Mobile industry nicely balances profit motive with improving lives: not everyone agrees...

It has been a tendency of this blog to eulogise the ways in which telecoms companies with business units in developing countries are able to reconcile efforts to alleviate poverty and misery with their need to turn a profit and grow shareholder value.

I therefore tend to be very encouraged when I read articles such as that written in April by Rohit Singh of the Overseas Development Agency (ODI), a British think tank focused on international development and humanitarian issues. Singh writes about the numerous studies which support the idea that a rapid increase in mobile penetration contributes significantly to economic growth. He discusses the incremental, tranformational and production benefits brought by mobile phones:

• Incremental benefits: improving what people already do – offering them faster and cheaper communication, often substituting for costly and risky journeys.
• Transformational benefits: offering something new such mobile banking, enabling the unbanked to store value.
• Production benefits: resulting from the creation of new livelihoods, not only through professional telecommunications jobs but also through activities like re-selling airtime or phone cards.
  

Much praise, then, has been directed by DevelopingTelecomsWatch at the efforts of mobile operators worldwide, notably in Africa. None of what has been written here suggests that there might be a possible downside to the rapid growth of mobile infrastructure and services in the places where the world's least affluent people live their lives.

There are those, however, who voice precisely that concern. Notable, I think, is Steve Song, who spent ten years working on ICT for Development issues at the International Development Research Centre (IDRC), a Canadian state-owned enterprise whose role is to help developing countries use science and technology to find practical, long-term solutions to the social, economic, and environmental problems they face. Song is now based in Cape Town, where he has taken up a fellowship with the Shuttleworth Foundation, an organisation which works to drive social and policy innovation in the fields of education and technology through policy dialogue and practical projects.

I was very interested in Steve Song's reaction to Kenyan cellco Safaricom winning a UN-HABITAT award for its M-Pesa mobile money services. This got a mention in the recent discussion here about whether mobile banking and money transfer services branded and run by cellular operators in developing countries might be vulnerable to a competitive threat from apparently operator-neutral solutions such as the one recently announced by Monitise. My own reaction to a cellco being lauded for how its services improve the lives of poor people is always very positive - it makes me pleased to make my living in and around an industry whose technologies can be a force for good. On hearing about Safaricom's award, Steve Song, however, was prompted to consider, not for the first time, "the effective monopolies/oligopolies" that mobile operators in Africa have become.

While Song acknowledges "the miracle that mobile phones are" and says that "there can't be many people who still doubt the direct value that mobile phones provide to people", he is concerned that the wealth that is being generated by cellcos in Africa is being distributed too unevenly. To support this assertion, he cites the case of South Africa's MTN apparently acknowledging that is subsidises 3G data traffic with revenue from its core voice and SMS business. This means, says Song, that when it comes to communication, "the poor in South Africa are effectively subsidising the wealthy".

Song also invites us to consider "the microeconomics of the edge cases of mobile access" - the case of a remote village served by a single cell tower. He contends that in this scenario, the majority of calls made would be to other users in the same area, i.e. local calls. Song also asserts that people in Africa "are spending substantial amounts of their disposable income on access." So, he argues, if, say 50% of the phone calls made in a remote village are local and if people are spending 50% of their disposable income on mobile access, "that means that 25% of their disposable income is being siphoned out of that village."

Perhaps with my own mobile bill in mind, I initially wondered whether it could really be true that even very poor people could possibly be spending as much as 50% of their disposable income on voice and SMS. Apparently so, according to a 2008 report from Research ICT Africa, a twenty-country network hosted by the EDGE Institute in Johannesburg and funded by Steve Song's former employers, the IDRC.

We can see from the table below that the report has indeed identifed African countries where consumers spend more than 50% of their disposable income on mobile services. These include Kenya (52.5%), Nigeria (52.4%) and Zambia (60.3%). According to this study, for the same three countries, the percentage of disposable cash spent on cellular services for the bottom 75% of the population by disposable income rises to 63.6%, 60.9% and 73.9% respectively.
Is this phenomenon - people spending such a major chunk of their incomes on mobile phone charges - purely an unavoidable consequence of how poor these people are? Or might more competitive mobile markets deliver considerably lower prices, thereby freeing up African consumers' cash to be spent on other items?

Several times, a DevelopingTelecomsWatch piece has focused on a particular country and voiced the idea that perhaps that state's mobile market is currently contested by too many cellcos - too many in the sense of not all of them being able to turn a profit and justify further investment. In the few months since this blog's inception, that question has been raised about Cambodia and Sri Lanka and about Tanzania, Burundi and Gabon.

Along the way, I've sometimes been quite critical of operators with aggressively low pricing. Metfone (the Cambodian subsidiary of Vietnamese MNO Viettel) is one example. I have expressed the view that Metfone's distribution of free SIMs and airtime is a "disruptive" market entry strategy which is "very nice for quickly building a subscriber base, but taken to its logical conclusion this can seriously erode overall market value for all players."

What I've had in mind is an idea I've heard articulated countless times at many, many telecoms industry conferences - that telecoms groups will only invest in and improve the communications infrastructure of those countries where good profits can be earned; that most operators naturally settle around a band of prices which enable profitable operation and happy shareholders for all competitors; that operators which sell their services below the lowest end of that band of prices can be accused of destroying martket value and threatening the ability of others to keep investing; that regulators/governments which allow any market actors to do this are not acting responsibly.

Steve Song would presumably not sympathise with these sentiments because he rails against the failure of telecoms regulators in Africa either to license enough new market entrants or to curb the excesses of incumbent players with significant market power. He feels that this has led to a situation where existing operators "collude to maintain high profits", citing the global price of SMS per byte vs. the true cost of delivering text messages.

The ODI's Rohit Singh also deals with the role of telecoms sector regulatory agencies in developing countries. He writes about how governments should oversee such issues as interconnection between the operators, spectrum allocation, and access to the international gateway. He argues that the importance of this role is shown when, in the absence of regulated interconnection tariffs, dominant firms charge high prices for connecting calls from other networks. Singh asserts that this limits effective competition, with dominant firms earning monopoly profits, keeping their prices high, and having little incentive to expand or innovate.

Without effective regulation, Singh continues, ownership of bottleneck infrastructure by dominant firms can diminish the developmental impact of the mobile sector by pushing up prices and restricting coverage.

When Singh reaches for an example of this kind of failure of regulation, he thinks of Zambia, where he says international calls are very expensive because the state-owned fixed-line operator charges high tariffs to private operators to access the international gateway. This distortion, he argues, then affects the domestic calls market, because private operators have to subsidise their international calls to compete with the public sector firm. In this characterisation, private sector mobile operators are the good guys of the piece, forced rather than inclined to charge high prices for their services. My feeling, then, is that Rohit Singh and Steve Song have quite different views of the optimally desirable interplay between telecoms operators and regulators.

Going beyond the issue of pricing, in an earlier blog post, Song expresses concern about how mobile operators in developing countries might conceivably take advantage of the ways in which cellphones have become indispensable in people's lives. Drawing on a March 2009 presentation by Nathan Eagle, the developer of crowdsourcing application txteagle, Song observes that no one in Kenya can afford not to have a mobile phone because "even if you are digging a ditch by the side of the road, day labour is now organised via SMS." Song feels that this means that mobile operators have Kenyans by the throat. To support this argument, he discusses another anecdote from Nathan Eagle's talk, which concerns a water pump manufacturer in Kenya that, by combining an M-Pesa-enabled, solar-powered metering system with their water pumps, has completely changed its business model. This company is apparently now giving water pumps away for free and then making a profit by selling access to water through the M-Pesa service. In his presentation, Eagle observes that Michael Joseph, the CEO of Safaricom, "loves this because you have to have a Safaricom account to get water."

Steve Song ask whether he is alone in finding this a little disturbing and feels that there is something wrong about a single mobile operator acting as the gatekeeper to water supply. Song argues that "for any village in this situation, Safaricom can charge whatever they like".

When I stumbled upon Steve Song's blog, I felt it would be interesting to draw attention to the uncomfortable questions which he raises. After all, DevelopingTelecomsWatch was never intended as a cheerleader for a particular view of the role of the communications sector in developing countries and emerging markets. So, for anyone else who has so far been unaware of Song's writing, I hope it has been refreshing to consider the ideas of someone who observes the actions of mobile operators with a critical eye. What I like about Song's writing is that his arguments are not weakened by an unattractively shrill tone. However, if you're curious to hear from someone who really doesn't mince his words about cellcos, I'd suggest you read a recent article by Llewellyn Kriel about South African operators and the country's telecoms regulator.

Mobile industry nicely balances profit motive with improving lives: not everyone agrees...