The third world now comes first...Forget the latest feature-rich smart phones - the real action is happening at the other end of the mobile phone market, says Futurity Media's Stewart Baines. All players are piling headlong into low cost mobiles in the hope that the three billion people who currently could but do not use a mobile phone will soon be able to embrace the 21st century.
Last month, the GSM Association announced the second phase of its Ultra-Low Cost (ULC) mobile phone initiative, aimed at making cellular more affordable in the developing world. The first phase, announced at the 3GSM Congress in Cannes, saw Motorola scoop the prize of producing six million handsets at the sub-$40 level.
The majority of these handsets have now been delivered to the operators backing the GSM Association initiative, including BSNL and Bharti from India, GrameenPhone from Bangladesh, Thailand's AIS, Globe Telecom in the Philippines and Egypt's Orascom - which recently swallowed up Wind, the third largest operator in Italy. The second phase of the GSMA initiative will seek to drive the price below $30 per handset.
The GSM Association is pretty convinced that cheap handsets equal new customers. "At the right entry level, we believe there is the potential for over a hundred million new connections per year," GSMA chairman Craig Ehrlich told Radioactive.
The market, of course, hardly needs incentives to drive prices down. All of the major vendors are concentrating on trimming the costs of their low-end handsets because that's where the majority of the growth will be. Nokia's recent results showed a sharp dip at the high end, with the strongest growth from low-end products where competition is fierce.
A recent survey by Portelligent , a specialist researcher in consumer electronics, revealed that the vast majority of component manufactures believe that a sub-$25 handset will be on the market in the next one to two years.
It's anyone's guess just how cheap a handset will go. Philips, a major component supplier to handset manufacturers, believes wholesale handset prices can be driven much lower. By the end of this year, its plant in Shanghai will be producing sub-$5 system components that will make $20 handsets plausible. Industry insiders are muttering that by the end of the decade, entry level handsets will have fallen to $15 per handset.
It is believed that 75 per cent of the world's population is in range of a mobile mast but less than 25 per cent currently use mobile services. For vendors this offers a huge alternative to the saturated western markets.
However, the problem for many of these new customers will be paying for services. The GSMA acknowledges that bringing handset prices down is only part of the solution. Voice tariffs and SMS costs have proved to be prohibitive to all but the wealthiest in developing markets such as sub-Sahara Africa, rural India and sub-prime southeast Asia. The challenge operators face in these markets is to achieve economies of scale and keep fees down with a relatively small number of customers.
The received wisdom is that handset costs are a critical factor in achieving sufficient scale. Phones in the developing world cannot be subsidised in the way that they were in the developed world during the 1990s boom. So drilling down to necessities - durability, good battery life and reception, basic messaging and address books, low-cost fascias and screens - is critical to keep costs down. And so is producing the same handset in sufficient volume (Henry Ford taught us that).
With more handsets, more customers could bring operators to task. Keep basic domestic voice and messaging services cheap and usage will boom. This is the idea anyhow.
The Egyptian-based telecom empire Orascom is proving there is a barely tapped gold mine in servicing the developing world. Dominant - or a major player - in Algeria, Congo Brazzaville, Egypt, Iraq, Pakistan, Tunisia and Zimbabwe, in 2004 it racked up more than 14.4 million customers, doubling the number of a year before. New networks in Bangladesh, DR Congo, Ivory Coast, Jordan and Yemen will fuel further growth.
If it planned to stay below the radar of the west's major players, such as Orange, T-Mobile and Vodafone, Orascom's €12bn purchase of Wind in Italy ruined that strategy - and serves as evidence of its growing market power. Naguib Sawiris, the entrepreneur controlling Orascom, admitted further raids into Mediterranean Europe should be expected. With more customers, in more places, Orascom can really start to dictate to handset vendors to cut prices - and to keep them down.
A recent investigation by analyst Ovum, commissioned by the GSM Association, into the economic benefits of mobile to the Indian economy is, as expected, glowing. Despite the fact that less than five per cent of India's one billion people are active mobile users, the report concludes that the supply-side economics generates huge sums for the India government's coffers.
Ovum estimates that the mobile industry generates 313 billion rupees annually, already accounting for one per cent of GDP. Its report on the issue reads: "3.6 million jobs in India depend on the mobile services industry. The industry itself employs only 171,000 staff. But it buys in support services which generate another 912,000 jobs while the taxes, interest payments and profits generated by the industry support a further 720,000 jobs. Finally the employees in these jobs spend their money within the Indian economy and this expenditure supports a further 1.8 million jobs."
With subscriber numbers growing 100 per cent annually, all things mobile will continue to have a positive impact on the Indian economy and many more millions of jobs can be ascribed to mobile growth. Consequently, initiatives such as the Ultra-Low Cost handsets, which can encourage uptake, will be warmly received not only in India but by governments all over the developing world.
Nokia, Motorola, Philips and other leading western industrialists may be eyeing a profit - but for once, it may be to the developing world's advantage.
Stewart Baines is a freelance journalist and director at Futurity Media