Lessons from the mobile revolution
The spread of the mobile telephone over the past decade has been nothing short of a revolution. According to market tracking firm Wireless Intelligence, in September 1999 there were about 340 million mobile telephone subscriptions worldwide. Ten years hence, that is less than the number of subscriptions in India or China alone, and worldwide the number has grown to 4.5 billion. There are valuable lessons from this revolution for the transformation we are hoping to see in broadband access and use.
Three factors played a role in this rapid expansion of mobile networks and use. Most importantly, there was a huge unmet demand for telephone service worldwide. In India, the waiting list for telephone services in 1990 was almost 2 million, or 40 percent of the number of subscribers. It used to take six years in Mexico City to get a telephone connection. Hence, when mobile telephones became available and affordable, those waiting bought in.
This leads us to affordability, a critical factor that made the mobile revolution possible. As late as 2000, the lowest effective tariff per minute according to data available with Wireless Intelligence was 6 US cents. Today, this has dropped to 1 US cent. And this is likely to drop further as mobile networks begin to go deeper into rural areas and try to attract poorer subscribers. Another important component in affordability has been the dropping prices of mobile handsets. In Afghanistan, for example, a mobile phone used to cost US$400. This has now dropped to under US$50. And it is likely to drop further as ultra-low-cost handsets proliferate further.
The third factor underlies these. It is the change in governments’ stance towards telecommunications services. Moving to deem telecommunications a necessity rather than luxury, and then liberalizing these markets to allow both private investments and competitive service provision were essential to unlocking growth. Indeed, telecommunications has been the sector to receive the largest part of all private investments worldwide. According to the World Bank, private investment in telecommunications since 1984 has crossed US$678 billion, representing 48 percent of the global total.
The economic and social impact of the mobile telephone revolution has been unprecedented. Enough has been written about it, and I direct the reader to other sources for this analysis.* Expanded telecommunications has benefited governments through fees and taxes, has created millions of jobs, and allows people to access markets, finance, and information. It has changed the lives of people by empowering them with, often, their first communications link to their governments and the world outside their communities.
New business models and sensibilities
The mobile revolution has also led to the creation of new business models. One of the most impactful was the creation of the prepaid billing system. Because users could pay for their talk-time before they made calls, price-sensitive consumers could control how much they spent. The size of prepaid packages also reduced—leading to what is called micro-prepaid—and allowing poorer users to get connected. And the benefit to the network operator was simplified bill collection and upfront revenues. The effect has been pronounced: since 2000, 77 percent of all new mobile subscriptions worldwide have been prepaid. In Africa, this share rises to 96 percent.
Along with prepaid came the scratch card and now electronic “top ups” that have created employment for innumerable people in rural and urban areas. In Kabul, as I have noted in an earlier post, one sees recharge cards being sold at almost every street corner. A similar phenomenon is seen in countries as diverse as Moldova and India. Other innovations include the development of the outsourced network business model, which the Economist reported on in a recent briefing,** and the more recent development of mobile telephone-based applications such as agricultural information services, and more famously, mobile money transfer.
The mobile telephone companies have performed well for their investors. Over the past five years, Bharti Airtel, India’s largest mobile operator, has seen its share price increase by 242 percent (at its peak in July 2007, it had increased 447 percent from its price in November 2004). In the past one year, South Africa’s MTN has seen its share price increase 80 percent, while global leader Vodafone has seen a 31 percent rise.
Yet, even as their value was rising, the average revenues per user (ARPU) for each of these firms was falling. Worldwide, ARPUs have fallen by 40 percent (not adjusted for inflation) over the past five years. India has seen its ARPUs drop by 60 percent while in South Africa they have fallen by 23 percent. The valuations of these companies have been responding not to revenues per se, but instead to market share and reach.
Put another way, the poorer (or stingier) the average subscriber was getting, the more some of these service providers were valued. This is not entirely surprising, because a number of service providers in the developing world have low ARPUs but higher operational profits (measured as EBITDA margins). Globally, the North American operators have the highest ARPUs at about $50 they have the lower EBITDA margins at about 38 percent. On the other hand, Africa’s mobile operators have ARPUs of only $10, but margins of 48 percent. Wireless Intelligence reports that Globe Telecom had EBITDA margins of 66.5 percent but ARPUs of only $3.73. Similarly, Kviystar in Ukraine had EBITDA margins of 59 percent and ARPUs of $5.72. The highest ARPUs at that time worldwide were in the U.S., France, and Japan at about $60.
Demanding a broadband revolution
The implications of highly efficient yet cheap mobile telephone services are significant for broadband. First off, it is obvious that for at least the medium term, broadband in the developing world will be a wireless service. It will develop off the existing mobile telephone networks for two reasons. First, that already their owners are looking for ways to increase revenues, and data is the way to go. Second, that mobile telephone networks are often the only ones with the required financial and technical capacity to enter the broadband market.
The second implication is that in order to be successful, broadband will have to see innovation in pricing and retailing similar to mobile telephone services. Numerous pilots for shared Internet access resemble those seen for shared telephone access. There might also be scope for pre-paid plans for broadband, or at least pay-as-you-go models that have been successful in attracting people to cybercafés but might have a larger impact if converted into subscriptions.
At the policy and regulatory level, the lesson from the mobile revolution was simple. Encourage competition, provide serious players with access to radio spectrum, and allow innovation. Similar levers will work in the case of broadband. The experience of the developed world with broadband is that countries that had competition among different wired providers (e.g. cable TV and telephone networks) saw faster growth. In the developing world, the same will have to happen among different wireless networks. But the critical component is radio spectrum, without which there cannot be high quality data services. In this, countries should consider new models of organizing and assigning frequencies as opposed to staying with the radio broadcasting-inspired command and control models.
The most important lesson from the mobile telephone revolution often remains unseen: without demand and relevance, telecommunications services will remain underused. It will be no use building access by expanding networks if people and businesses are not interested in using broadband. With the telephone, take up has been so rapid because of the high but unmet demand. In the early 1990s, the waiting list for telephones was about 45 million worldwide, and even more people were keen to have a telephone but could not afford or get one.
With broadband, the focus of development programs should be on demand promotion and facilitation. What will make the technology useful, relevant, and hence valuable to a business or citizen? I will write more on this in the next posting, but for now, let me leave you with a link to an excellent case study co-authored by a colleague, Tim Kelly, on the successful case of South Korea in this area.
[See also Arturo's note on how countries are beginning to take broadband seriously.]
* See Qiang, Rossotto, and Kimura: The Economic Impact of Broadband, in the IC4D 2009 Report of the World Bank.
** The Economist, Mobile marvels: A special report on telecoms in emerging markets, September 24th 2009