Strategies to Finance Handset Cost in Emerging Markets

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					                                                                                                                              CMO special: emerging markets
                                        Operators wanting to increase business in developing markets should recognise a number
                                        of key factors that can help to drive up penetration and usage among poor people, write
                                        Jean-Paul Evrard and Ronan Moaligou

                                        Driving mobile penetration and
                                        usage in developing markets
                                                           There is a lot of focus on the                    phones from different operators and offer services to
                                                           mobile telecommunications indus-                  passing consumers.
                                                           try about the “opportunities” for                   For more isolated areas, some operators use “village
                                                           serving low-income consumers in                   phone” concepts as originally pioneered by Grameen
                                                           developing markets.                               Telecom in Bangladesh, whereby micro-finance is
                                                             There are at least 2.7 billion                  provided to a franchisee who then offers shared-
                                                           consumers at the very base of the                 phone services to the local village community.
                                                           economic pyramid, with per cap-                     To capture the maximum market-share of this
                                                           ita incomes of less than $1,500. Of               segment it is important that telecom operators treat
                                                           those, more than a billion people —               these outlets as businesses and develop tailor-made
                                                           roughly one-sixth of the world’s pop-             offers for them.
                                                           ulation — have a per capita income of               We recently witnessed an operator in Africa increase
                                                           less than $1 a day, and very few have             revenues by almost $3 million over a three-month period
                                                           a mobile phone at present.                        by encouraging public-call owners to use only their net-
                                                             There is also a lot of talk about the           work instead of having a handset for each operator.
                                                           social and economic benefits that                   Clear communication, bonuses at the end of the
                                                           an increase in mobile penetration                 month linked to revenue, and good field execution
                                                           can bring to the poorest countries.               were the key success factors for achieving such out-
                                                           A recent study by London Busi-                    standing results.
                                                           ness School found that in a typical                 Commercial shared-use models remain important
Affordability is not the only barrier   developing country, a rise of 10 mobile phones per 100               in many markets, but our research reveals that as
to penetration and usage. Operators     people boosts GDP growth by 0.6 percentage points.                   entry-level handsets continue to decrease in price —
need to take into account factors         But the evolution of mobile penetration and usage by               currently less than $20 before taxes in many develop-
such as attitudes towards female        low-income consumers in the developing world is not a                ing markets — and innovations related to electronic
empowerment                             linear process, and there are a number of key variables              or “over-the-air” low-denomination recharge become
                                        for operators to understand when developing strategies               more pervasive, this market scenario will become
                                        drive penetration and usage among the poor.                          increasingly rare in all but the poorest demographic
                                                                                                             segments of developing countries.
                                        Start-up affordability
                                        The first of these variables is what we term start-up                2: Low start-up affordability and high recurring cost affordability
                                        affordability, which typically includes the cost of an               In this scenario, the costs of mobile handsets are still
                                        entry-level or second-hand mobile handset, and an                    beyond the means of very low income consumers, but
                                        initial prepaid SIM pack and all activation charges.                 recurring charges are not beyond the means of the poor.
                                          The second variable is what we call recurring                        This is typically achieved due to low per-minute
                                        affordability, which includes two key dimensions:                    costs driven by competition and/or innovative low-
                                        the cost per minute for mobile voice communication                   denomination recharge models that replicate the
                                        and the minimum prepaid recharge amount — either                     “sachet” pricing concepts used successfully by the fast
                                        electronic or voucher.                                               moving consumer goods industry. These recharges
                                          Taking these two key variables into consideration,                 can be delivered electronically or via vouchers, allow-
                                        our research has identified four distinct market types               ing consumers to recharge for the equivalent of $0.10
                                        and each of these market types requires specific strat-              or less in many developing markets.
                                        egies for operators:                                                   In a market scenario of this nature operators should
                                                                                                             encourage family phone ownership, or other models
                                        1: Low start-up affordability and low recurring cost affordability   in which a collective group of people pool their funds
                                        In this scenario, the costs of mobile handsets are still             to purchase a handset which is then owned and used
                                        beyond the means of very low income consumers, and                   by the group.
                                        high recurring costs also discourage ownership and                     Minutes of use can be quite high in this model as
                                        usage of mobile phones.                                              several individuals from the same family group will
                                          In this market scenario operators typically rely on                use a handset.
                                        variants of the public call outlet, as is the case with                Operators can support such practices by offering
                                        the almost pervasive availability of coin-operated                   multi-number SIM cards that allow different users to
                                        GSM pay phones in rural India or the “umbrella                       access their own SMS messages or voicemail. At the
                                        man” in Nigeria who typically has three or four                      same time, not all individuals will have a handset so u                                                                                               Global Telecoms Business: March/April 2009 51
CMO special: emerging markets
                                      the operator will also need to encourage and maintain                   Confidentiality and ease of use were the main factors
                                      public call outlets or other commercial — non-family                  for consumers to use their own handsets instead of
                                      — shared phone access.                                                turning to public call outlets for short outbound calls.
                                        This is very much the situation in the poorer                         The objective of the operator was to drive both
                                      states of rural India today, such as Bihar or Assam,                  subscriber penetration and usage of owned-phones,
                                      where mobile handset ownership is still expensive for                 and this was largely achieved.
                                      most individuals, but collective ownership by even
                                      the poorest households is growing rapidly. In these                   4: High start-up affordability and high recurring cost affordability
                                      markets there is still strong demand for public call                  In this market scenario mobile handset ownership
                                      outlets due to the fact that not every individual has                 and usage is growing rapidly, driven by widespread
                                      easy access to a phone at all times of the day.                       availability of entry-level handsets, and low recurring
                                        For example, our research reveals high public call out-             costs typically driven by competition.
                                      let usage by rural women in India in the evenings, even                 The scenario describes many middle-income states
                                      by women from households that own a mobile phone.                     of rural India, and it is no surprise that the Indian
                                        Why this pattern? Because in the evenings women                     market is now growing at a rate of approximately
                                      want to call family members or friends, but their own                 eight million new subscribers a month.
                                      handset is with their husband who might be with the                     In this market scenario it is critical for opera-
“Our research in                      men or travelling to another village for work.                        tors to develop effective route-to-market approaches
 parts of India,                      3: High start-up affordability and low recurring cost affordability
                                                                                                            that ensure the widespread availability of low-cost
                                                                                                            handsets and low-denomination recharges — either
 Nigeria and                          In this scenario, low-cost handsets are becoming availa-              electronic or voucher — and to make sure that the
                                      ble to even the poorest families, but per-minute charges              increasing affordability of mobile telecommunica-
 Pakistan has                         and/or minimum recharge amounts are still high.                       tions is clearly communicated to consumers who
                                         This is a typical scenario for developing markets that             might still have perceptions of high prices.
 revealed that it                     have limited competition between operators, such as
                                      many countries in Africa and central and South Amer-                  Barriers to penetration
 is social rather                     ica, resulting in high prices and/or a lack of innovation             Operators should also recognise that even in the pres-
 than economic                        around low-denomination recharge concepts.
                                         In this market scenario, mobile handset ownership
                                                                                                            ence of growing affordability, some other barriers to
                                                                                                            penetration might still remain.
 barriers that                        might well reach very high levels, but the usage of mobile              Our research in parts of India, Nigeria and Pakistan
                                      phones by the poor is constrained by high recurring                   has revealed that it is social rather than economic bar-
 are now slowing                      costs. Furthermore, because low-denomination recharge                 riers that are now slowing wider adoption of mobile
                                      is not readily available, or calling from a public call outlet        handsets, especially by women.
 wider adoption of                    or other commercially shared phone is cheaper than                      Our research has revealed that there are real oppor-
 mobile handsets,                     using an owned mobile phone, low-income consumers
                                      still use a pay-phone for many of their outgoing calls.
                                                                                                            tunities for mobile network operators to serve the
                                                                                                            poor in the world’s developing markets. But opera-
 especially by                           We have observed such dual-usage practices in
                                      markets such as Nigeria and the Democratic Repub-
                                                                                                            tors need to understand the level of maturity of the
                                                                                                            local market, and the reality of start-up and recurring
 women.”                              lic of Congo, and the slums and poorer regions of the                 affordability of mobile telecommunications for differ-
                                      Philippines, Mexico and Brazil.                                       ent segments of society.
                                         In Kinshasa in the DR Congo more than 90% of                         Based on the market scenarios of different coun-
                                      handset owners still continue to use public call outlets              tries, and even the affordability of mobile telecom-
                                      to make calls.                                                        munications for different demographic segments
                                         In such markets, it is not unusual to see a consumer               within a country, operators need to adapt their route
                                      approach a public call outlet with their own mobile                   to market approaches accordingly.
                                      phone in hand, search a number from their mobile                        They should also recognise that affordability is a
                                      phone’s address book, and then dial the number on                     dynamic process, and that a route to market approach
                                      the payphone.                                                         that might have been appropriate at a certain stage
                                         In this scenario, operators have to carefully plan                 of a market’s development will need to be adapted as
                                      and balance tariff structures and route to market                     penetration and usage practices of consumers con-
                                      approaches or risk expensive cannibalisation of sub-                  tinue to evolve.
                                      scriber revenues by encouraging the use of often                        Witness the decline of the village phone model in
                                      lower-margin public call outlet usage — which we                      Bangladesh as lower handset costs and price competi-
                                      have seen being as high as 40-60% of total minutes                    tion reduced demand for shared-phone use, or the
                                      in some markets in Sub-Saharan Africa.                                continued discounting of public call outlet tariffs in
                                         Product innovation is the key for operators to avoid               the DR Congo that eventually contributed to the can-
                                      high levels of cannibalization by public call outlet ven-             nibalisation of revenues from owned phones.
                                      dors. A good example is an operator in Africa that devel-               Finally, it should also be recognised that affordabil-
                                      oped a specific “sachet” product to respond to consumer               ity will not be the only barrier to pervasive penetra-
                                      behaviour in using public call outlets for very short calls,          tion and usage of mobile telephony in the long-term.
                                      instead of paying for a higher denomination recharge.                   Socio-cultural factors such as attitudes towards
                                         By offering low-denomination recharges of 30-sec-                  female empowerment will also need to be recognised
                                      ond or one-minute calls at the same price of public                   by operators in their marketing and communication
Jean-Paul Evrard and Ronan Moaligou   call outlets, the operator encouraged consumers to                    strategies. This will be the next frontier of driving
are with the Globalpraxis Group       make these shorter calls on their own handset.                        mobile adoption in the developing world. n

52 Global Telecoms Business: March/April 2009                                                                                  

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