1,200 million $1,916 million $116 million $213 million $329 million $192 $269 $457 IV. Mini-Cases provide a qualitative backdrop to the industry The use of case studies will be more qualitative in nature, and is based on responses of dealers we were able to interview and survey directly, or by the use of existing case studies in print. Because we were not able to confirm the data cited in these interviews, studies and printed cases, we cannot be fully confident in the exactness of income and profit numbers quoted in the mini cases. However, we include them in the analysis to provide a qualitative backdrop to the impact assessment derived from official government reports. 10 Appendix G discusses the methodology for the surveys and lists down key questions. A. Natividad Santos triples her monthly income which helps pay for basic expenses Natividad Santos is a middle-aged beautician who runs her small beauty parlor from her small living room in a densely-populated residential area in Quezon City, just several miles from Manila. Her parlor earns about P10,000 a month in revenues, which is hardly enough to support her family, given the rising cost of living in the capital region. In 2005, she heard about OTA airtime distribution from a friend who was a sub-dealer and decided to purchase her own kits to sell both Smart and Globe. Nowadays, she sells about P5,000 (USD 120) worth of airtime a day, generating over P700 (USD 17) in daily profits, or over P20,000 a month (USD 500). This means that, through OTA airtime distribution, Natividad has been able to triple her monthly household income from P10,000 to a combined P30,000 a month, which puts Natividad within the ranks of the Philippine middle class, instead of at the fringes of the poverty linexxxviii. This increased purchasing ability is reflected in how she chooses to spend her profits to pay for basic expenses such as food, clothing, housing and education as well as for some discretionary, personal expenses. B. Joseph Tumalip adds a virtual storefront while working his full-time job Joseph is a security guard, married with two kids, who works in one of the buildings at the heart of the country‟s Central Business District of Makati City. His job earns him about P8,000 (USD 190) a month before tax, which is definitely far below the poverty line, especially within Metro Manila. In 2004, Joseph sought to augment his income by becoming a sub-dealer for Globe and Smart after he found out about the opportunity from a friend and invested P500 for each carrier‟s starter kit. Now, selling airtime from behind his lobby station in the building, he sells P1,000 worth of airtime a day for each carrier, allowing him to take home almost P300 (USD 7.15) a day in clear profit, or P9,000 (USD 214) a month in additional disposable income. His wife, who does not have a steady job, also sells airtime from home, further augmenting their P17,000 (USD 405) a month household income. C. Arlene Rasonable reinvests her profits into additional inventory to achieve growth Arlene is a 38-year housewife. She heard about OTA airtime distribution from a friend in 2003 and invested almost P5,000 (USD 120) for the starter kits and initial airtime inventory. Her investment as well as the fact that she sells from home has definitely paid off. She averages about P5,000 (USD 120) in revenues which generate P700 a day in profits (P21,000 a month), which is far more than her household income of P8,000. Over 75% of her profits, almost P16,000 (USD 375) a month, go to basic expenses such as housing, food, clothing and educational expenses for herself, her husband and their two kids, while the rest goes into additional inventory for her airtime business. D. Arnel Dimaunahan chooses a prime spot with abundant foot traffic to set up shop Arnel is a 28 –year old old street vendor, selling cigarettes and airtime in the Central Business District who has chosen a prime spot for her trade at the foot of a cluster of buildings that houses several 24-hour call centers and technology companies. His initial investment of P3,000 to become a Globe and Smart OTA airtime distributor has enabled him to make an average of P4,500 (USD 107) in daily sales, yielding about P650 (USD 15) in profits. His monthly income from this venture, P19,500 (USD 464), exceeds the take-home salaries of many 11 of the office employees who buy their airtime from him, and is over twice as much as he would make selling cigarettes alone. Similar to Arlene, Arnel spends 75% of his profits on essentials such as rent, clothing, food and education, and ploughs the rest of it back into his airtime business. Based on our very small sampling of OTA airtime retailers, we can identify some common characteristics pertaining to their airtime retailing venture indicative of the impact of such a venture on their day-to-day existence: o Having a storefront, whether formal (such as a sari-sari store or a beauty parlor) or informal (a cigarette stand outside a building or from one‟s desk at work), to give a retailer access to customers is a crucial element to successful OTA airtime retailing. In all four mini-cases, the retailer had an existing store or place of business or had access to areas of regular and high foot traffic, which gave them access to around 40 to 100 customers a day. o Given that a retailer had access to regular customers, income from OTA airtime retailing could at least double household income, showing the impact that this venture can have on low-income and BoP households. o Income from OTA airtime retailing can be used to cover a significant amount of household living expenses, hopefully increasing overall quality of life. In the cases of Ms. Rasonable and Mr. Dimaunahan, 75% of their profits, or about P15,000 (USD 360) a month, went to household-related expenses, education and personal expenditures. o It may not be easy to grow one‟s OTA airtime retailing business if a retailer does not have an additional source of income because profits that could have been ploughed back into the venture is spent on household expenses. In Mr. Tumalip‟s and Ms. Natividad‟s cases, they were able to afford to put 80% of their profits back as airtime inventory because they were merely augmenting household income – Mr. Tumalip‟s wife also sold airtime and Ms. Natividad owned a small beauty parlor. V. Impact Assessment and Analysis The product strategy surrounding both Globe AutoloadMAX and Smart Load places a significant emphasis on price performance and cost reduction through the streamlining of retail distribution channels. At the same time, the increased reliability and monitoring capabilities inherent in the product‟s electronic platform have increased the quality of airtime distribution to subscribers. This has resulted in a sustainable and profitable model that now accounts for about 60% of total airtime reload value handled by both Smart and Globe for all its prepaid subscribersxxxix. We have seen how profitable the OTA airtime distribution model has been for both Globe and Smart, as well as for their dealers. However, what does an additional household income of P671 or P941 or even P1,600 a month mean to a dealer living at the BoP? Given the constraints facing the team in terms of time and finances that prevent us from conducting any form of indepth surveys or house visits among BoP dealers, we will assess impact on three levels: o First, we assess the impact of the program according to its effect on household income by comparing the program‟s results with metrics used by the Philippine government to 12 measure poverty such as subsistence and poverty thresholds, emphasizing its effect on a retailer‟s ability to „move up the income ladder‟. o Second, we make an attempt to discuss the program‟s accessibility to the poor, both in rural and urban areas. o Finally, we analyze the program‟s sustainability as a social entrepreneurship venture in terms of its ability to develop entrepreneurial skills among BoP-level retailers. A. Philippine subsistence and poverty thresholds as a metric According to the Philippine government, the Subsistence Threshold, also known as the Food Poverty Line or the Food Threshold, refers to the cost of basic food requirements. Basic food requirements are defined by the Food and Nutrition Research Institute of the Philippines (FNRI) to satisfy 100 percent adequacy for the Recommended Dietary Allowances (RDA) for energy and protein (2000 kcal a day) and 80 percent adequacy for the RDA for vitamins, minerals and other nutrients, both based on 1989 RDA levelsxl. The Poverty Threshold, on the other hand, takes into account the basic requirements for both food and non-food needs, and thus is higher than the Subsistence Threshold. Basic nonfood requirements include clothing and footwear; housing (including fuel, light and water); maintenance and minor repairs; and rental of owner-occupied dwelling units; medical care; education; transportation and communication; non-durable furnishings; household operations; and personal care and effects. Excluded are alcoholic beverages, tobacco, recreation, durable furniture and equipment; and miscellaneous expenditures. The government also acknowledges the higher cost of living in the capital region of Metro Manila, and has computed separate subsistence and poverty thresholds. The 2006 annual subsistence income threshold for the Philippines for a household of five is P50,125 (USD 1,193) while the poverty income threshold is P75,285 (USD 1,793). The annual subsistence income threshold for a household of five living in Metro Manila is P59,035 (USD 1,405), while the poverty line is drawn at P102,830 (USD 2,448). The Philippines also has statistics based on the $1-a-day and $2-a-day per capital income model, which is commonly used by international and regional development banks. However, for the sake of simplicity, we will not include them in our written analysis. Exhibit 2 details the monthly and annual income thresholds for poverty, subsistence and average level households comprised of five people: 13 Exhibit 2 Philippine Poverty and Subsistence Thresholds, 2006 (USD) Monthly Yearly Per-Capita Incidence Subsistence Threshold for a Household of Five (Basic Food Requirements only) Poverty Threshold for a Household of Five (Basic Food- and NonFood Requirements) Subsistence Threshold for a Household of Five (in Metro Manila) Poverty Threshold for a Household of Five (in Metro Manila) Average National Househld Income $99 $1,193 15% $149 $1,793 33% $117 $1,406 1.20% $204 $2,448 7% $341 source: National Statistical Coordination Board Note: Exchange rate used: USD 1 = PHP 42 $4,095 No data available B. Economic impact analysis allows for gap comparisons Without further data detailing the distribution of retailing income across all of Smart‟s and Globe‟s OTA airtime retailers, and without data regarding pre-retailing income levels for the members of their distribution network, we cannot know precisely what impact this program has had on each and every dealer and sub-dealer. However, we can determine the economic effects this program would have by comparing them to income threshold metrics, analyzing how much the program can bridge the gap between thresholds, and by comparing incremental income as a percentage of the poverty threshold with the average income gap between the average income of a poor person in the Philippines with the poverty threshold. 1. Comparison with income thresholds shows benefits for the poorest households For a family earning at the P75,285 (USD 1,793) poverty threshold, annual Globe profits of P8,052 represents almost 11% of their yearly income. Subsistence-level households stand to increase income by 16%, while Filipino households earning at the national average would earn 4.7% more a year. For Metro Manila retailers at the subsistence level, this would increase annual income by almost 14%, while poverty-level households earn 8% more. A dealer of Smart Load stands to increase yearly income by an average of 15% for his or her household living at the poverty line, or 22.5% if the household is at the subsistence level. Households at the national average can earn almost 7% more on the average. Subsistence-level households within Metro Manila increase yearly income by 19%, while subsistence-level households increase income by 11%. The biggest winners, however, are the savvy entrepreneurs who maximize their selling efforts by offering both Globe and Smart airtime. Those at subsistence level can increase income by 38%, while those at the poverty level earn 25.5% more. Those earning at the national average add almost 19% to their income. Subsistence-level households augment their annual income by almost 33%, while poverty-level retailers living within the capital region earn over 11% more. 14 Exhibit 3 details the percentage impact of Globe, Smart and combined Globe and Smart profits on the different income levels. Exhibit 3 Impact Assessment of OTA Airtime Distribution Profits (USD) Monthly Yearly Increases Increases Subsistence-Level Poverty-Level Income by Income by Increases Increases SubsistenceIncreases Poverty- Average Level Income (for Level Income (for Household Metro Manila) by Metro Manila) by Income by Globe AMAX dealer profits Smart Load dealer profits Profits for a dealer for both Smart and Globe $16 $22 $192 $269 $457 16.1% 22.5% 38.3% 10.7% 15.0% 25.5% 13.6% 19.1% 32.5% 7.8% 11.0% 18.7% 4.7% 6.6% 11.2% $38 Note: Exchange rate used: USD 1 = PHP 42 2. Moving up the income ladder becomes possible What does this incremental income mean for retailers at subsistence, poverty and average income levels? Exhibit 4 illustrates how income levels at the different thresholds are enhanced by the incremental income generated by OTA airtime retailing for Globe, Smart or both. Because of the cost of conducting an in-depth impact study to determine the tangible impact of these numbers, these percentage increases have a very theoretical feel. However, by citing examples findings from our mini-case surveys, we can get a qualitative feel for what OTA airtime retailers spend for using their profits. Subsistence-level households increase their income by a range of 14% to 38%, depending on which prepaid airtime service they sell, and on whether the household is located within Metro Manila or not. Thus, thanks to OTA airtime retailing, households at this level are able to satisfy between 14% to 38% of their non-food expenses such as rent, clothing, footwear, fuel, light, water, education, transportation and communication. Because of the lack of data on subsistencelevel retailers, we are unable to make use of qualitative measures to get a better feel for what these percentages mean. The impact on households at the poverty threshold, however, can be measured both by the percentage increase of income attributable to OTA airtime retailing as well as by survey responses detailed in the mini-cases. Poverty-level income can increase by 8% to 26%, depending on the location (whether Metro Manila or not). This can contribute to greater spending for better-quality education, housing and even entrepreneurship efforts, which can increase household income further and create a virtuous cycle of sustainable income generation. In the case of Ms. Rasonable, she set aside 20% of her profits, about P4,200 (USD 100) a month, for her children‟s educational expenses. This money can be used to cover the cost of muchneeded school books and classroom supplies that the country‟s „free‟ public education system frequently fails to provide. For average-income households, the impact of OTA airtime dealers is smaller percentage-wise, between 5% to 11%. However, this incremental income can enable additional investment in entrepreneurship, since at this level, basic food- and non-food needs are already being met. In the case of Natividad Santos, she reinvests 75% of her OTA airtime retailing profits in airtime inventory, which means that she is constantly increasing her ability to sell more and more airtime. Once she reaches a point at which purchasing more inventory is no longer 15 feasible, perhaps she will invest in another business such as a sari-sari store, thereby increasing her income-generating capability even further. This upward movement in income generated by OTA airtime distribution may be insignificant when we consider that the 800,000-or-so OTA airtime retailers are barely a percent of the total population, but to the lives of the individual retailers, an increase of 16% to 38% in annual income can translate into better nutrition, better clothing, a drier place to live or education for their children, and a legitimate shot to move up from their humble origins at the BoP. Furthermore, based on our small sample of survey respondents, retailers can choose to reinvest in their retailing business, thereby increasing their working capital as well as their capacity to generate more revenues and profits. Although the rates at which they reinvest profits vary (from 20% to 75%), the fact that reinvestment is happening means that retailers are slowly growing their business, and may eventually reach a point at which they may have enough money saved up to start another business that can further augment their income. This grassroots-level growth in entrepreneurship has the potential to create further employment among the BoP and stimulate the growth of the Philippine middle-class in the long-term. Exhibit 4 Income Impact: Increase in Annual Income due to OTA Airtime Distribution Yearly Subsistence Threshold for a Household of Five (Basic Food Requirements only) Poverty Threshold for a Household of Five (Basic Food- and NonFood Requirements) Subsistence Threshold for a Household of Five (in Metro Manila) Poverty Threshold for a Household of Five (in Metro Manila) Average National Househld Income With Globe Revenues With Smart Revenues With Revenues from Both $1,193 $1,385 $1,462 $1,651 $1,793 $1,984 $2,061 $2,250 $1,406 $1,597 $1,597 $1,863 $2,448 $2,640 $2,717 $4,364 $2,905 $4,552 $4,095 $4,287 Note: Exchange rate used: USD 1 = PHP 42 C. Accessibility assessment is crucial to determining the long-term impact The product allows for excellent distribution at low cost. However, are there obstacles that make it difficult for the average resident of the BoP to actually engage in OTA airtime distribution, outside of the P500 minimum startup cost? Three factors contribute to this program‟s accessibility to potential BoP entrepreneurs: rural coverage, saturation of retailers in urban areas and mobile penetration among the lowest levels of the BoP. However, because Globe and Smart have not shared proprietary data regarding the geographic distribution of their dealer networks, we cannot determine the rural-urban coverage of OTA airtime distribution. Also, because we are dealing with prepaid accounts that do not require any pre-registration of subscribers, the carriers have no record of the home addresses of 16 prepaid customers and thus cannot say how dense mobile penetration is in urban and rural areas. Because of this, we also cannot guess as to the urban-rural distribution of OTA airtime retailers. Finally, Globe and Smart do not collect income data from their dealer networks, so there is no way to say if OTA airtime retailing was benefiting the lowest levels of the BoP at all, or if this venture is limited to higher-income BoP households. The assessment of accessibility is crucial to determining the long-term impact of any BoP venture, but given this lack of data, we can only assume that, because of the very low cost of starting up an OTA airtime venture, this opportunity is available to anyone at the BoP with the means to pay for start-up kits. D. Sustainability can be measured by entrepreneurial actions We have seen how OTA airtime distribution can increase household incomes by 16 to 38 percent, depending on where the household is along the different income thresholds. However, is this enterprise a sustainable one for the micro-entrepreneur? We look at this question from the following angles: Regular access to customers is crucial to long-term success in this venture. From the mini-cases, we see that having an existing storefront, such as a sari-sari store or a beauty parlor, makes it easy to sell airtime on top of existing offerings. In addition, having access to an informal storefront, such as one‟s work desk at the lobby of a building or a cigarette stand outside a busy office compound, also gives a retailer access to a steady stream of customers every day. However, how easy is it to get such access? While it is relatively easy to sell airtime from one‟s home, one will be limited by the amount of foot traffic that passes in front of the retailer‟s house. In addition, this retailer will face competition from the local sari-sari store, where airtime will surely be sold as well. The sari-sari store will definitely generate greater airtime revenues because of its regular stream of customers who go to the store for reasons other than airtime. The best bet for a retailer without a formal or informal storefront would be to sell airtime from home and rely on one‟s personal network to generate customer traffic. This is extremely likely in a country such as the Philippines, where people generally have dense personal networks. Risk of obsolescence is another possible risk that OTA airtime dealers may face in the long run. However, because of the benefits of prepaid and the expense required to switch to a future technology (i.e. videoconferencing), we do not foresee any risk that prepaid airtime will become obsolete, at least in the middle and lower income segments for the near future. Sales training and networking is another crucial element of sustainability in this business. Based on the retailers surveyed for this paper, successful airtime retailers either had access to high foot traffic or had an existing network of regular customers. This implies that these retailers knew enough to find and win a nice spot at the foot of a building in the central business district, or to convince their network to use their services to satisfy their airtime requirements. What we don‟t know about are those OTA airtime retailers who stopped selling airtime – those with inactive retailer SIMs. Why did they fail? We cannot know for sure, but perhaps not knowing how to build a base of customers was a crucial factor in their failure. Finally, to assess the sustainability of OTA airtime retailing, we have to look at how OTA airtime distribution enables productive spending – the kind of spending that enables a person to either start another business or to work without having to worry about having decent clothes to wear, nutritious food to eat and clean water to drink, or having a roof over one‟s head. As we saw from the mini-cases, incremental income from airtime retailing seems to enable the latter – consumptive spending that helps a person function well as a member of society by 17 providing for his or her basic needs. However, we do not have enough data – either from the carriers or from an acceptable sample of retailers – to determine if OTA airtime revenues help fund the former type of expenditure –productive spending, such as capital to start a business. At the very least it is safe to say that the incremental income from this venture can contribute to a better life for the households of its retailers. VI. Recommendations A. Regulations encouraging mobile banking penetration may boost access for BoP As the OTA distribution channel grows and reaches more individuals in the BoP, the Philippine government can take on a strong role in setting standards for an associated application, mobile banking, “m-banking,” that could ease the transition of BoP consumers into the formal economy. A regulatory approach on the part of the government could stimulate greater access to formal financial services to the BoP through the use of OTA technology. OTA distribution currently eases the burden of conducting credit checks and of establishing branch locations to service consumers. The popularity of remittance services via mobile text messaging in addition to the ability of OTA to serve as a payment mechanism for small goods and services leads to a great opportunity to service the “unbanked” BoP.xli B. Tracking retailer data can attract NGO support Tracking data regarding the OTA distributor network‟s revenues, demographics and transaction locations will offer both Globe and Smart a way to improve OTA market reach and demonstrate the social entrepreneurial business case. By gaining credibility among those in the development arena, Globe and Smart will gain support from NGOs who are focusing on empowering the BoP consumer. C. Training and establishing a retailer’s trade association will improve adoption Providing retailer training can encourage individuals to increase loyalty to a particular retailer or mobile carrier. Such sales and entrepreneurship skills training can increase an entrepreneur‟s ability to expand his or her business and develop sustainable ventures beyond just OTA airtime retailing. Membership in a trade association can serve as a badge of legitimacy or certification of the quality of service provided by that retailer. This brand building can help boost sales for individual retailers as consumers become more confident that they will receive quality service. D. Partnering with the government can lead to more services for the informal economy The Philippine government faces difficulty in bringing many individuals at the BoP level into the formal economy. One way to encourage such consumers to join the formal economy is to make it easier for such individuals to participate. In 2005, the Philippine Bureau of International Revenue (BIR) allowed business owners to pay their registration tax via a mobile phone transaction. xlii Such experiments show that governments have the ability to reach individuals in the informal economy. 18 Appendix Appendix A. The OTA Distribution Network Family Tree: Telecommunication Company Distributors Sub-Distributors Dealer Dealer Dealer Dealer Sub-Dealers Sub-Dealers Sub-Dealers Sub-Dealers Subscribers Appendix B. How to become a Globe OTA airtime dealer 1 2 Visit your nearest Globe Business Center Give your address and contact number to Globe’s Customer Representative so that they can tell you from which distributor or subdistributor you can purchase your AMAX Retailer SIM and airtime 3 The nearest distributor or subdistributor will call you to set a date and place for delivery. You can also purchase AMAX SIM packs and AMAX airtime from these individuals Source: Globe Telecom www.globe.com.ph Appendix C. Advertising posters, ads Sample Advertising for Globe‟s Peer-to-peer airtime distribution product, Share-a-Load Samples of Posters for Smart All-Text Promotion, available via OTA airtime transfer Samples of Plastic Prepaid Cards 20 Appendix D. Computation and assumptions for revenue calculations For Carriers Globe Net monthly prepaid ARPU (2007) % of airtime sales generated by OTA distribution Net monthly prepaid ARPU generated via OTA distribution Number of prepaid subscribers, 2007 Total net revenues per month generated by OTA distribution (Globe only) For Carriers Smart Net monthly prepaid ARPU (2007) % of airtime sales generated by OTA distribution Net monthly prepaid ARPU generated via OTA distribution Number of prepaid subscribers, 2007 Total net revenues per month generated by OTA distribution (Smart only) Php207 Php233 62% 61% Php128.34 19,600,000 Php142.13 30,000,000 Php2,515,464,000 Php4,263,900,000 For Individual OTA Airtime Retailers For Retailers (Globe) Monthly Yearly Total net revenues per month generated by OTA distribution (net of commissions and discounts to retailers) Php2,515,464,000 Php30,185,568,000 Margin paid to retailers 14% Total Gross Monthly Revenues generated by OTA distribution Php2,924,958,139.53 Php35,099,497,674 Total Net Monthly Revenues to Dealer network: Divide Total net revenues by 86%, then multiply by 14% Php409,494,139.53 Php4,913,929,674 Average Gross Revenues per retailer (total sales per retailer) Php4,795.01 Php57,540.16 Average Net Revenues to Carrer per OTA retailer Php4,123.71 Php49,484.54 Average Net Monthly Revenues to OTA retailer Php671.30 Php8,055.62 Number of dealers 610,000 For Retailers (Smart) Monthly Yearly Total net revenues per month generated by OTA distribution (net of commissions and discounts to retailers) Php4,263,900,000 Php51,166,800,000 Margin paid to retailers 15% Total Gross Monthly Revenues generated by OTA distribution Php5,016,352,941.18 Php60,196,235,294 Total Monthly Revenues to Dealer network: Divide Total net revenues by 85%, then multiply by 15% Php752,452,941.18 Php9,029,435,294 Average Gross Revenues per retailer (total sales per retailer) Php6,270.44 Php75,245.29 Average Net Revenues to Carrer per OTA retailer Average Net Monthly Revenues to OTA retailer Number of dealers Php5,329.88 Php63,958.50 Php940.57 800,000 Php11,286.79 21 Appendix E. Direct Telecom Device Ownership and GDP per capita in Asia O w n e r s h ip a n d G D P p e r c a p ita (US D , P P P ) 90% % a t b o tto m o f p y ra m id 81% 76% 64% 59% 9 ,0 0 0 8 ,0 0 0 7 ,0 0 0 6 ,0 0 0 5 ,0 0 0 38% 80% 70% 60% 50% 40% 30% 20% 10% 0% P akis tan O wn a m o b ile O wn no thing (b ut use so m e thing ) 23% 18% 9%11% 7% 2 22% 3% 60% 4 ,0 0 0 23% 14% 3 ,0 0 0 2 ,0 0 0 1 ,0 0 0 0 Ind ia S ri L anka P hilip p ine s T hailand O wn a fixe d p ho ne P e r C a p ita G D P P P P (US $ ) Source: Lorraine Carlos Salazar. “Cost Cutting Strategies at the Bottom of the Pyramid: The SMS Story, Missed Calls, and others” (paper presented at the LIRNEasia Media Workshop, Singapore, February 28, 2007). Appendix F. Perceived Impact of Direct Telecom Access Source: Ayesha Zainudeen et al. “Teleuse at the Bottom of the Pyramid: Findings from a Five-Country Study.” LIRNEasia. Nov 2007. Appendix G. Survey Methodology and Questions One of the case writers approached a personal contact in Makati City, Philippines to distribute a two-page survey to six airtime sellers within the central business district. Four retailers replied. The survey was designed purely to provide some qualitative insights into OTA airtime retailing activities, and not to be a quantitative basis for conclusions. The survey asked questions such as the retailer‟s average daily revenues and profits, the retailer‟s use of the profits from airtime selling, the retailer‟s non-airtime monthly income, as well as the date the retailer started selling airtime and the method by which the retailer found out about this opportunity. G D P p e r c a p ita , U S D (P P P ) 22 SELECTED BIBLIOGRAPHY [November 2007] “Mobile use at the Bottom of the Pyramid: Findings from a Five-Country Study.” Ayesha Zainudeen et al. [November 15, 2007] “A bank in every pocket? Mobile banking.” In The Economist print edition (US). [October 2007] “The sari-sari store: informal retailing in the Philippines.” In Journal of Small Business Management, edited by Chandra S. Mishra. [July 2006] “One ICT in the Philippines shows why a BOP model is just SMART.” In World Resources Institute’s NextBillion.net, by Derek Newberry. [2005] “The Impact of Telecoms on Economic Growth in Developing Countries.” Waverman et al. [January 31, 2005] “Philippine tax agency tries mobile commerce.” In Computerworld print edition, by Grace S. Clavecilla [September 2004] “What Works: Smart Communications – Expanding Networks, Expanding Profits.” In the website of the World Resources Institute Digital Dividend, by Sharon Smith. [2002] “Statistical Challenges on Poverty Reduction in the Philippines 2002.” in the National Statistical Coordination Board of the Philippines website, by Romulo A. Virola 23 ENDNOTES i Waverman et al. “The Impact of Telecoms on Economic Growth in Developing Countries.” 2005. Ayesha Zainudeen et al. “Mobile use at the Bottom of the Pyramid: Findings from a Five-Country Study.” Nov. 2007. (See Appendix) ii iii CIA World Fact Book National Statistics Coordination Board (www.nscb.gove.ph) (The Manila Times April 3, 2008, http://www.manilatimes.net/national/2008/apr/03/yehey/top_stories/20080403top2.html IFAD, www.ruralpovertyportal.org the pyramid‟, September 2007, iv v vi Inquirer, 1st „sari-sari‟ store chain targets „bottom of http://business.inquirer.net/money/breakingnews/view_article.php?article_id=88594 vii viii Journal of Small Business Management, October 1997, http://www.allbusiness.com/management-companies-enterprises/6504891.html Reuters, Philippine Long Distance Telephone Company, in www.reuters.com Full Description of PLDT under Philippine Telecommunication Services Stocks, at http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=PHI (last visited April 16, 2008) ix x Based on the 2007 Philippine Census which reported a population size of roughly 88.5 million Filipinos An industry term, „gray market‟ refers to a market where subscribers can purchase mobile phones from retailers other than the mobile service provider. xi xii Smart Communications Full Year 2007 Financial and Operating Results: Philippine Long Distance Telephone Company, Full Year 2007 Financial and Operating Results Presentation, at www.PLDT.com.ph Investor Relations, in http://www.pldt.com.ph/, last visited April 10, 2008 Globe Telecom, Annual Report 2004, in Globe Investor Relations at http://www1.globe.com.ph/img/documents/2004.pdf, last visited April 10, 2008 xiii xiv Ken Zita, Philippines Telecom Brief, Network Dynamics Associates, LLC at www.ndaventures.com, last visited April 15, 2008. Telecoms.com, 120 text messages per subscription per month in North America, October 9, 2007, in www.telecoms.com, last visited April 30, 2008. xv xvi The OTA distribution network is illustrated in Appendix A. A SIM card, or subscriber identity module, contains subscriber-specific information such as the user‟s mobile phone number. A distributor SIM card does not only this, but is also able to transact and track reload transfers made through the OTA airtime distribution platform. xvii xviii Ibid. xix The dealer application process as implemented by Globe is illustrated in Appendix B. Computerworld, The Computerworld Honors Program: Case Study of Globe Telecom AutoloadMAX, 2006, at www.1globe.com.ph, in http://www.cwhonors.org/case_studies/GlobeTelecomAutoLoadMax.pdf, last visited May 1, 2008. xx Sharon Smith, What Works: Smart Communications – Expanding Networks, Expanding Profits, published by the World Resources Institute Digital Dividend, September 2004 xxi 24 Globe Telecom, Annual Report 2007, in Globe Investor Relations at http://www1.globe.com.ph/img/documents/2007-GTIDefinitive_IS.pdf last visited April 10, 2008. xxii Derek Newberry, One ICT in the Philippines shows why a BOP model is just SMART, at World Resources Institute‟s NextBillion.net, July 21, 2006, in http://www.nextbillion.net/blogs/2006/07/21/one-ict-in-the-philippines-shows-why-a-bop-model-is-just-smartbusiness, last visited May 2, 2008. xxiii „Sari-Sari‟ means „of a wide variety‟ in Filipino. Sari-sari stores are small, usually home-based retail stores that sell convenience items such as canned goods, cooking oil, eggs, cigarettes, drinks and sometimes even rice. xxiv xxv 540,000 retailers common to both carriers + 260,000 claimed by Smart alone + 70,000 claimed by Globe alone. Subscriber Acquisition Costs (SAC) are computed by totaling marketing costs, commissions and handset/SIM subsidies for the segment within a specific period, then dividing this total by the gross incremental subscribers. xxvi To obtain an estimate of marketing and promotional expenses (including commission and subsidies), we simply multiply SAC by the number of new subscribers added in the period. There were 4.6 million new subscribers for Globe and 5.9 million for Smart in 2007 according to their annual reports. xxvii According to the Computerworld case study, Emerita Nario is a 52-year old single parent who relies on her mom-and-pop store in her residential subdivision to get by. She sells more than P1,500 worth of airtime per day. xxviii The Computerworld Honors Program, 2006, Case Study of Globe http://www.cwhonors.org/case_studies/GlobeTelecomAutoLoadMax.pdf, last visited May 2, 2008. xxix xxx AutoloadMAX, at Smart introduced a special unlimited text and call plan for its subscribers in 2005 which it called „25/8‟, which was a response to a competing product from Digitel‟s Sun Cellular brand called „24/7‟. Derek Newberry, One ICT in the Philippines shows why a BOP model is just SMART, at World Resources Institute‟s NextBillion.net, July 21, 2006, in http://www.nextbillion.net/blogs/2006/07/21/one-ict-in-the-philippines-shows-why-a-bop-model-is-just-smartbusiness, last visited May 2, 2008. xxxi Subscriber churn measures the percentage of a carrier‟s subscribers who switch over to competing networks. For 2007, the average monthly prepaid subscriber churn rates for Globe and Smart ranged from 3 to almost 6 percent, compared to 1 to 2 percent for their postpaid subscribers. xxxii xxxiii A prepaid sim card can retail between P25 – P50 (USD 0.55 to 1.08), inclusive of free airtime. SIM swapping promotions encourage prepaid subscribers of one network to surrender their SIM card to competitors to get a FREE prepaid SIM+airtime package from the competitor. xxxiv Globe Telecom, Annual Report 2007, in Globe Investor Relations at http://www1.globe.com.ph/img/documents/2007-GTIDefinitive_IS.pdf last visited April 10, 2008. xxxv Derek Newberry, One ICT in the Philippines shows why a BOP model is just SMART, at World Resources Institute‟s NextBillion.net, July 21, 2006, in http://www.nextbillion.net/blogs/2006/07/21/one-ict-in-the-philippines-shows-why-a-bop-model-is-just-smartbusiness, last visited May 2, 2008. xxxvi xxxvii Based on an interview with Josef Marcelo, formerly of Unilever Philippines Dr. Romulo A. Virola, ‘Collapsing’ Filipino Middle Class, in Inquirer.net Opinion Section Dec. 16, 2007, at http://opinion.inquirer.net/inquireropinion/talkofthetown/view_article.php?article_id=107131 last visited May 15, 2008. xxxviii xxxix Globe Annual Report, 2007 and Smart Annual Report, 2004 Romulo A. Virola, Statistical Challenges on Poverty Reduction in the Philippines 2002, in the National Statistical Coordination Board of the Philippines website, at siteresources.worldbank.org/INTPAME/Resources/Country-studies/WBI-rav-2002finalpaper, last visited May 8, 2008. xl 25 “A bank in every pocket? Mobile banking.” The Economist (US) 385.8555 (Nov 17, 2007): p18US. Expanded Academic ASAP. Gale. Northwestern University – CIC. 26 May 2008. xli Grace S. Clavecilla. “Philippine tax agency tries mobile commerce.” Computerworld 39.5 (Jan 31, 2005): 14(1). Expanded ASAP. Gale. Northwestern University – CIC. 26 May 2008. xlii 26