Emerging Markets First, Traditional Markets Second For IBM

This week’s nugget was buried in a New York Times article by Steve Lohr on the lowering of IT-spending projections for 2008. The article contained the complete text of a memo by IBM’s CEO Sam Palmisano to the company’s senior executives. In the memo, Palmisano describes a major change in strategic direction – IBM “will focus first on how to capture all the growth in emerging markets, and then adjust our plans to serve the more traditional markets appropriately.” Palmisano underscores IBM’s continued investment in Brazil, Russia, India and China (BRIC), and announces a $1.6 billion initiative to capture growth opportunities in other parts of Southeast Asia, Eastern Europe, the Middle East, Africa and Latin America. A special emerging-market-based group will drive the initiative, which Palmisano expects to contribute significantly to the company’s revenues by 2010.

Palmisano deserves credit for recognizing the near-term opportunity “beyond BRIC” and providing strong leadership on strategic growth in “second-tier” developing countries. He has a proven track record of backing up past announcements with solid action. The number of employees in India, for example, has increased 40% to 73,000 in a year, reflecting the company’s rapid growth in the region. The BRIC countries have yielded a compound growth rate of 22 percent since 2004. Despite this success, Palmisano clearly understands the importance of bracing senior management for a strategic shift away from more comfortable traditional markets. “This is quite a change in mindset,” he says in the memo, “but that’s what is required to exploit today’s most exciting growth opportunities."

The overt change in focus by IBM and others (Cisco, GE, Microsoft, Nokia) presents an opportunity for regional offices to contribute more directly to the corporation’s strategic direction. With a spotlight on growth opportunities in their local markets, senior leaders in those countries (whether they are from the local area or moved there by the company from abroad) can contribute to company growth by influencing how products and services should be designed to meet local needs and preferences. For IBM to be successful in emerging markets, it will require a sustained commitment to innovation and understanding local markets. The details of Big Blue’s new emerging-market growth initiative will govern its degree of success, but the announcement alone is a bold step in the right direction.
Also in the news:

• Nokia Village Solution due out in Q108
  Cisco WiMax focus on developing countries
• China-based Hasee enters low-cost PC market

Prime Minister Calls for Corporations to Support Development

British Prime Minister Gordon Brown called this week for the support of multinational corporations to help achieve the United Nations’ Millennium Development Goals (MDGs) by 2015. Reports claim he is attempting to enlist the support of over 20 private corporations to use their expertise and resources for capacity building, infrastructure development and capital investments in developing countries. Calling the situation a “development emergency,” Brown believes that the lack of enterprise in some of the least-developed countries is inhibiting growth and the achievement of the MDGs. Private-sector companies already tapped for support include Vodafone and Google. In the coming years, Britain’s development minister will be focusing on initiatives in financial services, mobile phones and agriculture.

Brown raises a critical development issue - the need for enterprise investment to ensure sustainable economic growth in the world’s poorest regions. However, he failed to mention that ICT companies are focusing increasing attention and resources on fast-growing markets in the developing world. Companies like AMD, Intel, Microsoft, Cisco, Nokia and Ericsson have made significant business investments in developing countries. The reason for Brown’s omission may be that the public sector struggles to connect these investments with economic and social growth. Most large corporations, especially in the technology sector, have corporate social responsibility (CSR) programs but the size of philanthropic investments is inherently capped by market forces. These programs often pale in comparison to the business investments made by these companies in developing countries.

Private-sector companies can help the development community and the public sector appreciate the full social and economic impact of their activities in developing countries. The private sector has a direct and positive impact on the developing world through the expansion of local business ecosystems, the commercialization of new products and services designed specifically for these markets, and business models that increase the affordability of productivity tools. Because these efforts are profitable, they are more sustainable than philanthropic activities. Certainly, there is a place for philanthropy and CSR in addressing the challenges in the developing world. But a sustainable approach to addressing global poverty increases the longevity and size of resources committed to such investments. And corporations that identify credible methods for measuring and promoting the social and economic impact of their business efforts to the development community will experience greater business value through increased brand equity, visibility and an enhanced ability to influence local policies.

Also in the news:

• Handset majors may exit entry-level market
• M-payment not taking off in China
• Linux may take over low-end PC market

Bypassing the Network May Connect the Unconnected

This week’s nugget was unearthed when a little-known telecommunications company promised to bring to market a mobile phone that can bypass operator networks and enable users to text and make free calls to people within a one kilometer radius. Sweden-based TerraNet believes the technology addresses the need for communication in developing countries, especially in rural areas where operator networks do not exist, and could also aid in disaster relief. The technology can even be used for free phone calls outside the immediate vicinity if there is a broadband-enabled PC with Voice over Internet Protocol (VOIP) capability within range. Focusing on areas without existing operator networks, TerraNet intends to launch a commercial network in 2008 with revenue models based on licensing and handset sales.

Though TerraNet's technology requires special handsets, the company hopes it will eventually be a feature available on standard phones. Phone manufacturers, however, will have to overcome the objections of operators if they intend to offer a service that bypasses the operator’s network to make free calls. Indeed, many operators – focused relentlessly on competition from other operators and maintaining ARPU (average revenue per user) – may not be prepared for a competitive threat like TerraNet’s solution. Because consumer needs and user habits differ considerably in emerging and mature markets, a solution could quickly become formidable competition in emerging markets while not posing a threat in developed countries.

While TerraNet’s solution poses a threat to telecommunications companies, Vital Wave Consulting suggests that it may also present an opportunity for PC maufacturers and local entrepreneurs. Mobile technology that taps into a connected village PC for free VoIP calls could present not only a lifeline to the outside world but a strong enough value proposition to prompt community or entrepreneurial investments in PC-based connectivity for longer-distance communications. TerraNet’s solution is also a reminder that multinational technology corporations doing business in developing countries would do well to look far outside traditional technology and business model solutions to understand competitive threats and accurately identify growth opportunties.

Also in the news:

• Motorola loses ground because of ultra low-cost segment
• Everex partners with Zonbu for low-cost laptop
• OLPC signs Peru for 260,000 laptops

Asus Turns a White Box Play into Branded Success

Asustek Computer (Asus) capitalized on the U.S. pre-holiday news lull by generating coverage on the Eee PC. This PC solution seems to be catapulting Asus ahead of its low-cost computing competition. Announcements ranged from the introduction of new channel partners, to rollout into new geographies, and the availability of a Windows version of the Eee PC. An announcement of an increased sales forecast for 2008 to 5 million units of the Eee PC followed this week. But, in spite of the attention and growing forecasts, Asus’ CEO and President, Jonney Shih and Jonathan Tseng, claim Asus is not concerned that low-cost devices will cannibalize its more profitable PC business.

Asus’ sudden visibility in the low-cost laptop market may mislead business managers and industry watchers into overlooking the company’s primary business. Asus is, in fact, cited as the “mother of all motherboard producers”. With highly diversified manufacturing services, Asus produces components for cell phones, desktop and notebook computers, graphics cards, optical drives, servers, and networking devices for some of the world's leading ICT companies. One country-specific success story for Asus is in the Russian PC market where more than 80% of desktops are sold through the white box (unbranded) channel. The company entered this strategic growth market through this white box channel and developed a reputation for providing value and quality desktop PC components. Capitalizing on its brand recognition as a high-quality component provider, Asus has also become a highly competitive manufacturer of branded PCs in the Russian market.

HP, Dell and other hardware companies can take a page from the Asus playbook. To date, direct competition with white-box assemblers in emerging markets has proved largely unsuccessful for most global brands. Hardware companies could, instead, participate in this dominant emerging-market channel. With careful mapping of the value chain, global PC manufacturers can identify opportunities to provide aspects of their own competitive advantage (e.g. economies of scale, efficient tools and processes, pre-kitted and branded components, and even support services). With the white box market dominating the emerging-market PC business, hardware companies would do well to learn how to participate profitably in the revenue stream rather than swimming against the current.

Also in the news:

• Solar power charger launches in Kenya
• Financing opens doors for new handset buyers
• OLPC extends Give One Get One program

iPhones in Beijing? Well…maybe later

Close on the heels of Apple’s iPhone launch in England and Germany, China Mobile announced it is in talks with Apple to introduce their iconic device to the world’s biggest market. The stock market certainly liked the news – Apple’s share price jumped 10% on Tuesday. But we at Vital Wave Consulting are questioning the “mature-markets-first, emerging-markets-later” launch strategy.

Consider: no fewer than ten iPhone clones are now available in China. This is not just the result of lax IP protection; it is also an expression of pent up demand for the status and functionality of a high-end, multi-functional device. Emerging-market consumers have shown they’re more than willing to leapfrog technologies for the right value proposition (witness the millions who have foregone landlines in favor of mobile phones). This may already be occurring in India, where a combination of low phone rates and poor home Internet services has driven large increases in mobile browsing and, according to India’s Economic Times, a decrease in broadband subscriptions.

While Apple focuses on mature markets, China Mobile and other carriers have been strengthening their hand for the coming negotiations. China Mobile recently joined Google’s Open Handset Alliance, inked a deal with Research in Motion (RIM) to sell the Blackberry, and announced strong growth for their in-house music download service. (Sixty million out of their 350 million subscribers now use the service.) Apple, Google, Nokia, Palm, and RIM have an excellent growth opportunity in emerging markets, especially in urban areas where there is relatively strong infrastructure and a burgeoning middle class. However, the layer of gold around that opportunity will only get thinner with an “emerging markets later” approach.

Also in the news:

• Asus plans desktop Eee for ’08
• EBay launches microfinance lenders site
• Notebook makers pay attention to low-cost PC market

Infrastructure Companies Look Beyond Emerging Markets

Cisco’s CEO John Chambers made it clear this week that the company is banking on developing countries for future growth. The company launched its Globalization Center in Bangalore, intended to be a second headquarters and a hub for emerging-market business growth, rather than just a local design center. The company’s investment backs up the claim. In recent interviews, Chambers says he plans to triple headcount in India over the next few years, base more senior executives in developing countries, and double their venture capital investment in Indian companies (to $200 million). Cisco also announced a long-term expansion plan for China worth $16 billion - twice the company’s investment over the past five years. Cisco has good reason to believe these investments will pay off; their revenues in developing countries are already climbing 30-50% a year.

In fact, according to one Cisco executive, the company no longer includes India or China in the category of “emerging markets.” For Cisco, these countries have “emerged.” Certainly, the company deserves credit for its forethought, early investment and tenacity in the face of hiccups like one encountered in Brazil last week. But, early entry by infrastructure companies is also part of a natural progression. Companies like Cisco, Ericsson, IBM and others take the lead in new technology markets, laying the foundation for other technologies to operate.

In the context of emerging markets, IT and telecommunications firms can benefit from the trailblazing of infrastructure companies. As global players like Cisco accelerate expansion, they lay a path for broad economic and market growth. Their initial investments and early growth provide strategic indicators for subsequent market opportunities for their industry counterparts. Tracking the activities of infrastructure technology firms can help global software and device manufacturers avoid pitfalls and see farther ahead in markets that may be less transparent than developed countries.

Also in the News:

• OLPC becomes a marketing machine
• Everex launches low-cost PC
• Google to enter mobile phone industry with software

Google's Phone Keeps Everybody Talking

Google is characteristically silent, but rumors about the "Gphone" have people talking. According to Forbes Magazine, Google plans to enter the smart-phone market with a high-end handset subsidized by targeted advertising. Brian Caulfield, the article’s author, suggests that Google’s ad-supported mobile phones may best fit consumers in emerging economies. An effective advertising model could reduce the price of the handset and/or service, appealing to this price-sensitive market. Caulfield points out that a mass-market approach fits Google’s business model, and suggests China Mobile and Orange are possible partners.

Google certainly knows how to monetize advertising volume, but a foray into hardware would put the company well outside its comfort zone. While Google has entered partnerships in the past, it has never been as dependent on those partners as it would be with telecommunications partners in this new scenario. A phone with a great user interface and cool applications may get the market’s attention, but the ability to scale will be largely in the hands of Google’s partners. Google’s strength is its ability to abandon traditional business models. A mobile phone that makes money on something other than voice or data transmission may fundamentally disrupt the market, but is Google in the best position to capitalize on the opportunity?

An ad-based revenue model presents an opportunity for a host of other technology players. Yahoo! and AOL are also chasing emerging-market eyeballs through acquisitions and partnerships that integrate their services with newer handsets. Larger phone manufacturers and operators are exploring an ad-based interface, trying to secure revenues without giving too much away to content providers. Microsoft software is available on 140 mobile phone models, so it has well-established ties in the telecommunications industry. Perhaps a (long-rumored) partnership between Yahoo! and Microsoft would pave the way for an ad-based mobile OS. Ultimately, the winner in this race will be the company that offers the most compelling deal to developing-country operators without losing focus on the real opportunity - access to two billion eyeballs.

Also in the news:

• Quanta denies that OLPC shipments are delayed
• India mulls open standards
• Cisco chooses WiMax

Western Union Joins Mobile Remittance Market

Western Union has been so slow to respond to the market impact of mobile-phone based remittances, the company risks losing decades of market leadership in the money transfer business. The recent announcement of a partnership with the GSM Association (GSMA) may be an attempt to catch MasterCard, which announced a similar initiative at the 3GSM conference in February. According to Reuters, Western Union and GSMA will help operators let customers transfer funds from a mobile phone to a Western Union location and vice versa, and enable mobile-to-mobile transfers. A pilot program of the service will be available by mid-2008 and Western Union expects to see a material contribution to revenues in 3-5 years.

Western Union’s slow rollout of a mobile remittance program opened the door for companies like Visa, MasterCard, banks, and local service providers. Mobile-to-mobile money transfer programs are already generating revenue for more nimble players like Smart in the Philippines and Safaricom in Kenya, among others. By 2012, the number of recipients of international remittances could reach 1.5 billion and the size of the remittances market could total US$1 trillion, according to GSMA.

Non-technology companies like Western Union are being drawn into the telecommunications market by the increasing utility of mobile phones. The GSMA, its members and other mobile technology companies will benefit from new partnerships with global non-technology companies like Western Union. They provide valuable assets such as global brand and new services that can now be delivered via mobile technology. Association with a strong brand like Western Union can allay customer fears associated with accessing services and executing transactions via mobile phones. And, the added services present opportunities for additional revenue sources for all involved partners.

Also in the news:

• Mitec plans to enter low-cost PC space
• Eee PC makes a hot debut
• Norhtec thin client surfaces again

India’s Broadband Drop Surprises Analysts

This week’s nugget was unearthed in an Economic Times article that claimed, to everyone’s surprise, India’s fixed broadband subscription rates fell last quarter. The total number of Internet connections dropped to 9.22 million between April and June from 9.27 million the previous quarter. The article and related blogs speculate on the possible causes for this drop: unstable connections, poor service and bandwidth constraints. It may be that Indians are turning to their mobile devices to access the web. According to the Economic Times, 38 million people, or more than a fifth of India's 200 million-plus mobile subscribers, access the web via their handsets.

This drop in broadband Internet connections is small for a country the size of India. However, the lack of growth and the strength of mobile Internet access are notable. Fixed broadband availability and usage rates have often been used as an input for measuring a country’s technical maturity. The increasing sophistication of mobile devices may change that. Historical growth trends would have predicted that India’s broadband rates would continue to increase and certainly not slow, let alone fall. This demonstrates a weakness in historical-based approaches and confirms that new markets require new methods of evaluation. Applying developed-country adoption trends to developing-country markets leads business managers to design inappropriate strategies in emerging markets.

Technology is being adopted faster in emerging markets than in mature economies. Moreover, adoption and usage patterns may differ considerably. Consumer cash flow constraints, the stability and availability of a local infrastructure, technology awareness, and access to various technology devices all impact adoption curves. Therefore, historical growth trends are only one input among many to credibly forecast emerging-market growth. In a market like India, these factors can help project dramatic shifts in technology usage patterns. The increasing use of mobile phones for Internet access is yet another sign that IT and telecommunications strategies can no longer be considered in isolation, especially in emerging markets. Both industries will be competing more and more for access to the limited disposable income of developing-country customers.

Also in the news:

• Who pays for low-cost laptops?
• Intel readies CPU for cheap computers
• Eee PC scores one million-unit Russia deal

Africa Says "Call Me Back"

Reporting in their “oddly enough” section recently, Reuters noted that one-third of all cell phone calls made in Africa are “missed.” While odd to Reuters, “missed” calls are a generally accepted method of communicating in Africa. The practice of “beeping,” which involves phoning someone and hanging up so the burden of the return call cost is on the receiver, was created by cost-conscious users. (In most markets outside the U.S., cell phones charges are billed only to the calling party.) Frustrated local phone operators, whose lines are tied up with non-income generating exchanges, are actively seeking methods to generate nominal revenue from this practice including offering a limited number of “call me back” text messages for free with accompanying fees for increased use.

“Beeping,” while unanticipated by wireless operators, is a smart adaptation of technology to better suit user needs and is currently under study by Microsoft Research. Cash-strapped users can continue to use their phones to communicate with friends and family as long as someone else foots the bill. This practice comes with a host of etiquette rules like not beeping a romantic interest and the one with more wealth pays. While such rules help to make “beeping” more socially acceptable, it is still considered nominally intrusive by receivers and demonstrates the degree to which users are willing to inconvenience or be inconvenienced in order to communicate with one another via cell phone.

Wireless operators have the opportunity to benefit from users' willingness to suffer minor inconveniences in return for service. With emerging advertising models, operators allow users to make a phone call for free or at subsidized rates in return for viewing (or listening to) a short ad. Operators can sell ad space to corporations interested in reaching the emerging mass markets of developing countries. Skeptics may question whether cash-strapped cell phone users are an interesting target market for advertisers. Vital Wave Consulting research demonstrates that cell phone users, even those earning less than subsistence-level income ($2 per day), have funds available for the purchase of goods and services. For instance, in Nigeria alone, individuals earning less than $2 per day represented a $40 billion market last year. Add this to other large markets and the African continent begins to represent a significant growth opportunity for consumer companies that face saturated or low-growth markets in developed countries. With advertising in exchange for free or lower-cost phone calls, former “beepers” could be the next billion pairs of eyes and ears to corporations seeking such growth opportunities in emerging markets.

Also in the news:

• India's broadband connectivity numbers are falling
• CDMA still kicking in Africa
• International remittances equal to a Fortune 500 company

NComputing Gets a Leg Up in Low-cost PC Space

Recent articles praised NComputing, a company specializing in multi-user PC solutions, for its deal to provide every k-12 Macedonian student with one-to-one computer access. Prior to this, NComputing’'s customers were mostly suburban, developed-world school districts and government offices. The company has sold over 500,000 seats in less than two years. The Macedonia deal demonstrated that developing-country ministries of education may be a receptive market. This is the second foray into challenging the computer industry for NComputing’'s CEO, Stephen Dukker, who founded and led eMachines,– often credited with driving down the price of personal computers (PCs) worldwide.

NComputing’'s success shows that perhaps the needs of a suburban school in Dallas are not that different than those of a Macedonian school district. Both customers were looking for a solution that could stretch their existing technology budgets to accommodate more students. Capitalizing on existing PCs in under-equipped computer labs, NComputing’'s technology turns one CPU into individual computer access for up to seven students. NComputing built upon existing technology and previously-tested solutions to address a fundamental need to increase one-to-one computer access in emerging economies. Like many emerging-market solutions, the beauty is in the simplicity. The education market agrees. In a recent roundtable discussion with Vital Wave Consulting, Dukker explained that NComputing’'s biggest limiting factor is not demand but rather a robust enough channel to distribute the technology.

Research by Vital Wave Consulting suggests that NComputing'’s approach of adapting current technology for emerging-market needs has merit. (Indeed, the company has had more success to date than other high-profile, low-cost PC initiatives.) Vital Wave Consulting favors this approach as one of the key strategies for success in emerging markets. With straightforward technology adaptations like NComputing'’s multi-user solution, corporations could penetrate developing-country markets without undue disruption to current industry and technology processes.

Also in the news:

• 3Com Goes After Cisco in Emerging Markets
• Cheap Laptops are Still Missing in Action
• Ericsson’'s Approach to Low-End Markets is More of Same

Build on Existing Distribution Networks

Nokia Siemens Networks announced a “Village Connections” pilot project in Eastern Cape, South Africa last week. The initiative, part of a broader goal of providing wireless access to 5 billion people by 2015, is an attempt to lower the capital and operating expenses that keep most operators away from remote, rural villages. Wireless subscribers to this service are also expected to benefit from lower fees.
Nokia Siemens Networks (NSN) claims the reduced costs are enabled by an innovative “distributed architecture.” These technology and business-model advances push call control and customer management out to rural access points, each of which serves approximately 80 subscribers and runs on a basic computer equipped with a simple software application and wireless card.

With this initiative, NSN moves toward a potentially lucrative opportunity – a franchised service model for phone and Internet connectivity. NSN claims its GSM Access Points are “plug-and-play” and backed up by solar or battery power. The challenge remains, however, in identifying, training, supporting and managing a large number of geographically-scattered rural franchisees.

NSN (or other multinationals) will maximize their chances of success by identifying and securing good distribution partners. While every rural village has a small shop or retailer, networking companies don’t have enough boots on the ground to train entrepreneurs or install and service even the most self-contained access points at each location. They may, however, be able to piggyback on distributors who regularly supply soft drinks, beer, soap or other goods to those retailers. Distributors would gain a new revenue stream and operational efficiencies (i.e., shopkeepers could place orders using the new phone network). Village retailers could benefit from offering a new product line to their customers, beginning with phone service and extending to handsets, additional airtime and phone accessories. These shopkeepers are also the most likely to know how to run a business and protect valuable equipment. Schools might also be potential partners. In many rural villages, the school is the first (or only) place with a PC, electricity, adequate security and sufficiently educated personnel. And, if bureaucratic snags can be avoided, it may be worthwhile to partner with a government entity. Such alliances might help technology companies solve the rural distribution riddle.

Also in the news:

• OLPC Punts
• Dell Joins HP on Chinese Shelves
• M-banking Programs Supported By World Bank (and Gates)

Mobile Phones as Productivity Tools for the Poor

Business Week recently reported what telecommunications companies and industry watchers have known for years - that mobile technology is helping developing-country entrepreneurs dramatically improve their businesses. It is clear that clever people are using their mobile phones to order supplies, check prices and find buyers. These efficiencies, the article states, are contributing to its rapid uptake of mobile technology among the world’s poor. In India, for example, there are six million new subscribers every month, and some are paying an entire month’s paycheck even for a low-end handset.

Press accounts do an admirable job of chronicling the mobile phone market’s expansion. Anecdotes of phone-wielding farmers finding the best crop prices before traveling to market could almost lull telecommunications investors into thinking that nothing could stop this spectacular growth. However, many handset manufacturers are already beginning to learn that new customers who come from ever-lower economic segments are making it harder to maintain high adoption rates and stay ahead of competitors.

The near-term handset market is comprised of 1.5 billion potential buyers living at or slightly above the subsistence level. The utility of a mobile phone may be clear to Business Week readers, but an upcoming research report by Vital Wave Consulting suggests that a mobile phone is still largely perceived as a luxury, or non-essential purchase, by would-be handset buyers in emerging markets. The report describes an opportunity for the mobile industry to re-position mobile phones as essential productivity tools, making them more appropriate targets for financing. Prospective buyers would be more willing to take on a loan to purchase a mobile phone if it was perceived as an integral part of their livelihood. Formal and informal lenders would also be more inclined to issue debt, believing recipients will repay loans with incremental income earned by using phones for business efficiencies and better customer outreach. Through appropriate marketing and the inclusion of various, existing financing mechanisms in their business models, sellers of mobile phones can accelerate and capture a larger share of the near-term handset market in developing countries.

Also in the news:

• NComputing Gathers Steam in the Low-cost PC Ride
• Plugging in for Broadband, Is Powerband an Option?
• Shades of Gray in China’s “Black” Handset Market

Convergence Necessitates Mutual Understanding for IT & Telecommunications Industries

This week’s International Telecommunications Union (ITU) Trends in Telecommunication Reform, 2007 report concludes that poor regulatory rules are a key inhibitor to telecommunications development in some regions, and governments must put better licensing frameworks in place to achieve the full economic value of next-generation mobile communications.

Several recent articles about wireless spectrum releases in Russia and India underscored this issue. In Russia, high costs and technical/bureaucratic regulations are slowing the clearance of public spectrums (from military use), and may even push the launch of 3G services in Moscow past the 2009 deadline operators agreed to last April. In India, where over 7 million new subscribers sign up for mobile phone service each month, the Ministries of Defence and Telecommunications ended months of wrangling to free up spectrum for 50 urban areas around the country by December.

Operators, networking companies and handset manufacturers have been focused on high-growth emerging markets for years. The opportunity presented by millions more mobile subscribers and increasing data-service revenues is clear, and many of these companies are lobbying hard for the regulatory reforms advocated in ITU’s report. Research by Vital Wave Consulting, however, suggests that the 3G environment in emerging markets is far less clear to IT companies that could benefit from the convergence of data services and mobile communications. An upcoming report, Demystifying 3G in Emerging Markets, explains how forecasts of 3G penetration rates are muddied by inconsistent definitions of networks, variable handset functions, and even industry data from organizations with a stake in the success of 3G services. The report characterizes the top 20 emerging markets in a 3G Readiness Index.

As data services and mobile communications converge, IT companies that learn the telecommunications industry’s technologies, regulations and business dynamics have the best opportunity to form profitable partnerships and fend off competition. (Similarly, mobile industry players would benefit from studying the IT industry). A clear understanding of the 3G environment in emerging markets is crucial for any company interested in capturing revenues from the products and services enabled by broader network access. Businesses that lack extensive in-house research capabilities and relevant emerging-market experience risk misaligning resources based on insufficient or incorrect data. A better understanding of the 3G environment in emerging markets will help companies develop and offer relevant, valuable products and services on a broad scale.

Also in the news

• Tech companies are investing more in developing-country start-ups
• Microsoft and Google take “cloudware” baby steps
• SanDisk offers solid state drive for low-cost PCs

New Data Tools and Methods Required for Emerging-Market Business Decisions

Recent news articles have called into question the reliability of developing-country market data that is crucial to good decision-making for developing-country business expansion. Respected economist Lester Thurow challenged China’s economic growth statistics (New York Times subscription required) by using electricity consumption as a proxy for economic growth. Thurow estimates that China’s economy is growing at a rate of 4.5% to 6% annually, far less than the Chinese government’s figure of around 10%. Similarly, the Arab Advisors Group (AAG), a local telecommunications industry advisor, suggested that estimates of Jordan’s mobile penetration rates may be exaggerated based on results from their recent survey. Using two simple calculations - an assessment of population that takes into account migrants and expatriates as well as standard population figures, and an estimate of the actual number of phones per users – AAG asserts that mobile penetration may be closer to 50%, rather than the 74% claimed by local operators.

Market data such as mobile penetration and economic growth rates inform critical business decisions. The possible discrepancies suggested by AAG and Thurow demonstrate the complexity of designing for, and selling into, developing-country markets. Erroneous data can result from misrepresentation, insufficient validation, or from applying mature-market methods, user trends and historical adoption curves directly to emerging markets. Thurow’s approach to assessing China’s growth demonstrates how even developing-country data can be tested with creative proxies. AAG’s primary research revealed that over a third of all mobile users in Jordan have multiple phone lines (to capture savings on operator offers and promotions), which would lower market penetration estimates based on a unique subscription-to-subscriber ratio.

These two examples demonstrate that gathering accurate, reliable data on emerging markets requires new tools and methods, investigation beyond standard published sources, and a profound knowledge of local user needs, preferences and usage patterns. The companies that base their business growth decisions on sound, market-appropriate data collection and analysis will have the best chance of understanding the scope and location of the most compelling emerging-market growth opportunities.

Also in the news:

• Asus Set to Mass Produce and Launch $199 EEE PC
• India Overtakes U.S. as Nokia’s Second-largest Market
• Rumored Google Phone to Compete with OLPC

From Design to Market: Commercializing Innovations for Emerging Markets

Sometimes, the most elegant solutions to a problem are also the simplest. Last week, Tapan Parikh from the University of Washington was named Innovator of the Year by MIT’s Technology Review for his small-business software applications designed for mobile phones. Parikh's solutions help farmers and women's self-help groups capture and store information, manage their finances and communicate with lenders.

Parikh's simple, easy-to-use applications buck the trend of faster, more powerful technology for an increasingly sophisticated world. Many leading multinational companies have invested heavily to establish research and development centers in emerging markets, but then question whether the investment is paying off. But perhaps the problem is closer to home than in far-off R&D labs. Advance word from the researchers and developers attending this week's Home-Oriented IT (HOIT) conference in Chennai, India is that developing technology for local markets is sometimes easier than convincing corporate business managers to commercialize them.

Overseas labs frequently produce solutions that, like Parikh’s, receive positive press coverage, awards, and broad recognition for their relevance and quality. Nevertheless, they are often released only regionally and reach a fraction of their potential market. Why? In part, because emerging-market solutions are often simpler and cheaper – giving mature-market business managers visions of declining margins and cannibalization of existing products.

Companies like Microsoft, Intel and Nokia (among others) have developed various strategies for ensuring that emerging-market solutions do not cannibalize existing product lines. And the fact is, many products conceived in overseas labs, or by entrepreneurs, would not find a ready market in North America or Europe anyway. Researchers who assess and articulate the financial and operational opportunities posed by their innovations are better equipped to validate or dissipate the fears of business managers. With accurate assessment of the market opportunity and a realistic view of threats to their existing products, companies will better capitalize on emerging-market trends that are essential to maintaining global market share.

Also in the news:

• The iPhone in developing markets?
• Nokia uses anthropologists to design low-end handsets
• Nigeria replacing South Africa as Africa's economic engine

Recycled phones - Good for the environment, Good for revenues?

by Karen Coppock
____________

Handset manufacturers have multiple incentives to remove used handsets from the marketplace - keep environmentalists happy while decreasing a formidable threat to first-time handset purchases (used phones)

Environmentalists vocally encourage the reuse and responsible recycling of mobile phones. In the summer of 2006, Greenpeace began rating the environmental policies of mobile phone and personal computer manufacturers. The Greenpeace ratings are based on the amount of hazardous substances used in the product and the company’s take back and recycling program. None of the top five handset manufacturers – Nokia, Motorola, Sony Ericsson, LG and Samsung – analyzed by Greenpeace received the highest “green rating,” and many were penalized in their rating due to the lack of disclosure or progress on voluntary take back and recycling programs.

Mobile handset manufacturers may want to consider implementing more aggressive take back programs in emerging markets as an environmentally friendly mechanism for decreasing the amount of used handsets in circulation in these high-growth countries. By decreasing the availability of used handsets in these markets, manufacturers could minimize a significant competitor to the low-end models they are increasingly launching in these markets. Mobile handset manufacturers may even want to evaluate the feasibility of offering "certified used handsets" that they have cleaned, tested and updated potentially capitalizing on the used handset phenomena themselves while being good, and clean, corporate citizens.

Telenor Pakistan Plants a Flag on the Tip of the M-remittance Iceberg

Telenor Pakistan announced a partnership this week with ezetop Ltd (of Ireland) to offer a new “International Recharge” service for its customers. The service allows people working overseas to send phone credits to friends and family back in Pakistan.

From the available details, Telenor Pakistan’s new service is a bit cumbersome compared to mobile phone-based remittance services in more advanced telecommunications markets like the Philippines. To use Telenor’s service, overseas workers must visit an “ezetop distribution partner,” buy a voucher and send the voucher details back to relatives in Pakistan. But Telenor Pakistan’s service is a start, and they will likely improve the process in time to capitalize on m-banking services as they spread through Pakistan and other developing countries.

Pakistan has seen astonishing growth in mobile subscriptions in recent years. There are now 63 million subscribers in Pakistan, up from just 3 million in 2004. However, with a population over 150 million, there is ample room for growth. In an upcoming report on financing options for handset buyers in emerging markets, Vital Wave Consulting estimates Pakistan’s total addressable market for first-time subscribers at around 24 million.

Telenor Pakistan has mirrored the industry’s growth, jumping from 3.8 million subscribers in July ‘06 to over 9 million in March ’07 (or 16% of the Pakistani mobile market). Though aimed at current mobile phone users, Telenor’s International Recharge service could also help drive new subscriptions and mobile handset sales. Many potential buyers in Pakistan’s near-term addressable market are poor, speak a minority language, and live in remote areas; it can be very difficult to reach them via traditional media. Marketing to the economic buyer (overseas workers) rather than the end user could be a cost-effective way to extend mobile communications to new users (family or friends in Pakistan). Handset manufacturers could also join carriers to enable purchases of handsets, in addition to phone time. Telenor Pakistan, its partners and emulators would be tapping into a sizeable opportunity. Worldwide, remittances from overseas workers total more than $250 billion annually – vital income for millions of emerging-market families.

Also in the news

• Airtel extends access for rural subscribers
• ISI focuses on remittances from the US to Mexico
• AMD’s strong growth in South Africa

Microsoft Pilots Ad-supported Software, Aims for New Revenue Streams

Microsoft announced last week that it will offer a free, advertising-supported version of Microsoft Works, its basic productivity software suite. Microsoft is working with undisclosed computer manufacturers to bundle the software and pilot the solution in certain geographies. Combined with other recent announcements about expanding their subscription and Flex-go programs, the ad-supported software suite adds to Microsoft's competitive efforts against Google, piracy, and open source software. (Google offers a Beta version of free online applications - Google Docs and Spreadsheets, and the free software suite from OpenOffice.org has been downloaded 100 million times since 2001.)

Microsoft has not specified where the ad-supported Works will be tested, but the model has clear potential in emerging markets. Developing-country users are more price-sensitive and may be more willing than their developed-country counterparts to trade ads for free, legal software. Emerging-market users might also prefer Microsoft's pre-loaded software over online productivity applications if their Internet connection is slow, expensive or unreliable.

Microsoft's foray into the free software market would benefit low-income computer users who cannot afford full-priced software licenses and do not want to use pirated software. In addition to gaining new (legal) users, Microsoft would also benefit from partnerships with multinational corporations (e.g., Coca-Cola, P&G, Dell) eager to reach emerging mass markets through targeted advertising. Ad-based software could help these potential advertisers capture a larger share of the small but rapidly growing disposable income of emerging mass market consumers.

Also in the news

• Lenovo to Launch $199 PC
• Google to Develop its own Handset
• Emerging Markets-based Companies Spend More on Innovation

Global versus Local: Search Engine Strategies for Emerging Markets

Google’s recent earnings report focused on their aggressive hiring in international locations. Eric Schmidt, Google CEO, explained that searching the Internet is now a global activity, and in order to compete with Yahoo!, Microsoft and, increasingly, local competitors like Baidu, Google’s staff has to become more international. Google has also developed a “cross-language informational retrieval” service, which translates foreign-language content for English-language searches (and vice-versa). According to one blog, translations will be available in English, Arabic, French, German, Italian, Japanese, Korean, Mandarin, Portuguese, Russian, and Spanish. Google’s “world-is-flat” macro approach will appeal to more Internet-savvy users interested in international news and opinions.

Yahoo!’s approach to international markets is slightly different. The company offers a language-translation program similar to Google’s, but a more intriguing initiative is the attempt to attract local users in developing countries by turning their search engine into citywide portals. Yahoo!’s India-based pilot, Our City - an online clearinghouse for local, dynamic content - has been introduced in 40 Indian cities and appears to have gained a solid user base. Yahoo!’s more localized approach will meet the demands of new users who are just beginning to access the web and are most interested in locally-relevant information such as government services, news, entertainment and events. While a combination of approaches is likely the best strategy for emerging market business success, a focus on locally available services and content will motivate the next billion PC users to take the Internet for a test drive.

Yahoo!, Google, and other IT companies should have no trouble finding local content. Small and medium-sized businesses (SMBs) are eager for sales opportunities outside their brick-and-mortar confines, and governments in many emerging-market countries are investing heavily in e-government portals and support for the SMB sector. Smart local entrepreneurs with intimate knowledge of local content needs could act as aggregators, benefiting from the technology, resources and scale of a multinational technology partner. All stakeholders understand this would result in more emerging-market users online, creating potential consumers of other online content and services.

Also in the news:

• Internet Slow to Reach the Unconnected
• Everex, Acer, and Medison Introduce Low-cost PCs
• Technology and Power, How is Access Defining Progress

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Brazil's New Mobile Regulations: Pro-consumer, Pro-Operator or Both?

by Karen Coppock
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Several news outlets, including cellular-news.com, carried a story today reporting that "Brazil Regulator Announces New Pro-Consumer Cellular Rules."

Could these rules, which include the requirement that prepaid mobile phone credits must be reactivated when phones are recharged and must be valid for 180 days rather than current requirement of 90 days, be good for mobile operators as well? Definitely.

During a global study of potential first-time mobile handset purchasers, our field researcher team in Egypt reported that Mobinil's new Lifetime Validity program (allows customers to make only one charged call every three months to retain their prepaid-account) was mentioned as an incentive for low-income individuals to finally buy a mobile phone. Mobinil's CEO notes “...this has had a very significant market impact for us. We saw large subscriber growth following the introduction of this offer...” Vodafone soon launched a lifetime validity program of its own and in its July 2007 Interim Management Statement, it noted that "Organic customer net additions were 1.0 million, with a positive reaction to the introduction of lifetime validity for prepaid customers."

Whether they are forced, as in the case of Brazil, or pushed for, as is the case of Mobinil in Egypt, business model innovations will put mobile phones and service at the reach of individuals lower and lower down in the economic pyramid - likely to the benefit of both consumers and corporations.

Are Mobile Phones Going the Way of Refrigerators?

A recent study by Enterprise Africa! on emerging-market technology trends examines the poverty-alleviating aspects of mobile phones in Africa. The organization looked closely at the small, Southern African nation of Botswana, where cell phone subscribers jumped from zero in 1998 to 823,070 by March 2006. With mobile technology now reaching roughly half the population, Botswana is a model for other developing economies striving to impact development through access to technology. Most notable about the study is the utilitarian rationale provided for cell phone ownership - safety and business expansion.

As handsets penetrate ever-lower rungs of the economic ladder, new buyers are more concerned that the purchase can be justified as an essential utility. Mobile phone companies in developing countries are competing for a share of the wallet with non-traditional competitors such as household appliance retailers. Vital Wave Consulting research found that many low-income residents of developing countries consider a stove, TV and refrigerator to be “essentials” and all other electronic and durable goods, including mobile phones, “luxuries.” In one study of prospective phone buyers in six emerging-market countries, TVs were preferred over both landline and mobile phones by two-thirds of respondents.

In order to capture growth opportunities in these rapidly-expanding markets, mobile phone service providers and manufacturers would do well to convey the safety and business benefits of cell phones to potential customers who live on little more than $1 per day. Low-income consumers are required by virtue of their limited resources to conduct a careful cost-benefit analysis for all purchases. With refined value-proposition messaging that includes the utilitarian functionality of cell phones, the mobile industry may accelerate the growth of their market opportunity among lower-income segments in developing countries.

Also in the news:

• The XO Computer may hit US retail markets by Christmas
• Microsoft Expands Pay-As-You-Go Model for Office ’07
• World Bank and Google Mash Development and Business

Emerging Markets Definition and World Market Groups

Vital Wave Consulting enables accelerated revenue growth in emerging markets. The company follows established World Bank economic benchmarks to define emerging markets as countries that have a gross national income (GNI) of $10,725 or less per capita.

Within emerging markets, Vital Wave Consulting distinguishes between three sub-groups according to market size (population) and economic attractiveness (GNI per capita in purchasing power parity terms).

• Strategic Opportunity Markets are the largest and most economically attractive for a multinational corporation that is looking to grow its customer base. These markets have a population over 40 million, and strong real GDP growth. These markets also have a GNI per capita over $2000 per year in purchasing power parity (PPP).
• Niche Opportunity Markets are countries with a population under 40 million that have average incomes over $2000 in PPP terms and strong real GDP growth. These markets provide multinational companies with opportunities to grow their markets on a smaller scale, or they may be “gateways” to larger nearby markets.
• Long-term Opportunity Markets are the least attractive markets to a multinational corporation. These markets exhibit a low standard of living with a GNI per capita under $2,000 per year in PPP terms. In these countries, persistent poverty, corruption and political instability may be hampering economic growth. These countries may be viable markets in the long term with consistent political and economic reform.

(to view a larger version of this chart on the Vital Wave Consulting website click here).

Over 141 countries, representing 84% of the world’s population, meet these criteria. The proportion of worldwide technology expenditures by emerging-market countries is steadily increasing relative to mature markets. The ten largest emerging markets are expected to spend $558 billion on IT and telecommunications in 2009. By 2015, the combined GDP of emerging-market nations will surpass that of the top 20 developed economies.

Vital Wave Consulting provides strategic consulting, market research and business intelligence services and publications on emerging-market business opportunities. Clients include multinational corporations in the information technology and telecommunications industries. For more information, please visit www.vitalwaveconsulting.com, or call (650) 321-3313.

Marketing to the Masses: Bringing Low-cost PCs to the General Public

Dominating the technology and emerging markets news again this week is the race to capture the low-cost PC market in developing countries. Via joined its competitors last week with the release of a low-cost education PC in South Africa. Intel also announced that they are joining forces with the One-Laptop-per-Child initiative, adding the tech giant’s heft to the project, and two weeks ago we discussed Microsoft’s recent launch of the IQ PC for India. The solutions all share a focus on the education market and have limited distribution.

PC and software companies aim for the education segment in emerging markets because government buyers, even in poor countries, can have relatively large budgets. Vital Wave Consulting research shows the 10 largest emerging-market countries spent an estimated $4.7 billion (USD) on IT in education last year. A well-designed computer with relevant content can help meet a country’s education goals, and affirm the PC manufacturer’s commitment to social and economic development, blunting any criticism that they are capitalizing on the world’s poor.

Targeting the education segment is strategically sound, but the fast-growing consumer segment also presents a significant opportunity for multinational companies (MNCs) looking to increase revenues in developing countries. Original research by Vital Wave Consulting identifies a noticeable discrepancy between consumers’ perception of PC prices and the actual price offered in the retail channel. In-depth interviews of likely near-term PC buyers in seven emerging markets showed that the prices most consumers are willing to pay for a PC actually exceed the current price of a basic computer. MNCs can increase their total addressable market (TAM) by educating potential buyers about the “true price” of a starter PC. This is one strategy that can help MNCs capture near-term incremental market opportunities with minimal disruption to existing business processes.

Also in the news:

* Michael Dell and OLPC execs spar over recycled PCs
* Developing countries as leaders in innovation
* iPhone as a computer of the future with developing world applications

WiMAX - Cream Skimming or Bridging the Digital Divide

by Karen Coppock
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For all of the talk about WiMAX being the silver bullet for rural connectivity and bridging the digital divide, I have seen many announcements about WiMAX deployments in major urban areas.

This week MTN Uganda will start a national deployment of WiMAX across Uganda. According to a press release by Alvarion, MTN Uganda's WiMAX technology partner, WiMAX will first be deployed "in the capital and largest urban settlement of Uganda – Kampala, [and] is planned to be followed by additional network deployments in 30 other cities across the country."

A few months ago Saudi Arabia went live with a WiMAX deployment on Tahlia Street in downtown Riyadh as a part of its "SmartCity" program. Mohammed Saquer, CEO ITC states that, "this service will further our effort to enliven downtown and continue Riyadh's aim of being a city at the cutting edge of technology innovations." Intel is an active partner in this initiative to revitalize cities.

Even in the United States, WiMAX will be deployed in urban areas. SprintNextel selected ZTE to supply their WiMAX solution, which they plan to use to "cover 85 percent of the households in the top 100 U.S. markets."

Perhaps Ericsson's statement about the lack of a solid business case for WiMAX was referring to WiMAX in rural areas?

Designing for Global Markets

GE Chairman and CEO Jeffrey Immelt offered up this week’s nugget at a gathering of Indian Institutes of Technology (IIT) graduates in California’s Santa Clara Convention Center. During a wide-ranging address, Immelt characterized three generations of technology business: the past, in which developed-world companies designed for mature markets; the present, with developed-world companies tapping emerging-market manufacturing and personnel resources to deliver products and services to mature markets; and the future, when developing-world companies design and sell products and services to mature markets.

Vital Wave Consulting wondered why Immelt’s three generations each ended with mature-market (rather than global) buyers, when GE’s revenues from emerging markets are projected to grow from $10 billion to $50 billion between 2000 and 2010. Last year, nearly 20% of the company’s $163 billion in revenues came from emerging markets, and revenue in these markets rose 14% in the first quarter of 2007. Emerging markets already represent the fastest growing markets for global technology companies, and overall revenue potential in these regions will soon overtake that of mature technology markets. For GE and other technology companies, a more accurate description of the third generation of technology business is global companies designing for global markets, not just the developed world.

Immelt’s audience of primarily Indian-born engineers, eager to compete in the world’s most advanced markets, was receptive to his suggestions. Successfully designing for the developing world, however, presents a worthy challenge and, in the long-run, larger rewards. Business trends suggest that companies based in developing countries will not only be selling into mature markets, they will also be designing for emerging markets around the world. With lower cost structures, technical expertise, and a broader understanding of global problems, emerging-market entrepreneurs may bring a richer set of solutions to local challenges. Multinational corporations, however, retain the advantage of global scale. To lead in developing countries, they must develop effective strategies to design for the world’s growing mass markets. First, however, they must acknowledge that the market opportunity is global and that, if they don’t act fast, their counterparts in developing countries will.

Also in the news:

• Via pushes forward in emerging markets with a Mecer PC
• Vodafone and Nokia petition for m-banking regulatory changes
• Rare interview with Aga Khan: Development through venture capital