Bandits, Drug Traffickers, and other Barriers to Entry

Last week in Barcelona at the Mobile World Congress (the conference formerly known as 3GSM), attendees got a taste of what it really means to bring technology to frontier markets. Karim Kohja, CEO of Afghanistan telecom operator Roshan, described the challenges of expanding into rural Afghanistan. He woke up his audience with the story of his unexpected entry into the “financial services industry” when he had to carry boxes of cash into bandit-infested mountains. Kohja quickly learned that, if reaching remote customers was easy, they would already be subscribers.

While the Afghanistan telecom example is extreme, it is not unique. Barriers to entry are typically segment- and geography-specific, and mature-market experience does not necessarily help a company prepare for them. Vital Wave Consulting field researchers know this well – before conducting interviews or taking photos of technology usage in the favelas of Rio de Janeiro, they must request permission from local drug traffickers. Oftentimes the more remote the region or poor the market, the greater the challenge. But, emerging-market expansion is not always so treacherous. Many, for instance Eastern European countries, can look and act more like developed markets than their least developed counterparts such as those in Sub-Saharan Africa. And the least developed markets can also offer unexpected advantages. Markets that have not yet been penetrated by technology have fewer barriers to entry (e.g., no legacy systems to upgrade, less competition).

Companies eager to find growth opportunities in emerging markets must balance their appetite for risk with the urgency to grow. Businesses may chose to work with partners to share the risk or to avoid the most extreme situations. Others may chose to embrace the risks and hedge against them with business rigor, including tested business models, credible market and business intelligence, and reliable supply chains. Businesses with such a toolkit will mitigate emerging-market risks and gain a reliable measure of potential rewards. These are the firms most likely to effectively tackle the unique barriers to entry in new markets.

Also in the news:

• $20 mobile phones coming to India
• The marriage of music and handsets
• Low-cost notebook round-up

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

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

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

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

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

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.

Mobile Banking Lacks a Global High-Tech Leader

Using mobile phones for financial transactions, or m-banking, has seen rapid adoption in countries like the Philippines and Japan. Though the service remains fragmented and country-specific, this week’s CIO magazine points out the growing opportunity for m-banking in Africa.

CIO bases their assertion on survey results from South Africa, where local bank subsidiaries are already processing thousands of mobile transactions each month, and the biggest barrier to wider adoption seems to be a lack of consumer awareness.

Finding signs of m-banking success in South Africa is not surprising. Vital Wave Consulting research reveals that the mobile phone saturation rate among South Africans living at or above subsistence is comparable to the level in European markets. Saturation in South Africa (and Nigeria), together with rapidly increasing mobile penetration rates in other African countries, create a fertile user base. And mobile phone-based financial services are particularly attractive when poor roads and public transportation systems make a trip to the bank an expensive, all-day journey.

There are ample, quantifiable business opportunities in the m-banking value chain for multiple players, including banks, international credit companies, carriers, and software designers. While financial service providers are moving quickly to realize these opportunities, no global technology leader has stepped forward. A multinational high-technology company capable of providing such mobile solutions has much to gain by enabling comprehensive m-banking across emerging markets.

Also in the news:
• Microsoft is putting their money on smart phones as the next computer
• GSM and CDMA search for the best foothold in developing countries
• Vodafone unveils handsets designed for emerging markets