A special report on telecoms in emerging markets

A special report on telecoms in emerging markets
Mobile marvels
Sep 24th 2009
From The Economist print edition

Poor countries have already benefited hugely from mobile phones. Now get

ready for a second round, says Tom Standage (interviewed here)

Eyevine

BOUNCING a great-grandchild on her knee in her house in Bukaweka, a

village in eastern Uganda, Mary Wokhwale gestures at her surroundings. “My

mobile phone has been my livelihood,” she says. In 2003 Ms Wokhwale was

one of the first 15 women in Uganda to become “village phone” operators.

Thanks to a microfinance loan, she was able to buy a basic handset and a

roof-mounted antenna to ensure a reliable signal. She went into business

selling phone calls to other villagers, making a small profit on each

call. This enabled her to pay back her loan and buy a second phone. The

income from selling phone calls subsequently enabled her to set up a

business selling beer, open a music and video shop and help members of her

family pay their children’s school fees. Business has dropped off somewhat

in the past couple of years as mobile phones have fallen in price and many

people in her village can afford their own. But Ms Wokhwale’s life has

been transformed.


Ms Wokhwale prospered because being able to make and receive phone calls

is so important to people that even the very poor are prepared to pay for

it. In places with bad roads, unreliable postal services, few trains and

parlous landlines, mobile phones can substitute for travel, allow quicker

and easier access to information on prices, enable traders to reach wider

markets, boost entrepreneurship and generally make it easier to do

business. A study by the World Resources Institute found that as

developing-world incomes rise, household spending on mobile phones grows

faster than spending on energy, water or indeed anything else.

The reason why mobile phones are so valuable to people in the poor world

is that they are providing access to telecommunications for the very first

time, rather than just being portable adjuncts to existing fixed-line

phones, as in the rich world. “For you it was incremental—here it’s

revolutionary,” says Isaac Nsereko of MTN, Africa’s biggest operator.

According to a recent study, adding an extra ten mobile phones per 100

people in a typical developing country boosts growth in GDP per person by

0.8 percentage points.


In 2000 the developing countries accounted for around one-quarter of the

world’s 700m or so mobile phones. By the beginning of 2009 their share had

grown to three-quarters of a total which by then had risen to over 4

billion (see chart 1). That does not mean that 4 billion people now have

mobile phones, because many in both rich and poor countries own several

handsets or subscriber-identity module (SIM) cards, the tiny chips that

identify a subscriber to a mobile network. Carl-Henric Svanberg, the chief

executive of Ericsson, the world’s largest maker of telecoms-network gear,

reckons that the actual number of people with mobile phones is closer to

3.6 billion.

But exact numbers are hard to come by, not least because of the continued

rapid growth in the global number of subscribers. In the year to March

2009 an additional 128m signed up in India, 89m in China and 96m across

Africa, according to TeleGeography, a telecoms consultancy. Numbers in

Indonesia, Vietnam, Brazil and Russia also grew rapidly (see chart 2).

China is the world’s largest market for mobile telephony, with over 700m

subscribers. India is adding the biggest number each month: 15.6m in March

alone. And Africa is the region with the fastest rate of subscriber

growth. With developed markets now saturated, the developing world’s rural

poor will account for most of the growth in the coming years. The total

will reach 6 billion by 2013, according to the GSMA, an industry group,

with half of these new users in China and India alone.


All this is transforming the telecoms industry. Within just a few years

its centre of gravity has shifted from the developed to the developing

countries. The biggest changes are taking place in the poorest parts of

the world, such as rural Uganda.

Not the usual suspects
Three trends in particular are reshaping the telecoms landscape. First,

the spread of mobile phones in developing countries has been accompanied

by the rise of home-grown mobile operators in China, India, Africa and the

Middle East that rival or exceed the industry’s Western incumbents in

size. These operators have developed new business models and industry

structures that enable them to make a profit serving low-spending

customers that Western firms would not bother with. Indian operators have

led the way, and some aspects of the “Indian model” are now being adopted

by operators in other countries, both rich and poor. This model provides

new opportunities, especially for Indian operators. The spread of the

Indian model could help bring mobile phones within reach of an even larger

number of the world’s poor.

The second trend is the emergence of China’s two leading telecoms-

equipment-makers, Huawei and ZTE, which have entered the global stage in

the past five years. Initially dismissed as low-cost, low-quality

producers, they now have a growing reputation for quality and innovation,

prompting a shake-out among the incumbent Western equipment-makers. The

most recent victim was Nortel, once Canada’s most valuable company, which

went bust in January. Having long concentrated on emerging markets, Huawei

and ZTE are well placed to expand their market share as subscriber numbers

continue to grow and networks are upgraded from second-generation (2G) to

third-generation (3G) technology, notably in China and India.

The third trend is the development of new phone-based services, beyond

voice calls and basic text messages, which are now becoming feasible

because mobile phones are relatively widely available. In rich countries

most such services have revolved around trivial things like music

downloads and mobile gaming. In poor countries data services such as

mobile-phone-based agricultural advice, health care and money transfer

could provide enormous economic and developmental benefits. Beyond that,

mobile networks and low-cost computing devices are poised to offer the

benefits of full internet access to people in the developing world in the

coming years.

This special report will examine each of these three trends in turn. Each

one is significant in itself but also has consequences for rich as well as

poor countries. Together they could start a second wave of mobile-led

economic development as powerful as that prompted by the original launch

of mobile phones. Their spread in poor countries is not just reshaping the

industry—it is changing the world.
Eureka moments
Sep 24th 2009
From The Economist print edition

How a luxury item became a tool of global development

Reuters

What, no network?
HOW did a device that just a few years ago was regarded as a yuppie

plaything become, in the words of Jeffrey Sachs, a development guru at

Columbia University’s Earth Institute, “the single most transformative

tool for development”? A number of things came together to make mobile

phones more accessible to poorer people and trigger the rapid growth of

the past few years. The spread of mobile phones in the developed world,

together with the emergence of two main technology standards, led to

economies of scale in both network equipment and handsets. Lower prices

brought mobile phones within reach of the wealthiest people in the

developing world. That allowed the first mobile networks in developing

countries to be set up, though prices were still high.

The next big step was the introduction of prepaid billing systems, which

allow people to load up their phones with calling credit and then talk

until the credit runs out. When mobile phones first came in, subscribers

everywhere talked first and paid later (a model known as postpaid), so

they had to be creditworthy. Prepaid billing saves operators sending out

bills and chasing up debts. It helped the spread of mobile phones among

teenagers in Europe in the late 1990s because it offered parents a way of

preventing their children from running up huge bills. It also dramatically

expanded the market for mobile phones in poor countries.


Themba Khumalo of MTN recalls the firm’s launch of mobile services in

South Africa in 1994, using the postpaid model. “Mobiles were initially

perceived as a niche product, for business people, unaffordable by

ordinary people,” he says, so this seemed the obvious method to adopt. But

the launch of prepaid services “changed the landscape”, he says, by

reducing the cost of owning a mobile phone. Top-up vouchers, in

denominations as small as $0.50, are now routinely sold by agents in small

shops and on street corners across the developing world. “Mobile phones

could not work in Africa without prepaid because it’s a cash society,”

says Mo Ibrahim, the Sudanese businessman who established Celtel, a pan-

African mobile group now owned by Zain, based in Kuwait. The prepaid model

requires systems to accredit and support thousands of resellers, as well

as handling the actual top-ups, says José María Álvarez-Pallete, general

manager for Latin America at Telefónica, a Spanish telecoms giant that

transferred its prepaid expertise from Spain to its Latin American

subsidiaries.

From luxury to commodity
Once the switch to prepaid was made, the biggest barrier to broader mobile

access became the cost of a handset, which was still an expensive item in

the late 1990s. But the price of a basic model steadily fell, from around

$250 in 1997 to around $20 today. As handset-makers became aware of the

scale of the opportunity in the developing world, they turned their minds

to producing low-cost models. And for those who still could not afford

their own handsets, help was at hand in the form of microfinance.

Popularised by Grameen Bank in Bangladesh, this involves making small

loans, mainly to the rural poor. In a typical example, a woman borrows

money to buy a cow and then repays the loan from the profits she makes on

selling its milk. That way she gets an income, and her neighbours are able

to buy milk.

Iqbal Quadir, a Bangladeshi who moved to America and became an investment

banker, looked at this model and had an epiphany: “A cellphone could be a

cow.” In 1997 the resulting effort to combine microfinance and mobile

phones brought forth a Bangladeshi mobile operator called GrameenPhone, a

joint venture between Grameen Bank and Telenor, a Norwegian telecoms firm.

GrameenPhone pioneered the idea of the “telephone lady”, extending loans

to women in rural villages to enable them to buy a mobile handset, an

antenna and a large battery so they could sell calls to other villagers.

Taking a small cut on each call, they were able to pay off the loan and

thereafter to use the proceeds to pay for health care and education for

their families and to develop other businesses. This “village phone” model

quickly extended mobile coverage to thousands of villages in Bangladesh.

Although telephone ladies now make up only a small proportion of

GrameenPhone’s customers—around 220,000 out of a total of 8.5m—they

account for as much as one-third of all calls because their phones are

used by many people. The Grameen Foundation, a not-for-profit organisation

set up by Muhammad Yunus, the founder of Grameen Bank, has since

replicated the village-phone model in Cameroon, Indonesia, Rwanda and

Uganda, and and it has been widely copied elsewhere. In Afghanistan

telephone ladies take an average of eight months to pay off the microloan

required to buy their equipment and then earn $50-100 a month, says Karim

Khoja, chief executive of Roshan, the country’s largest operator.

The village-phone model is a good way to introduce people to the

advantages of telecommunications and provide access to start with, but it

may soon have had its day. With prices continuing to fall, the vast

majority of mobile users in the developing world now have their own

handsets. Mr Khumalo says MTN recently placed an order with a Chinese

manufacturer to supply handsets at $13 each. Still, demand for shared

phones has not dried up completely. Calling from a village phone costs

less than buying a top-up, so even people with their own handsets may

sometimes make calls from shared phones if they have run out of credit,

notes Eric Cantor of the Grameen Foundation’s Uganda office. And Mr

Khumalo points out that some of MTN’s village-phone operators now make

more money selling airtime than phone calls.

Prepaid billing and affordable handsets on their own are not enough to

ensure a rapid adoption of mobile phones, however. Another vital factor

has been the liberalisation of telecoms markets and the issuing of

licences to rival operators. As those operators compete for customers and

try to recoup the cost of building their networks, calling charges fall

and mobile adoption increases.


There is clear evidence that liberalisation drives adoption (see chart 3).

The most vivid illustration comes from a comparison between two African

countries: Ethiopia and Somalia. Ethiopia is one of the few remaining

countries where mobile telecoms remains a government-run monopoly. By the

end of 2008 the country had a “mobile teledensity” of 3.5% (ie, 3.5 mobile

phones per 100 people), compared with 40% for Africa as a whole. By

contrast, in war-torn Somalia, a similarly poor country with no

functioning government and a completely unregulated telecoms market, more

than a dozen operators have sprung up to meet demand, and mobile

teledensity is 7.9%. Even warlords want their phones to work, notes Mr

Ibrahim, so they leave networks alone: Celtel launched its networks in

Sierra Leone and the Democratic Republic of Congo during civil wars, and

both prospered.

Calling for growth
Does the spread of mobile phones promote economic development? At first

the evidence was anecdotal. There were stories about farmers and fishermen

phoning around to see where they would get the best price for their

produce, for example. Mobile phones also unlock entrepreneurship: porters,

carpenters and other self-employed workers can advertise their services on

lamp-posts and noticeboards and ask potential clients to get in touch with

them. Mr Quadir likes to tell the story of a barber in Bangladesh who

could not afford the rent for a shop, so he bought a mobile phone and a

motorbike instead, scheduling appointments by phone and going to his

clients’ homes. This was more convenient for them and he was able to serve

a larger area and charge higher fees.

Globally such micro-entrepreneurs account for 50-60% of all businesses,

and in Africa nearly 90%, says Jussi Impio, the head of Nokia’s African

research arm, based in Nairobi. Mobile phones make micro-entrepreneurs

vastly more productive: a plumber no longer has to return to his shop to

pick up messages from clients, for example. Mr Impio says he recently met

an entrepreneur with a roadside kiosk who sold underwear and ice cream,

“an interesting combination”. He had conducted a detailed study of his

company’s fortunes and found that his income had increased by 70% in the

six months after he started using a mobile phone in 2006, because basic

activities such as stock handling and negotiating prices with suppliers

become much more efficient with a mobile phone.

It is also clear that mobile phones create new jobs, stimulate investment

and provide tax revenues for governments. Roshan is Afghanistan’s largest

private company, largest investor and largest taxpayer, and with its

network of 25,000 agents who sell top-up vouchers it is one of the

country’s largest indirect employers. Roshan’s success in Afghanistan

attracted MTN and Etisalat, two big foreign operators, who provided

further investment and created more jobs. By generating taxes, creating

jobs that are not related to opium production and promoting prosperity,

says Mr Khoja, the telecoms industry provides “a bubble of hope for

Afghanistan”.

In the past few years the anecdotal evidence has been backed up by studies

that measure the economic impact of mobile phones directly. One example is

the analysis of fish prices on the coast of Kerala, in southern India,

carried out in 2007 by Robert Jensen, an economist at Harvard University.

By examining historical price data as mobile-phone coverage was extended

down the coast between 1997 and 2001, Mr Jensen was able to show that

access to mobile phones made markets much more efficient. Fishermen could

call several markets while still at sea before deciding where to sell

instead of taking their catch back to their home market and throwing it

away if there were no buyers for it. This eliminated waste, dramatically

reduced the variation in prices along the coast, brought down consumer

prices by 4% and increased fishermen’s profits by 8%. Mobile phones paid

for themselves within two months. Mr Jensen concluded that “information

makes markets work, and markets improve welfare.”

Similarly, Jenny Aker of the University of California at Berkeley carried

out an analysis of grain markets in Niger, published in 2008, to see how

the phasing-in of mobile-phone coverage between 2001 and 2006 affected

grain prices. She found that it reduced price variations between one

market and another by a minimum of 6.4%, and often more in remote and

hard-to-reach markets. As a result, prices for consumers were lower and

profits for traders higher. During a spike in food prices in 2005 grain

was 4.5% cheaper in markets with mobile coverage.

Such microeconomic studies provide support for macroeconomic analyses that

suggest a link between mobile phones and economic growth. In a much-cited

study in 2005, for example, Leonard Waverman of the London Business School

found that an extra ten mobile phones per 100 people in a typical

developing country added 0.6 percentage points of growth in GDP per

person. Critics say that it is difficult to tell whether mobile phones are

promoting growth, or whether growth promotes the spread of mobile phones

as more people become able to afford them. But detailed analyses of micro

market data, such as Mr Jensen’s study, demonstrate that phones really do

make people better off. As Grameen Bank’s Mr Yunus, who won the 2006 Nobel

peace prize, once put it: “When you get a mobile phone it is almost like

having a card to get out of poverty in a couple of years.”


The most recent macroeconomic study, carried out by Christine Zhen-Wei

Qiang, an economist at the World Bank, examined the effect of fixed-line

and mobile phones, as well as dial-up and broadband internet access, on

GDP per person for 120 developed and developing countries. She found that

an increase of ten percentage points in mobile-phone adoption in a

developing country increased growth in GDP per person by 0.8 percentage

points, consistent with Mr Waverman’s earlier result. According to Ms

Zhen-Wei Qiang’s research, mobile phones were more effective at promoting

growth than fixed-line phones, but less effective than internet access or

broadband (see chart 4). Since mobile phones have the greatest

penetration, however, “the aggregate impact is highest for mobile,” she

says. She also found that all telecoms technologies promoted growth more

effectively in developing countries than in developed ones. This is

because telecoms services help make markets more efficient, reduce

transaction costs and increase productivity—all areas in which developing

countries have further to go than developed ones.

Wireless freedom
But the benefits of mobile phones are not just economic; there are

political and social advantages too. FrontlineSMS, a system that allows

groups to communicate via text messages, is being used to report human-

rights violations and co-ordinate aid and conservation projects, among

many other things. Ushahidi (Swahili for “testimony”), a website set up in

response to the post-election violence in Kenya in 2008, allows mobile

phones to be used for crisis and disaster management. In India’s election

this year voters were able to use their handsets to call up information

about candidates, such as their educational background and any criminal

charges they might be facing.

Mobile phones have been used for election monitoring in countries

including Nigeria, Kenya and Sierra Leone. Reporting vote totals by phone

from polling stations to local radio stations makes it harder to fiddle

the results later. And text messaging has been used to co-ordinate

political protests in many countries. “Mobile phones play a really

wonderful role in enabling civil society,” says Mr Ibrahim, who has set up

a foundation to improve transparency and governance in Africa. “As well as

empowering people economically and socially, they are a wonderful

political tool.”

Mr Impio cites the popularity of call-in radio shows in Kenya as another

example of how mobile phones can make politics more transparent. “People

have phones, and when politics is being discussed they can call

anonymously and say things journalists cannot discuss,” he says.

“Newspapers have started to quote them, and journalists say it has given

them more freedom to discuss corruption.”

Mobile phones can also be used to root out corruption in more direct ways.

For example, Zubair Bhatti, a Pakistani bureaucrat, asked all clerks in

the Jhang district who handled land transfers to submit a daily list of

transactions, giving the amount paid and the mobile-phone numbers of the

buyer and the seller. He explained that he would be calling buyers and

sellers at random to find out whether they had been asked to pay any extra

bribes or commissions. When charges were subsequently brought against a

clerk who had asked for a bribe, the others realised that Mr Bhatti meant

business, and buyers and sellers reported a sudden improvement in service.

Mr Bhatti extended the scheme to other areas, such as cracking down on

vets who demanded bribes from farmers, and has proposed that the Jhang

model, as it is now known, be adopted in other districts. “It could easily

be institutionalised with a call centre,” he says. “It could have big

vote-getting influence.”

Again, these are just a few anecdotal examples, but they illustrate the

myriad unseen ways in which mobile phones are improving people’s lives

across the world, and in the developing world in particular. New data

services that provide agricultural advice and price information, improve

the provision of health care and allow quick and easy money transfers hold

out the promise of extending the benefits of mobile phones still further.

Ericsson’s Mr Svanberg draws an analogy with the internet: only when it

had been widely adopted in the rich world were websites such as Facebook

and YouTube able to take off. Similarly, he says, once poor countries have

established comprehensive mobile coverage, and a reasonable proportion of

the population owns a handset, they have a platform from which new

services, such as farming advice and mobile money, can be launched. This

second wave of mobile-driven benefits, however, will reach its full

potential only if access can be extended even further. That, in turn, will

require mobile operators in developing countries to find new ways to cut

the cost of ownership even more.

The mother of invention
Sep 24th 2009
From The Economist print edition

Network operators in the poor world are cutting costs and increasing

access in innovative ways

Alamy

Dialling low-cost innovation
PROVIDING mobile services in a developing country is very different from

doing the same thing in the developed world. For a start, there may not be

a reliable electrical grid, or indeed any grid at all, to power the

network’s base stations, which may therefore need to run on diesel for

some or all of the time. That in turn means they must be regularly

resupplied with fuel, which can be tricky in remote areas. Then there is

the challenge of running the network profitably. In Europe mobile

subscribers typically spend about $36 a month, a figure known in the

industry as the average revenue per user (ARPU). In America that figure is

$51 and in Japan $57. But in China it is only around $10, in India less

than $7 (see table 5) and in some African countries even lower. As mobile

phones get cheaper and more poor people can afford them, ARPUs across the

developing world are falling.


Operators in poor countries have responded by finding new ways to reduce

the cost of operating mobile networks and serving customers. The country

that has gone furthest down this road is India, so the result is sometimes

known as the “Indian model”, even though some of its features originated

elsewhere, and some low-cost innovations developed elsewhere have not

caught on in India. Despite an ARPU of only $6.50 and call charges of

$0.02 per minute, Indian operators have operating margins of around 40%,

comparable with leading Western operators, according to a study by

Capgemini, a consultancy. “On low-cost, innovative models, this is where

the centre of gravity is,” says Prashant Gokarn, head of strategy at

Reliance Communications, India’s second-biggest operator. Given India’s

size, its combination of poverty and rapid growth and its reputation as a

centre of technology and outsourcing, it is hardly surprising that it has

emerged as the crucible of business-model innovation.


Indian model
Outsourcing is at the heart of the Indian model, which was pioneered and

is now embodied by Bharti Airtel, India’s biggest mobile operator. All of

Bharti’s information-technology (IT) operations are outsourced to IBM; the

running of its mobile network is handled by Ericsson and Nokia Siemens

Networks (NSN); and customer care is outsourced to IBM and a group of

Indian firms. This passes much of the risk of coping with a rapidly

growing subscriber base to other parties and leaves Bharti to concentrate

on marketing and strategy. Unusually, it is not just the operation of

Bharti’s network that is outsourced but the construction as well, under a

scheme known as “managed capacity” that is now used by several Indian

operators.

When moving into a new area, Bharti requests a certain amount of calling

capacity and pays for it three months later at an agreed price per unit of

capacity, says Kunal Bajaj of BDA, a telecoms consultancy. That leaves it

up to the vendor to handle the business of designing networks, putting up

base stations and so on, giving it an incentive to build the network as

frugally as possible. Margaret Rice-Jones of Aircom, a network-planning

consultancy, says this cut costs by ensuring that operators do not pay for

more capacity than they really need. “The old model was a bit like letting

your supermarket plan your shopping list,” she says. The vendors, for

their part, gain economies of scale because they build, run and support

networks for several Indian operators. Ericsson’s Mr Svanberg says his

firm can run a network with 25% fewer staff than an operator would need.

Bharti’s operating expenses are around 15% lower than they would be if it

were to build and run its network itself, and its IT costs are around 30%

lower, according to Capgemini.

Arguably, the Indian model should be called the Ericsson model, says Mr

Svanberg, because his firm developed it and first deployed it on a small

scale in New Zealand. But, says Mr Bajaj, “Bharti decided to do its entire

network like this, and to experiment at that scale is totally different.”

There were growing pains to start with as Bharti and its outsourced

suppliers searched for the right balance of cost- and risk-sharing.

Expanding into rural areas is especially tricky because the capacity

needed is initially very low, so Bharti typically agrees to buy a minimum

amount.

Equipment vendors make most of their profits when capacity is increased.

“You make the land grab in the early phases, and what you’re securing is

margins and revenues for the future,” says Ms Rice-Jones. The outsourced-

network model is now gaining popularity with other operators in India.

Even if they do not go as far as Bharti, they are more likely than

operators elsewhere to outsource network design, tuning and management,

says Mr Svanberg.

A second plank of the Indian model is infrastructure-sharing, in which

several operators share the metal towers on which network antennae are

mounted and which house their associated equipment, generators and so

forth. In 2007 three Indian operators, Bharti, Vodafone Essar and Idea

Cellular, pooled 100,000 of their towers in a single company, Indus

Towers. Not all the operators use all the towers (the average is about 1.5

operators per tower), but the arrangement saves the three companies having

to find new sites and build their own towers. Indus Towers will also lease

tower capacity to other operators.

Similarly, Reliance Communications has spun off its towers into a separate

unit that will offer tower capacity to other operators. This turns an

operator’s assets into a source of new revenue, says Mr Gokarn, and allows

the mobile operator to concentrate on serving customers. Tower-sharing

happens in other countries too, including Britain and America, says Greg

Jacobsen of Capgemini; and some countries, including China and Bangladesh,

have made sharing compulsory. What is unusual about India is the extent of

voluntary, market-led sharing as a way to reduce costs.

Other components of the Indian model include “lifetime” prepaid schemes,

in which customers pay a one-off fee and can then receive incoming calls

indefinitely, even if they do not make outgoing calls; widespread use of

paperless top-ups, to reduce the costs of distributing top-up vouchers;

and automatically turning off some equipment at night, when traffic

volumes fall, to reduce energy usage.

The search for new cost savings continues. Reliance is experimenting with

a “micro-call-centre” model, in which large call centres in urban areas

are replaced by a smaller number of centres in more rural areas. This

means agents can be paid less and are more likely to be able to answer

queries. Turnover is high, so the trick, says Mr Gokarn, is to reduce the

cost of training new agents. Indian operators are also keen adopters of

“green” base-station technologies, such as air cooling, solar and wind

power, and hybrid diesel-electric generators, which reduce energy

consumption and hence operating costs. “Green technology has become a hot

topic in India because it’s cheaper,” says Mr Bajaj.

Dynamic Africa
African operators, which face many of the same difficulties as those in

India, have devised some cost-lowering innovations of their own, such as

dynamic tariffing, pioneered by MTN. This involves adjusting the cost of

calls every hour, in each network cell, depending on the level of usage.

Customers can check the discount they are getting on their handsets. At

4am it can be as high as 99%. This generates calls when the network would

otherwise be little used, says Themba Khumalo of MTN Uganda. In addition

to the peak hour from 8am, he says, there is now a new peak hour from 1am

as people take advantage of cheaper calls. Customers in developing

countries are far more price-sensitive than people in the rich world,

notes Stephan Beckert of TeleGeography, so they are prepared to stay up

late to save money. Vodacom has introduced a similar scheme. In Tanzania,

says Ms Rice-Jones, it found that call volumes increase by 20-30% in areas

where dynamic tariffing is switched on.

Another African innovation is “borderless roaming”, introduced by Celtel

(now Zain) in late 2006. This allows customers in Kenya, Tanzania and

Uganda to move between these countries without paying roaming charges to

make or receive calls. They can also top up their calling credit in any of

these countries. The scheme has been extended to other African countries

where Celtel operates, and rival operators such as MTN have introduced

similar offers. Borderless roaming is possible because many operators have

direct fibre-optic connections between their networks in different

countries, allowing them to act, in effect, like a single network.

Alessio Ascari, of McKinsey, a consultancy, argues that Africa, rather

than India, “is the new battlefield and the new laboratory for

development” in telecoms. The difficulties operators face are even greater

than in India, given the huge diversity and political instability in many

countries, as well as widespread poverty and fierce competition. Africa is

also interesting because local operators and regional champions are

competing with Middle Eastern operators, such as Zain and Etisalat, and

those from Europe, such as Vodafone and Orange. All of them, Mr Ascari

points out, “bring different strengths to the market”.

The wealth of innovation in India and Africa demonstrates that the Western

operators are not always best at running networks. “Each of us is learning

different pieces of the puzzle from the others,” says Mr Álvarez-Pallete

of Spain’s Telefónica. His company is transferring expertise, and indeed

managers, between its operations in Europe and Latin America. Much the

same is done at Vodafone, which has separate divisions for the developed

and the developing world. Vittorio Colao, its chief executive, says his

company is applying its European expertise in customer-profiling and

segmentation in India, for example, as customer loyalty becomes more

important. But there is also a flow of expertise in the opposite

direction, in particular in network operations. “There are a lot of

operational ideas from a cash-constrained, poor and very entrepreneurial

environment that you can immediately bring back to the developed world,”

he notes.

Perhaps the most striking example is the agreement struck between Vodafone

and Telefónica in March 2009 to share towers and other network

infrastructure in four European countries. Network-sharing is not new,

says Mr Colao, “but the confidence to do it at scale, and with a fierce

competitor, came from India. Once you see how it works in that kind of

environment, you become much more confident that you can do it in

Barcelona or Venice.” The savings are much bigger in Europe because the

cost of leasing tower sites is higher, which adds to the attraction of the

deal. An agreement reached in July by Sprint, an American operator, to

outsource the day-to-day running of its network to Ericsson can also be

seen as an example of the spread of the Indian model, argues Capgemini’s

Mr Jacobsen. Ericsson is betting that it will be able to sign similar

deals with other American operators in order to gain economies of scale.

Vodafone has outsourced more of its IT, again inspired by the Indian

example, and it is using the Indian “managed capacity” model at one of its

rapidly growing subsidiaries in Turkey. But according to Mr Colao this

model, which he likens to leasing rather than buying a car, does not work

everywhere. “In markets where you are not sure about speed and shape of

growth, the model makes sense,” he says. But in mature markets where

demand is easier to predict it can be better for operators to build new

capacity themselves. Vodafone is also taking a leaf out of the Indian

marketing book, moving its marketing chief from India, Harit Nagpal, into

a global marketing role. (Google “Zoo zoo” to see Vodafone’s popular

series of Indian television advertisements.)

The challenge now is to apply all these cost-saving lessons to connecting

the world’s remaining 3 billion people and achieving universal mobile

coverage. Within India, even the most remote areas are now judged to be on

the verge of commercial viability, judging by the results of two auctions

held in 2007. In each case bidders had to say how much government subsidy

they would require to expand into rural areas, with the contract going to

the lowest bidder.

In the first auction, for the right to build shared towers in 8,000 rural

locations, the average subsidy requested was 35%, much less than expected.

In the second auction, for the right to offer mobile services, many

operators submitted zero bids or even negative ones—in effect offering to

pay for the right to set up in rural areas. “The subsidies required are

not as big as everyone thought, because the companies believe there’s a

business case in being present in rural areas first,” says Mr Bajaj. In

part this reflects the cut-throat competition in the Indian market. But it

also shows that mandated tower-sharing can make the economics far more

attractive for operators in rural areas, which could be a valuable lesson

for other countries. A second round of rural expansion, with another

12,000 shared towers, has been announced.

In China tower-sharing is mandatory, which has helped reduce the cost of

expanding into rural areas. But since the three mobile operators are

state-owned, the extension of coverage is co-ordinated from the centre.

China Mobile, the largest operator, has signed an agreement with the

agriculture ministry to cover 98% of rural areas by 2012, in part to

compensate for its relative weakness in third-generation (3G) networks,

where it is being forced to adopt the home-grown and relatively immature

Chinese standard. And just as India, renowned for its technology-services

industry, has pioneered clever business models and outsourcing to get

prices down and extend access, China has used its own particular strength

as a low-cost manufacturer (see article).

Rural access elsewhere in the developing world is also likely to improve.

One hopeful sign is the merger being negotiated between Bharti and MTN,

which should accelerate the transfer of low-cost operating expertise

between India and Africa. Greater scale will also increase the combined

firm’s clout with suppliers. The deal is driven by Bharti’s and MTN’s

desire for long-term growth potential outside their existing markets,

rather than by hopes of cost savings, says Mr Bajaj. But it could promote

greater use of network outsourcing in Africa, and new techniques such as

dynamic tariffing in India.

Spreading the word
This is unlikely to be the end of Indian operators’ international

ambitions, which could spread the Indian model to other parts of the

world. So far moves into Africa by Middle Eastern operators have not been

conspicuously successful. Nick Jotischky of Informa Telecoms & Media, a

consultancy, notes that Middle Eastern operators often lack the Indian

operators’ experience with low-cost business models. Zain, for example,

was said to be looking for a buyer for its operations in sub-Saharan

Africa, many of which are making losses, to concentrate on wealthier

customers in North Africa and the Middle East. But in recent weeks it has

been negotiating to sell a 46% stake to a consortium of Indian and

Malaysian buyers. Reliance, India’s number two, held merger talks with MTN

last year.

In recent years Indian firms have made a series of bold foreign

acquisitions in industries such as steel and cars. If its telecoms giants

follow suit, their low-cost model could give them a clear competitive

advantage—and help bring mobile phones within reach of even more people.

Up, up and Huawei
Sep 24th 2009
From The Economist print edition

China has made huge strides in network equipment

Imaginechina

Now gearing up in handsets
IN THE 1960s, when Japan emerged as a manufacturing exporter, it soon

became a byword for low cost and low quality. Much fun was made of

unreliable Japanese watches and cheap Japanese cars. But quality improved

and Japan became a powerful force in electronics, carmaking and other

industries. Today Toyota is held up as a model of efficient manufacturing,

and Japanese firms lead the world in clean technology, carmaking and

consumer electronics. China hopes to make a similar transition. For now,

foreigners think that its home-grown electronics and cars are cheap and

shoddy, as Japan’s were thought to be 40 years ago. But quality is

steadily improving and China is being taken increasingly seriously as an

innovator. The firm that embodies this new, high-tech China is Huawei, the

country’s largest telecoms-equipment company.


Now gearing up in handsets
Founded in 1988, Huawei has risen astonishingly fast. Last year it was the

world’s fourth-largest maker of network equipment, ranked by sales (see

chart 6), and this year it is expected to move into third place, according

to BDA, a consultancy. It is already ranked a close second in optical

networking and third in mobile-network gear. Only slightly behind is ZTE,

China’s second-largest maker of telecoms equipment, founded in 1985. Last

year it was in eighth place, and it is moving up the field—not least

because Nortel, the number seven, went bankrupt in January. Both Chinese

firms specialise in network infrastructure, but they also make handsets.

In a fiercely competitive market, ZTE became the world’s sixth-largest

handset-maker last year. Its goal is to be the number three in handsets

within five years.

The two Chinese firms’ global market share is still relatively small, but

their impact on telecoms has been colossal. Together they have driven down

costs and brought about consolidation across the industry. Having offered

discounts of as much as 50%, they were in large part responsible for the

mergers in 2006 between Alcatel and Lucent and the network-equipment arms

of Nokia and Siemens, and the collapse in January 2009 of Nortel and the

sale of many of its assets to Ericsson.


Huawei and ZTE are now winning the lion’s share of equipment contracts for

China’s three third-generation (3G) mobile networks, spending on which

will total $59 billion between 2009 and 2011, according to the Ministry of

Industry and Information Technology. This will further increase their

market share, to the disappointment of Western vendors that had hoped to

benefit from China’s adoption of 3G, one of the biggest telecoms projects

in history. “The vendor community is struggling, but Huawei and ZTE are

still growing, largely on the back of the emerging markets,” says

Informa’s Mr Jotischky.

The Chinese are coming
Huawei and ZTE are not just strong at home; both firms also ventured

abroad in the 1990s, selling fixed-line equipment in Asia and Africa.

Western vendors’ interest in those regions was limited and their prices

were too high, says Zhu Xiaodong, ZTE’s technology chief in Europe. Next,

the Chinese firms began selling wireless equipment in the Middle East,

South-East Asia, Africa and Latin America. Mr Zhu, who led the team that

designed ZTE’s first mobile base-station based on the GSM standard, says

Chinese companies had two advantages in the wireless-equipment market:

much cheaper labour and, by that time, settled standards. Nokia and

Ericsson, the pioneers of the GSM standard, took years to develop the

technology; ZTE built its first base-station in six months.

Huawei was the first of the two firms to move into Europe, the home market

of Ericsson, the world’s largest telecoms-equipment supplier. At first

only smaller operators, and the eastern European subsidiaries of bigger

ones, bought its equipment, but now it supplies several leading European

operators, including Vodafone, Telefónica, T-Mobile and BT. In America

Huawei is selling 3G network gear to Cox Communications, and its equipment

is being tested by AT&T.

Customers needed time to get to know Huawei, says Edward Zhou, its

marketing chief in Europe, but now “we are accepted as a provider of

innovative solutions and high quality.” A few years ago Huawei had only a

small booth at Mobile World Congress, the industry’s biggest annual trade

show, notes Mike Thelander of Signals Research, a consultancy. This year

it had a whole building to itself, which had been Ericsson’s sole

prerogative. “It’s impressive what they’ve done in a short period of

time,” says Ericsson’s Mr Svanberg.

Perceptions of the Chinese vendors within the industry shifted suddenly

between 2004 and 2006, says Vodafone’s Mr Colao, who spent that period

working outside the industry as head of an Italian media group. “When I

left, I think I had heard of Huawei twice, but I would not have been able

to remember their name,” he says. “When I came back in 2006 they were a

supplier to Vodafone, and they are now one of the main ones.” Having got

started by offering low prices, he notes, the Chinese firms have since

gained scale and a reputation for innovation.

Huawei and ZTE led the way in something called “remote radio-head”

technology. In a mobile base-station the radio circuitry usually sits in a

cabinet and is connected by a cable to an antenna on the tower overhead.

Replacing this cable with an optical fibre, and moving the radio circuitry

into the antenna itself, eliminates power losses in the antenna cable,

cutting energy consumption by around one-third and reducing the size of

the equipment.

More recently, says Weiran Zhuang of BDA, the Chinese vendors have shown

that they can innovate by launching reconfigurable base-stations, the

functions of which are defined in software rather than hardware. That

means the base-station can be quickly rejigged to support different

mobile-network technologies, or even several such technologies at the same

time. Most mobile operators are now running 2G and 3G networks alongside

each other, using separate sets of equipment, so the prospect of being

able to replace them with a single system is enticing. América Móvil, the

largest mobile operator in Latin America, found that deploying Huawei’s

reconfigurable SingleRAN hardware reduced the power consumption of its

base-stations by 50% and the volume of equipment needed by 70%. ZTE makes

a similar system which reduces power consumption by 40% and has already

been deployed by CSL, an operator in Hong Kong. Both systems can also be

upgraded to LTE, the emerging 4G standard. This has particular appeal for

Chinese operators, which are still upgrading from 2G to 3G as 4G already

looms on the horizon.

A few years ago Huawei used to boast of its cost advantage in research and

development, mostly because its Chinese engineers commanded much lower

salaries than its rivals’ staff. But as foreign firms have shifted more of

their own R&D to China, and Huawei has expanded outside China, it is now

keen to present itself primarily as an innovator rather than a low-cost

provider. “It is a misperception to say that Huawei is a low-cost

company,” says Mr Zhou. The firm now has over 100 offices abroad and

maintains research centres in Europe, America and India as well as China.

In January Huawei topped the World Intellectual Property Organisation’s

2008 rankings for international patent applications, a sign that the

company is outward-looking and determined to defend its intellectual

property abroad.

A TD-S diversion
Even the Chinese government has been surprised by the speed at which

Huawei has established itself as an international force. Since the late

1990s the government has been pursuing an elaborate industrial policy

designed to boost the prospects for Chinese equipment-makers at home and

abroad. But the plan has fallen so far behind schedule, and Huawei and ZTE

have done so well on their own in international markets, that the entire

scheme has become almost irrelevant.

The plan involved the development and promotion of a Chinese 3G technology

called TD-SCDMA, or TD-S. A decade ago, as operators in America, Europe

and Japan prepared to build the first 3G networks, there was a fierce

argument over the merits of two rival 3G technologies: one called W-CDMA,

backed by European operators and vendors, and one called CDMA2000, backed

by American firms. It was clear that W-CDMA would predominate in Europe

and CDMA2000 in America, but both camps had their eye on foreign markets.

Chinese officials decided that China should also enter this competition

and develop its own 3G standard. By mandating its adoption in China they

could provide enough scale to get the technology established. TD-S could

then be offered to operators abroad, particularly those in Asia whose

customers might wish to roam in and out of China. Chinese equipment-makers

would enjoy a boost to their sales and would not have to pay licensing

fees to foreign vendors.

But TD-S took much longer to develop than expected. The government delayed

issuing China’s 3G licences because it wanted to ensure that TD-S would be

used for at least one of the country’s 3G networks. After years of

uncertainty it reorganised China’s various mobile and fixed-line operators

into three giant groups in 2008, in preparation for the introduction of

3G. But by this time Huawei and ZTE were doing well in foreign markets

without any help from TD-S, and the global telecoms industry was already

looking towards 4G networks, based on the LTE standard. Huawei is at the

forefront of LTE development: the world’s first LTE mobile connection was

made using the company’s equipment in June this year. But TD-S has had so

much political capital invested in it that the Chinese government could

not give up on it. So when at last it awarded 3G licences in January this

year it required China Mobile, the world’s largest operator by subscriber

numbers, to use TD-S to build its 3G network.

Because of its size, China Mobile is arguably the only operator on Earth

that could establish a new technological standard on its own, but even

this giant seems unable to make a success of TD-S. In a recent filing with

financial regulators the company admitted that “we have encountered and

may continue to encounter challenges in the deployment of our 3G services”

and that “we may not be able to effectively and economically deliver our

3G services based on this technology.” The main problem is the lack of

TD-S handsets: existing models must be completely redesigned to work with

TD-S networks. China Mobile had hoped to have 10m TD-S subscribers by the

end of 2009, but by the end of June it had signed up only 959,000. Of

these, says Mr Zhuang, only half are using TD-S handsets. The other half

are using the TD-S network to provide a mobile-broadband connection for

laptops, which seems a more promising market until more TD-S handsets

become available. The prospect that TD-S will be adopted outside China,

never bright, has now faded altogether.

Although China Mobile, Huawei and ZTE continue to talk up TD-S, they have

already devised a face-saving exit strategy: to promote a new variety of

LTE, called TD-LTE, which with enough hand-waving can claim to be derived

in some respects from TD-S. “The reality is that they are two completely

different, incompatible technologies, but it’s a nice way to get away from

TD-S, by claiming it’s an upgrade or an evolution,” says Mr Thelander.

China Mobile now requires all suppliers of 3G equipment to support smooth

evolution to LTE, says Mr Jotischky.

Vodafone and Verizon Wireless are taking part in efforts to make TD-LTE

work smoothly with the mainstream LTE standard. (Vodafone owns a small

stake in China Mobile and would like a single global 4G standard to make

roaming easier and increase economies of scale.) If TD-LTE can then be

rolled into the main LTE standard, so that LTE handsets work well on

Chinese TD-LTE networks, China Mobile will escape being hobbled by an

inferior home-grown technology motivated by political aims. In the

meantime it must push ahead with TD-S as best it can.

Both Huawei and ZTE, along with other Chinese equipment-makers such as

Datang, received government funds to support the development of TD-S. But

“by the time the TD-S cake was baked—and it never really tasted that good

—Huawei and ZTE had racked up impressive and unexpected gains,” says

Duncan Clark of BDA. Huawei, which did the minimum necessary to support

TD-S, has emerged as the strongest, whereas Datang has been far less

successful abroad. So it is difficult to argue that the TD-S project has

helped make Chinese firms more internationally competitive.

One source of concern about Huawei is its opaque ownership. The company is

privately held, and Mr Zhou insists that it is entirely employee-owned.

But its military culture, and the fact that its founder, Ren Zhengfei, is

a former army officer, have led to persistent rumours that it has close

ties with the army. Moreover, its ownership structure may be complicated

by its history of joint ventures, says Mr Clark.

The big two Chinese vendors are relatively weak in services compared with

their Western rivals, though both are pushing ahead as fast as they can.

Being able to offer services in conjunction with network equipment is

becoming more important as operators, in India and elsewhere, outsource

their network operation to reduce costs. As network gear becomes

commoditised, services offer higher margins and long contracts, notes Mr

Thelander. Like many people in the industry, he believes that only

Ericsson and Huawei are sure to be around in a decade’s time. A senior

executive at one large mobile operator says he sometimes awards contracts

to non-Chinese vendors, even if their prices are a little higher, in order

to maintain choice and competition in the market.

As Huawei goes up against Ericsson in network equipment, ZTE hopes to move

up in handsets. At the moment many of its handsets are sold by mobile

operators (including Vodafone and T-Mobile) under their own brands,

customised to the operators’ specifications. ZTE says it is willing to

work with operators, but is also preparing to push its own brand more

vigorously, particularly in western Europe. To succeed, it will need to

produce some desirable, high-specification handsets. So far, says Mr

Thelander, “I haven’t seen anything that’s wowed me.” But then only a few

years ago the Chinese vendors’ network equipment was seen as not very

exciting.

eyond voice
Sep 24th 2009
From The Economist print edition

New uses for mobile phones could launch another wave of development

Reuters

I'm not selling for that
IN A field just outside the village of Bumwambu in eastern Uganda,

surrounded by banana trees and cassava, with chickens running between the

mud-brick houses, Frederick Makawa is thinking about tomatoes. It is late

June and the rainy season is coming to an end. Tomatoes are a valuable

cash crop during the coming dry season and Mr Makawa wants to plant his

seedlings as soon as possible. But Uganda’s traditional growing seasons

are shifting, so he is worried about droughts or flash floods that could

destroy his crop. Michael Gizamba, a local village-phone operator, offers

to help using Farmer’s Friend, an agricultural-information service. He

sends a text message to ask for a seasonal weather forecast for the

region. Before long a reply arrives to say that normal, moderate rainfall

is expected during July. Mr Makawa decides to plant his tomatoes.

A few miles away in the village of Musita, Michael Malime, another

village-phone operator, explains how his customers have been using the

same service to get farming tips. Rice farmers who had trouble with aphids

texted for advice and received a message telling them how to make a

pesticide using soap and paraffin. A farmer with blighted tomato plants

learned how to control the problem by spraying the plants with a milk-

based mixture.


The Farmer’s Friend service accepts text-message queries such as “rice

aphids”, “tomato blight” or “how to plant bananas” and dispenses relevant

advice from a database compiled by local partners. More complicated

questions (“my chicken’s eyes are bulging”) are relayed to human experts,

who either call back within 15 minutes or, with particularly difficult

problems, promise to provide an answer within four days. These answers are

then used to improve the database.

Farmer’s Friend is one of a range of phone-based services launched in June

by MTN, Google and the Grameen Foundation’s “Application Laboratory”, or

AppLab. As well as disseminating advice in agriculture, provided by the

Busoga Rural Open Source and Development Initiative, the new services also

provide health and market information. The Clinic Finder service points

people to nearby clinics, and the Health Tips service explains the

symptoms of common diseases.

Lastly there is Google Trader, a text-based system that matches buyers and

sellers of agricultural produce and commodities. Sellers send a message to

say where they are and what they have to offer, which will be available to

potential buyers within 30km for seven days. Mr Makawa says his father

used the service to look for a buyer for some pigs, which he sold to pay

school fees. These services cost 110 shillings ($0.05) a time, the same as

a standard text message, except for Google Trader, which costs double

that. In their first five weeks the services received a total of more than

1m queries.

A web of sorts
“There is a big shift from holding a phone to your ear to holding it in

your hand,” says David Edelstein of the Grameen Foundation. “It opens the

door to information services. It’s not the web, but it’s a web of services

that can be offered on mobile devices.” As with the Village Phone project,

Grameen is trying to establish a model that can be scaled up and

replicated in other countries. Offering agricultural and health

information is more difficult than offering a phone service, however,

because such information must be localised and must take cultural

differences into account. The answer is to work closely with local

partners, says Mr Edelstein. Grameen is also experimenting with the idea

of “community knowledge workers”—local people who can help others get

access to mobile services, reading, translating and explaining text

messages where necessary, just as village-phone operators provide access

to basic communications.

Trading up
Grameen’s collaboration with MTN and Google in Uganda is just one of

dozens of services across the developing world that offer agricultural,

market and health information via mobile phones. In India, for example,

farmers can sign up for Reuters Market Lite, a text-based service that is

available in parts of India. Its 125,000 users pay 200 rupees ($4.20) for

a three-month subscription, which provides them with local weather and

price information four or five times a day. Many farmers say that their

profits have gone up as a result.

Tata Consultancy Services, an Indian operator, offers a service called

mKrishi which is similar to Farmer’s Friend, allowing farmers to send

queries and receive personalised advice. “The rural population is willing

to pay substantial subscription fees to get this information multiple

times a day,” says Kunal Bajaj of BDA. There have been lots of pilot

schemes in the past, he says, but commercial offerings are now beginning

to gain ground.

Nokia, the world’s largest handset-maker, launched its own information

service, Nokia Life Tools, in India in June. In addition to education and

entertainment, it provides agricultural information, such as prices,

weather data and farming tips, that can be called up from special menus on

some Nokia handsets. The basic service costs 30 rupees a month, and a

premium service which provides detailed local crop prices in ten states is

available at twice that price. “It is in its early stages, but it has

resonated extremely well with its target audience,” says Olli-Pekka

Kallasvuo, Nokia’s chief executive.

Services to help farmers have been most widely adopted in China, where

China Mobile offers a service called Nong Xin Tong in conjunction with the

agriculture ministry, as part of its push into rural areas. It has already

signed up 50m users and is aiming for 100m within three years. The service

provides news, weather information and details of farming-related

government policies.

China Mobile also runs a website, 12582.com, that sends farmers

information about planting techniques, pest management and market prices.

The service, which costs two yuan ($0.30) a month, sends out 13m text

messages a day and has over 40m users. There are dozens of other examples

across the developing world. TradeNet, launched in Ghana in 2005, now

links buyers and sellers of agricultural products in nine African

countries; CellBazaar provides a text-based classified-ads service in

Bangladesh.

Mobile phones are also being used in health care. One-way text alerts,

sent to everyone in a particular area, can be used to raise awareness of

HIV; sending daily text messages to patients can help them remember to

take their drugs for tuberculosis or HIV. Mobile phones can be used to

gather health information in the field faster and more accurately than

paper records and help with the management of drug stocks. Camera-phones

are used to send pictures to remote specialists for diagnosis.

Bright Simons, a Ghanaian social entrepreneur, has devised a phone-based

system called mPedigree to tackle the problem of counterfeit drugs. Some

10-25% of all drugs sold are fakes, according to the World Health

Organisation, and in some countries the proportion can be as high as 80%.

Under Mr Simons’ scheme, which is being implemented in Nigeria and Ghana,

a scratch-off panel on the packaging reveals a code which can be texted to

a special number to verify that the drugs are genuine. Most mobile-health

projects are still at the trial stage, but a report compiled in 2008 by

the UN Foundation and the Vodafone Foundation documented around 50 such

projects across the developing world. Studies are now under way to

quantify their benefits.

These new services have become feasible because mobile phones are

increasingly ubiquitous. “We are now in a new phase where we are seeing

the network effects of so many people using mobile phones,” says Mr

Simons. His system can, for example, safely assume that the pharmacist in

any given village will have a mobile phone. These text-based services,

though they fall short of full internet access, have the potential to

unlock a range of social and economic benefits to users of even the most

basic mobile phones. “There’s a lot of talk about what you can do with

more sophisticated devices, but it’s much more compelling when you focus

on the devices that people have in their hands today,” says Mr Edelstein.

Money talks
Quantifying the benefits of agricultural and health services is hard, and

such services are still in their early days in much of the world. The

mobile service that is delivering the most obvious economic benefits is

money transfer, otherwise known as mobile banking (though for technical

and regulatory reasons it is not, strictly speaking, banking). It has

grown out of the widespread custom of using prepaid calling credit as an

informal currency.

Suppose you want to send money from the city back to your family in the

country. You could travel to the village and deliver the cash in person,

but that takes time and money. Or you could ask an intermediary, such as a

bus driver, to deliver the money, but that can be risky. More simply, you

could buy a top-up voucher for the amount you want to transfer (say, $10)

and then call the village-phone operator or shopkeeper in your family’s

village and read out the code on the voucher. The credit will be applied

to the phone of the shopkeeper, who will hand cash to your family, minus a

commission of 10-20%. In some countries, where airtime can be transferred

directly from one phone to another by text message, the process is even

simpler: load credit onto your phone, then send it to someone on the spot

who in return gives cash to your intended recipient.

These methods became so widespread that some companies decided to set up

mobile-payment systems that allow real money, rather than just airtime, to

be transferred from one user to another by phone. Once you have signed up,

you pay money into the system by handing cash to an agent (usually a

mobile operator’s airtime vendor), who credits the money to your mobile-

money account. You can withdraw money by visiting another agent, who

checks that you have sufficient funds before debiting your account and

handing over the cash. You can also send money to other people, who will

be sent a text message containing a special code that can be taken to an

agent to withdraw cash. This allows cash to be sent from one place to

another quickly and easily.

Some mobile-money schemes also allow international remittances; others

issue participants with debit cards linked to their mobile-money accounts.

Since there are many more mobile phones and sellers of mobile airtime than

there are cash machines and bank branches, mobile money is well placed to

bring financial services within reach of billions of “unbanked” people

across the developing world.

Getty Images

Banking for the unbanked
The biggest successes in this field so far have been Gcash and Smart Money

in the Philippines, Wizzit in South Africa, Celpay in Zambia and, above

all, M-PESA in Kenya, which has become the most widely adopted mobile-

money scheme in the world. Launched in 2007 by Safaricom, Kenya’s largest

mobile operator, it now has nearly 7m users—not bad for a country of 38m

people, 18.3m of whom have mobile phones. M-PESA’s early adopters were

young, male urban migrants who used it to send money home to their

families in the country. But it has since become wildly popular and is

used to pay for everything from school fees to taxis (drivers like it

because it means they are carrying less cash around). Roughly $2m is

transferred through the system each day, with an average amount of $20.

“In markets in Kenya, stallholders are happy to take M-PESA payments. It’s

pretty dramatic,” says Bob Christen, head of the “Financial Services for

the Poor” initiative at the Bill & Melinda Gates Foundation.

Making it easier, quicker and cheaper to transfer money has enormous

social and economic benefits. Commissions are lower, and recipients no

longer have to pay for transport to towns to make withdrawals. They can

also take out funds more easily and frequently. In rural households that

have adopted mobile money, incomes have increased by 5-30%, according to

Olga Morawczynski, an ethnographer at the University of Edinburgh who has

studied M-PESA in detail. It also saves men working in the city having to

take time off to deliver the money to their families. The only drawback,

say their wives, is that some men now visit home less frequently.

A safe place for savings
M-PESA is also used as a form of savings account, even though it does not

pay interest. Having even a small cushion of savings to fall back on

allows people to deal with the unexpected, such as suddenly having to pay

for medical treatment. “An awful lot of people climb out of poverty every

year, but a lot drop back in because they have no savings, no buffer, so

when something bad happens they have to sell assets and lose a lot of

ground,” says Mr Christen. Poor people tend to save by buying livestock,

which can get sick or die, or buying gold, which can be stolen, or

investing in community-based schemes that may be fraudulent, says Timothy

Lyman of the Consultative Group to Assist the Poor (CGAP). Mobile banking

offers a more reliable alternative, he says, and could have economic

benefits comparable to those of mobile phones.

Given all these benefits, why has mobile banking taken off in Kenya and a

few other places but not elsewhere? M-PESA did not do well in neighbouring

Tanzania, for example. There were special factors that made M-PESA more

likely to work in Kenya: the unusually high cost of sending money by other

methods; the unusually large market share (80%) of Safaricom, the main

mobile operator (an affiliate of Vodafone); the regulator’s decision to

allow the scheme to proceed, even without formal regulatory approval; and,

most intriguingly, the post-election violence in the country in early

2008. M-PESA was used to transfer money to people trapped in Nairobi’s

slums at the time, and some people regarded M-PESA as a safer place to

store their money than the banks, which were entangled in ethnic disputes.

All this makes Ms Morawczynski think that Kenya’s success in mobile

banking may not be matched elsewhere. “But I hope somebody can prove me

wrong,” she says.

There are signs that her wish may soon come true. Banks and regulators,

which have been sceptical towards mobile money in many countries, are

coming around to the idea, in large part because of M-PESA’s success.

“Many of the issues that seemed to be significant stumbling blocks last

year seem less significant now, or at least more manageable,” says Mr

Lyman. There has, he says, been a “change in the comfort level” about

non-banks (ie, operators) providing financial services. “A year ago most

banks were scared—they were seeing the mobile guys taking their lunch

away,” says Dare Okoudjou, head of mobile money at MTN. But now, he says,

some banks have realised that teaming up with a mobile operator to launch

a mobile-money service will allow them to reach many more customers. After

all, mobile operators have far more powerful brands and much greater reach

than banks.

Regulators, meanwhile, are reassured by the banks’ involvement. Mobile-

money schemes generally limit balances and transfers (typically to around

$100), which helps allay fears about money-laundering. And when customers

sign up, they have to produce some form of identification. That makes the

process more formal than for buying a SIM, but less rigorous than for

opening a bank account. “We can find a balance between those two,” says Mr

Okoudjou.

MTN’s launch of a mobile-money service in Uganda in March 2009, in

partnership with Stanbic Bank, provides further cause for optimism. MTN

backed up its launch with a huge marketing campaign based around the

simple idea of sending money home, as Safaricom had previously done in

Kenya. After three months 60% of the population had heard of the service—a

level of awareness that M-PESA took a year to achieve, according to MTN.

After four months the service had signed up 82,000 users. Of the $5.1m

transferred in that period, half was in the fourth month, indicating a

rapid take-off. MTN plans to increase the number of outlets that can

handle mobile money to 5,000 by early 2010.

Banking for the unbanked
MTN’s apparent success in Uganda seems to suggest that Kenya may not be a

one-off after all. After fine-tuning its technology and procedures in

Uganda, MTN plans to introduce the service in 20 other African and Middle

Eastern countries; it has already launched in Ghana. Meanwhile Zain, which

operates in several African markets, has started its own mobile-money

service, called Zap. According to CGAP, there will be over 120 mobile-

money schemes in developing countries by the end of 2009, more than double

the number in 2008. By 2012, it predicts, some 1.7 billion people will

have a mobile phone but no bank account, and 20% of them will be using

mobile money.

Operators do not expect to make much money from mobile banking, says Mr

Okoudjou, but it can help keep customers from defecting to rivals and cut

costs by allowing people to top up their airtime directly on their phones,

as well as providing wider social and economic benefits that reflect well

on operators. Most importantly, he says, mobile banking can help the

industry repeat the huge impact made when mobile phones were first

introduced. “This is a second wave that can unleash the potential of

mobile phones again,” he says. “So we need to do this, and we need to do

it properly, and we need to do it all over.”

Finishing the job
Sep 24th 2009
From The Economist print edition

Mobile-phone access will soon be universal. The next task is to do the

same for the internet

Panos

The way forward
HOW long will it be before everyone on Earth has a mobile phone? “It looks

highly likely that global mobile cellular teledensity will surpass 100%

within the next decade, and probably earlier,” says Hamadoun Touré,

secretary-general of the International Telecommunication Union, a body set

up in 1865 to regulate international telecoms. Mobile teledensity (the

number of phones per 100 people) went above 100% in western Europe in

2007, and many developing countries have since followed suit. South Africa

passed the 100% mark in January, and Ghana reached 98% in the same month.

Kenya and Tanzania are expected to get to 100% by 2013.

Even 100% teledensity does not mean that everyone has a phone, because

many people have several handsets or SIMs. But nor is everyone a potential

customer: the under-fives, for instance, still usually manage without. But

at current rates of growth it seems likely that within five years, and

certainly within ten, everyone in the world who wants a mobile phone will

probably have one. 3G networks capable of broadband speeds will be

widespread even in developing countries, and even faster 4G networks will

be spreading rapidly in some places. Then what?

The next task, says Mr Touré, is to ensure that everyone who wants to can

use mobile technology to access the internet. Like many in the industry,

he predicts that this will be done using low-cost laptops, or netbooks,

connecting to the internet via mobile networks. “Mobile broadband will

become a global phenomenon—it will be the dominant form of broadband,”

says Informa’s Mr Jotischky. He thinks there could be 1.4 billion mobile-

broadband subscribers by 2014.


Meanwhile, with the falling price and size of laptops and the advancing

potential of mobile phones, the two seem to be converging in a new range

of devices that combine the power and versatility of a computer with the

portability of a phone. Already, netbooks can cost as little as $200,

making them cheap enough to be given away with long-term mobile-broadband

contracts in some countries, just as mobile handsets already are for some

users. Mobile phones, it seems, are the advance guard for mobile-broadband

networks that will extend internet access to the whole of mankind.

The combination of mobile broadband and cheap netbooks will resolve a

long-running argument within the technology industry about the relative

merits of computers and mobile phones as tools to promote development.

Leading the computer camp is Nicholas Negroponte of the Massachussetts

Institute of Technology, the man behind the $100 laptop. He and his

followers argue that bringing down the cost of laptops, and persuading

governments in developing countries to buy and distribute millions of

them, could have enormous educational benefits.


Critics of his scheme argue that it makes more sense to spend $100 on a

schoolhouse, or textbooks, or teacher training, than on a laptop. And

advocates of mobile phones, including Iqbal Quadir, who has sparred with

Mr Negroponte on the subject, point out that mobile phones provide

immediate economic benefits, which enables them to spread in a self-

sustaining, bottom-up way, without the need for massive government

funding. Mr Negroponte responds that mobile phones are not much use for

education; Mr Quadir replies that thanks to economic development driven by

mobile phones, parents can afford to educate their children. The argument,

having rumbled on for years, has now ended in compromise.

On the face of it, those in the mobile camp seem to have won. Mobile

phones are now seen as a vital tool of development, whereas Mr

Negroponte’s laptop project has failed to meet its ambitious goals. But

although his engineers have so far only managed to get the cost of their

elegant laptop down to about $150, they have shown what is possible with a

low-cost design, and helped create today’s vibrant netbook market. If

netbooks do indeed become the preferred devices to access the internet in

the developing world, Mr Negroponte will have had the last laugh. But if

those netbooks turn out to be, in effect, large mobile phones with

keyboards that access the internet via mobile networks, as also seems

likely, Mr Quadir and his camp can claim to have won the day.

Technological progress in devices and networks seems to have rendered the

debate moot: the important thing is that internet access will be on its

way to becoming as widespread as mobile phones.

Obstacles remain even to universal mobile access, and beyond that to

universal internet access. One problem is a lack of backbone links,

particularly to Africa. But a series of new cables is in the works to

improve Africa’s connectivity with the rest of the world, increasing

capacity and reducing the cost of internet access. The first of these, the

SEACOM cable, eastern Africa’s first modern submarine cable, was completed

in July.

As international links improve and network equipment becomes cheaper and

more effective, it will not be difficult to provide a low-cost mobile-

broadband service, says Vodafone’s Mr Colao. The main challenge will be to

reduce the price of access devices. “We need to come up with a mobile-data

device that costs $60-80 maximum,” he says. “Netbooks are very good, but

we need an emerging-market netbook that costs one-third of the price.”

With phones, he observes, “we got real penetration when we got below $35.

Netbooks must be below $100 in price to get real traction.” This will

require advances in neighbouring industries, such as chipmaking and

manufacturing, rather than telecoms, he points out.

The rise of the village netbook
In the meantime, notes the Grameen Foundation’s Mr Cantor, the internet

equivalent of the village-phone model could provide a stepping stone to

wider internet access in the poorest areas, just as village phones did for

telephony. The Grameen Foundation has already experimented by giving

netbooks to a few village-phone operators in Uganda so that they can sell

internet access as well as telephony. Despite the relatively slow

connection provided by Uganda’s 2G mobile networks, demand for the service

proved to be stronger than expected, and revenues were double the level

required to make the service self-sustaining.

Christine Zhen-Wei Qiang of the World Bank notes that internet-kiosk

operators in India are charging small fees for access to government

services online. This makes such services easier to get at, prevents

officials from extorting bribes and provides an income for the kiosk

operator, “so there is a revenue-generating model,” she says. It might

make sense to offer microfinance loans to entrepreneurs to buy netbooks

and provide information services. Many of the methods used to make mobile

phones more widely available seem likely to be applied to extending

internet access in the future.

As Ms Qiang’s research shows, access to the internet can provide an even

bigger boost to economic growth than access to mobile phones. But to make

the most of the internet, users have to have a certain level of education

and literacy. Its effect on development may be greater in the long term,

but is unlikely to be as sudden and dramatic as that of the spread of

mobile phones in the first decade of this century.

In the grand scheme of telecoms history, mobile phones have made a bigger

difference to the lives of more people, more quickly, than any previous

technology. They have spread the fastest and proved the easiest and

cheapest to adopt. It is now clear that the long process of connecting

everyone on Earth to a global telecommunications network, which began with

the invention of the telegraph in 1791, is on the verge of being

completed. Mobile phones will have done more than anything else to advance

the democratisation of telecoms, and all the advantages that come with it.