Emerging markets fuel cell phone growth

The next wave of growth will come from poor, developing nations, leaders in the wireless industry say at 3GSM.
Written by Marguerite Reardon, Contributor
BARCELONA, Spain--Once viewed as expensive and unprofitable, developing regions such as Africa, China and India are now being thought of as the cash cows of the mobile phone industry.

As penetration rates in many developed regions such as Europe approach 90 percent or more, mobile operators and handset makers are looking to new markets where people may have never even picked up a regular telephone, let alone a mobile phone, according to a panel discussion Wednesday at the 3GSM World Congress.

The topic has been widely discussed at the conference here, with mobile operators Vodafone, Orange and Telenor outlining their strategies and making announcements.

3GSM panel

"There is a massive opportunity for our business in India," Arun Sarin, CEO of Vodafone, said during a keynote address on Tuesday. "We are really excited to move into the rural areas. Whenever we get into these rural areas, we find people love to talk. They light up our base stations immediately."

There are still challenges in dealing with existing infrastructure, coming up with low-cost handsets and putting adoption-driving services into place. But the sheer numbers of potential subscribers make emerging markets a likely source of growth.

Today, there are roughly 2.2 billion cell phone subscribers worldwide. Experts predict that will jump to 3 billion by the end of this year, with much of the growth to come from new subscribers in countries like India, China, Africa and Latin America. As only about one third of people in developing markets have a cell phone, operators believe there is a huge promise for profits.

On the eve of the conference, for example, global industry leader Vodafone announced that it had gained a controlling stake in Indian operator Hutchison Essar. In India, about 13 percent of people have cell phones. Vodafone's Sarin said that he expects market penetration to reach 40 percent, or 500 million subscribers, within a few years.

Hurdles to overcome
But chasing after this untapped market is challenging. In many countries, the electrical infrastructure is so unreliable that operators are using generators to power bay stations. And dealing with local government regulations and taxation can also be tough. For example, taxes in Brazil account for roughly 44 percent of a cellular subscriber's monthly bill.

"For companies that have less than a 25 percent profit margin, it's difficult to generate enough cash to expand the business and cover more rural areas where you know the return will be much lower," Roberto Oliveira de Lima, CEO of Brazilian wireless carrier Vivo, said during the panel discussion at 3GSM Wednesday. "So we try to balance the profits as best we can."

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In general, mobile operators generate significantly less revenue from customers in emerging markets than they do from customers in more developed regions. For example, major carriers in the U.S. can expect to bring in about $50 in revenue per subscriber a month. Compare that with Brazil, where 80 million people have a family income that totals less than $400 per month. Carriers there can expect between $3.50 to $7 in revenue per user a month.

As a result, operators must select equipment carefully, to make sure that their handsets aren't priced too high for customers and that their network equipment isn't costing the company too much.

"The average ARPU (average revenue per user) isn't what we're used to," said Jon Fredrik Baksaas, CEO of Norwegian carrier Telenor, who also participated in the panel. "So the services we offer have to be tailored to reach new users. And the industry is challenged to work with vendors to bring both the handset and network costs down."

Nokia, the world's largest handset maker, has proven that money can be made from low-cost phones for the developing world. To do so means manufacturing handsets that can sell for less than $100, while still maintaining healthy profit margins.

"In the developing world, most people who can afford a phone already have one," Antonio Torres, director of business development for entry-level mobile phones at Nokia, said during an interview. "The challenge is making phones affordable for people who have an income of about $50 to $100 per month. For these people, buying a cell phone is like buying a car. It's a huge investment."

The GSM Association, which represents GSM wireless providers, has a program to get low-cost 3G phones in the hands of consumers in the developing world. This week, it announced that South Korean handset maker LG has won a deal to supply 3G products to 12 operators that have committed to buying the phones.

The idea is to help manufacturers produce more cost-effective handsets by getting a band of operators to commit to selling large volumes of the phone. LG said that its KU250 is expected to cost roughly 30 percent less than typical entry-level 3G phones.

Profit in pennies
Even with all the financial constraints, the sheer volume of subscribers in poor and underdeveloped regions of the world has allowed carriers to make money on services, even if these cost just a few dollars a month.

And in turn, these services are having a profound impact in the regions where they are offered. There are signs that cell phone penetration is reflected in gross domestic product, a measure of a country's economic health: For every 10 mobile phones per 100 people, GDP advances 0.6 percent a year, experts estimate.

As penetration increases in developing areas, some carriers are creating services with specific importance to the people who live there. For example, they are introducing services such as mobile banking, which enables people who don't have bank accounts to use cell phones to transfer money. Operators in the Philippines and in Africa have already begun experimenting with such a business model.

Earlier this week, the GSMA announced a partnership with credit card company MasterCard to begin a pilot program of a cell phone banking service. In the program, cell phone subscribers will have a special chip embedded on their SIM card that will allow them to send credit over the mobile phone network via a text message. Recipients take their phone with the text message to a retailer or similar outlet to pick up their cash.

The service is likely to become hugely popular among migrant and foreign workers in countries such as the United States. More than 200 million people have left home to work in other countries, according to W. Roy Dunbar, president of global technology and operations at MasterCard International.

And those people very often send money home on a regular basis. Over the last several years, money transfers to developing nations have increased from $147 billion in 2001 to $268 billion in 2006, according to the World Bank. But transferring money via wire services or other means is expensive, particularly where the sums are small. For example, someone sending 500 pounds ($982) from the U.K. to India could pay between 1 percent and 8 percent in transfer fees. But if the amount being sent was 100 pounds, the transaction fee could cost the sender up to 40 percent.

Transferring money via mobile phone could greatly reduce these costs, the panel said. It could also cut the transfer time to minutes rather than days. Last, it could be more convenient for senders and recipients, who may live far from a bank or money-wiring office. The end result could mean more cash in the hands of individuals living in poor regions of the world. These individuals might then spend that money locally, helping to fuel a cycle of economic development.

"Throughout history, communication technology has equaled commerce," Dunbar said during the panel discussion. "And now mobile telecommunications plus financial services will equal economic development."

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