Nokia: Low TCO is key in emerging markets - but how to achieve it?

I recently made reference to an emerging markets-focused publication which I consider to be an excellent source of information and insights: Expanding Horizons magazine, which is offered to ICT decision-makers in the private and public sectors by Nokia and Nokia Siemens Networks. The latest issue is a special edition packed with interesting articles from the last 2-3 years. Expanding Horizons aims to explore the socio-economic benefits that mobile technologies offer as well as best practices from around the world in order to encourage affordable mobile communications and bring the Internet to the next billion consumers. Its editors also aim to demonstrate how to create favourable environments for market growth in developing countries.

One of the most recent articles opens with a challenging question: Why is TCO (Total Cost of Ownership) of USD 5 per month possible in India, Pakistan, Sri Lanka and Bangladesh but not in 76 other emerging markets covered in a study conducted by Nokia in 2007. For the purposes of the study, TCO was defined as a combination of the service fee, taxes and mobile device price. The study found that the average TCO for subscribers in these developing countries was USD 13 per month and its authors asserted that bringing this figure down to less than USD 5 would enable a majority of low-income prospective subscribers to use mobile services. Surely, then, all four South Asian countries with outstandingly low average TCO should have very high mobile penetration rates when compared to the broader selection of emerging markets. Let's look at mobile penetration in these four countries as of December 2008, according to the World Cellular Information Service.

• India: 28.31&
• Pakistan: 51.68%
• Sri Lanka: 49.48%
• Bangladesh: 28.95%

Of the 76 countries found to have higher average TCO, quite a large number have outperformed these South Asian markets in terms of mobile penetration. Let’s pick out some examples, choosing only countries with lower per capita GDP and/or ranking lower on the Human Development Index than India. Again, the figures are from the Informa Telecoms & Media World Cellular Information Service:

• Vietnam: 79.37%
• Yemen: 28.53%
• Kyrgyzstan: 65.83%
• Cameroon: 31.01%
• Nigeria: 44.50%

I wish I had time now for a detailed discussion about why some of the above countries, all of which have higher average mobile services TCO than the South Asian markets, have done better in terms of getting mobile devices into the hands of larger slices of their populations. In lieu of that discussion, for which I hope to find time another day, it does, at least seem fair to assert that while low average TCO is highly desirable, it is clearly not the single most important factor for mobile services to be taken up by the less affluent population segments in developing countries.

This is not to say, of course, that it is not worth trying to understand how TCO can be minimised. Nokia were interested enough to commission a follow-up study, executed by LIRNEasia, a regional ICT policy and regulation capacity-building organization active across the Asia Pacific.

So what explanations were found for the USD 5 TCO in the four South Asian countries? The Expanding Horizons article states that "surprisingly, the data led to the exclusion of such factors as per capita GDP, mobile penetration and growth rates, population size and density, and governance." In each instance, the article continues, other countries surveyed with more favourable values for any one of these characteristics also had monthly TCO levels substantially exceeding the crucial USD 5 per month. Instead, "our study told us that the two factors most common among the four countries that had the lowest TCO levels was superior market access and business model innovation," said Mr. Rohan Samarajiva, executive director of LIRNEasia. "In addition to the availability of low-cost handsets and modern wireless infrastructure equipment, a market requires a ‘disruptive competitor’... one who does not play by the established rules."

To summarise, the strategies of these 'disruptive competitors' have, according to the article, involved shifting the operator’s focus to lower income consumers and increasing network utilization. The article continues that this kind of strategy is built on the principle of widening the user base significantly, handling a greater volume of smaller transactions very efficiently, driving down customer acquisition costs and creating an efficient network architecture. All of this is done, continues the article, with the goal of allocating the network’s fixed cost structure over a broader user base while significantly raising more marginal revenue through higher numbers of previously under-served, low-income consumers.

In the case of Bangladesh, my guess is that the first-mover in terms of being a 'disruptive competitor' would have been Grameenphone, famous for its association with the Village Phone microfinance initiative, now replicated in African and other Asian markets, which puts mobile devices in the hands of low-income subscribers in rural areas and enables them to build sustainable businesses. In the case of the other three markets, the identities of the 'disruptive competitors' does not immediately spring to my mind. Perhaps some helpful reader has a view.

Nokia: Low TCO is key in emerging markets - but how to achieve it?