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...

Zain Africa Speculation Watch: Episode 4

Much of the commentary on the Zain-quitting-Africa rumours has focused on how such a move seems at odds with the Kuwaiti group's recently stated ambition to be a top 10 global mobile operator by 2011. I thought I'd also like to have a dig around for any recent evidence to suggest that Africa, specifically, continues to be of strategic importance to the company.

I found one piece of such evidence contained within the Q4 2008 Zain update by Gavin Patterson of Informa Telecoms & Media. I'm not 100% sure when this was written (as opposed to published). It refers heavily to Zain's Q4 2008 results announcement, which was made in March and contains references to events which took place in May - but the Informa piece itself is dated 16th June. If Patterson's article was written just this week, I wonder why there is no reference to the current speculation about the group's African assets. Whatever the timing, I find one particular statement from Zain's March announcement to be very interesting in the context of this week's rumours:

"[Zain CEO Saad] Al Barrak said the financial crisis was an opportunity to make more acquisitions in Africa and indicated that the group was "actively" pursuing a number of prospects. He said Zain would adapt its strategy – where it made commercial sense and where it was economically viable – to pursue opportunities involving share swaps and acquiring minority stakes in other telecoms operations."

Specifically in the African context, then, if recent rumours are to be believed, Zain has moved from acquisition mode to selling in just three months.

Share swapping would not be a new experience for Zain. Last month, the group announced a deal of this type with Paltel, owner of the only mobile network so far operating with dedicated coverage of the Palestinian Territories (although this monopoly is set to be broken this year by the entry of Wataniya Palestine, assuming issues around Israel releasing spectrum do not prove insurmountable).

In the context of discussions around Zain getting out of Africa, it's really interesting to see Gavin Patterson's article going into some detail about where in the continent the group might be looking to expand. He writes that "Zain has also made public its interest in South Africa and Mali and was disappointed not to win Rwanda's third mobile license at the end of last year, which went to Millicom International Cellular. According to Patterson, Zain plans to make "three or four" acquisitions in Africa this year.

Expansion of this kind - rather than the recently rumoured shrinking of the group - seems in line with the group's plans to have a subscription base of 150 million by 2011. To reach that figure, however, Informa Telecoms & Media's number crunchers feel that Zain would need to be even more aggressive in terms of acquisitions because, as Gavin Patterson writes, based on its current operations, his company forecasts that the group will fall well shy of that 150 million subs mark, with 83.4 million subs by the end of 2011.

Zain Africa Speculation Watch: Episode 4

CDMA to GSM migration: another one jumps ship in Africa

Reports of the death of CDMA have been greatly exaggerated. That has been the theme of of few articles I've posted here. In March I blogged on claims made about the standard being in rude health in Nigeria. A month earlier, I was writing about operators betting on CDMA in India. That article, however, did report on the seemingly unstoppable rise of the GSM family and the constantly eroded global market share of CDMA. Contributing to this trend is the phenomenon of former CDMA operators migrating to the more successful technology. An example of this is currently underway in Africa.

I learned via Telegeography yesterday that Rwandan mobile operator Rwandatel is continuing to switch users from CDMA mobile phones to 3G-enabled GSM handsets.

According to the article, which quotes RwandaTel CEO Patrick Kariningufu, the MNO is handing out new GSM handsets to an estimated 20,000 subscribers mainly located in rural areas. The move is said to be part of the company's response to increased competition.

The country's mobile market is currently split two ways - but the slices are very differently sized. MTN's Rwanda outpost has 82.61% of the country's subscriptions according to WCIS. Until late last year, Rwandatel, as a purely CDMA operator, was doing OK in terms of slowly chipping away at MTN's dominant position. The decision to migrate to GSM/W-CDMA was made some time ago, however. A Global Mobile Daily note of December 5th indicates that while the new network was launched around that time, the operator, a unit of Libya's Lap Green, had hoped to make the move to GSM earlier last year but was prevented from doing so by equipment shipping delays caused by the post-election violence in Kenya.

Both cellcos will be preparing for the impact of a new challenge to the status quo. This comes in the form of a soon-to-be-launched Tigo-branded MNO, the newest part of the Millicom International Cellular empire.

In November, GMD reported that Millicom had been awarded Rwanda's third mobile operating license by the Rwanda Utilities Regulatory Agency, which reportedly rejected competing bids from Zain and Telecel Globe, a company owned by Orascom Telecom. Millcom's new operation will offer mobile and fixed-line services.

Market-watchers will be interested to see if Rwandatel's migration to GSM will be enough for the operator to compete effectively vs. this new entrant and the well-established MTN operation.

CDMA to GSM migration: another one jumps ship in Africa

How rural users gain from connectivity in emerging markets

The theme to which I have really warmed in the last few days is that of how telecoms and Internet services are improving the lives of poor people in developing countries, especially those who live away from major towns and cities. I have tried to examine how this kind of humanitarian objective can be reconciled with for-profit telecoms sector businesses seeing a solid return on their investments and thereby building shareholder value.

My most recent post, for example, mentioned Village Phone projects in Bangladesh, Indonesia and those involving subsidiaries of MTN in Uganda and Rwanda. This did include a video clip about the Village Phone initiative in Uganda, but I am conscious that I have otherwise been a bit vague about precisely how access to services makes a positive impact on the economies and social conditions of rural communities in emerging markets. In the following clip, which relates to the Rwanda project, we see how a small business works more efficiently by gaining the facility to order materials online rather than having someone travel to make a purchase. The same business has also gained from being able to access international markets for its products.


As well as showing us the benefits for users of services, we also hear echoes of a point discussed here. In the clip, MTN Rwanda CEO Themba Khumalo says: "we are creating a base of potential customers into the future. Not the very far future. The near future." This chimes neatly with the 2005 quote from Neil Gough of Vodafone which I dug up for Saturday's entry: "all of these results were achieved through enterprise rather than aid. A clear success story in commercial terms but one that also had a profound impact on the development of the economy and society."

This is taken from the Autumn 2008 edition of Ericsson 's online magazine 'Telecom Report' and is part of a longer video article on Corporate Social Responsibility. In my last post, I looked at the enthusiasm of Ericsson's rival Nokia Siemens Siemens Networks for work of this kind, quoting the company's Head of New Growth Markets, Rauno Granath who is adamant that "there is still a lot of pure business sense for operators to reach the rural areas." With that in mind, I do wonder why the presenter of Ericsson's video magazine saw the need to round up the item by asking whether the case of the basket weavers of Rwanda is "a marketing ploy or sincere commitment", particularly because it's not immediately clear whose possible 'marketing ploy' he is referring to. Does he mean a marketing ploy on the part of MTN? It is hard to tell, not least because I am not sure who commissioned and produced the film from Rwanda. MTN? Ericsson? Some third party? Whatever the story, I feel sure that Ericsson would not want the remark to suggest any cynicism on their company's part regarding the idea of bringing communications services to poor people in rural areas in the developing world - not least because in late 2007, the Swedish vendor announced its own partnership with the United Nations and The Earth Institute to provide connectivity to African villages through the same Millennium Villages project mentioned in the Rwanda clip.

In the clip, and via Ericsson's November 2007 announcement, we can see that as well as improving the efficiency of the villages' nascent entrepreneurs, access to the Internet is being used to benefit the education of children. Ericsson's Millennium Villages announcement also emphasised the health benefits, quoting Jeffrey Sachs, special advisor to the United Nations Secretary-General and head of the Earth Institute at Columbia University, a key partner in the Millennium Villages project: "A mobile phone is one core breakthrough technology; it won’t end malaria by itself, but it can make it possible for a mother whose child is dying of malaria to access a community health worker to ensure that her child gets the emergency treatment they need to stay alive."

I only wish these points were always so clearly articulated in the general news media. The UK's Guardian newspaper supports development work carried out by the African Medical and Research Foundation (Amref) and Farm-Africa in Katine, a rural sub-county of north-east Uganda. The project was launched by Guardian editor Alan Rusbridger and is being funded by donations from Guardian and Observer (the paper's Sunday edition) readers and Barclays Bank, which initially gave £500,000 to the project and will match fund donations over the course of the project up to £1m.

The Katine project is more than just a fundraising push. Via the Guardian's dedicated Katine website readers can follow how the money is spent, how development works (the successes and the failures) and how the lives of the sub-county's 25,000 inhabitants are changing.

While this all sounds very good, something I did find rather frustrating was an article earlier this month, which I felt made a fairly weak case for spending donors' money on providing Katine resident with Internet access. I felt the flippant title ('Learning to surf') and the fact that the piece does not really go into how Internet access will benefit the villagers makes it an unhelpful contribution to the debate around this.

Last month, however, there was a better Katine article covering mobile phone use and how "the latest technology is enabling villagers to bypass middlemen and find out the prices their crops will command." I also noticed that Ken Banks of Kiwanja.net fame responded to the article's point about how mobile users in Katine charge their phones. There is more about this issue from Ken on one of his 2008 blog posts.

That's all for now. In the next hour I have to head for the airport to take the last family vacation before starting my challenging, exciting new assignment. I daresay that by the next time I am on online there will be plenty of news emanating from Barcelona worthy of comment here.

How rural users gain from connectivity in emerging markets

Millicom's global emerging markets strategy examined

Following my recent posts here regarding 2008 results and 2009 forecasts from the emerging markets components of the Telenor and TeliaSonera businesses, I would like to examine the performance of a company whose main focus is to provide affordable, widely accessible and readily available prepaid cellular telephony services in developing countries.

In April 2008, I spent an enjoyable two weeks visiting a very diverse range of telecoms service providers in four South American countries. At the time, I was responsible for the development of the Informa Telecoms & Media-produced annual Americas Com conference and exhibition, part of the Com World Series, a global suite of emerging markets-focused telecoms sector networking and discussion events. In the case of Americas Com, which under my watch was held twice in Rio de Janeiro, we were working to broaden the audience. Formerly known as GSM Americas, the event had a strong track record of gathering executives from mobile operators, particularly from Brazil and the Cono Sur countries of Argentina, Chile and Uruguay. I was keen to connect with prospective speakers and delegates from less well-represented countries. Another priority was to reach out to wireline operators of various kinds. Across the four countries I visited, therefore, I had meetings with people from national incumbent long-distance carriers, several cooperative-owned LECs and a cable MSO - as well as with MNOs on every stop of the tour.

In Paraguay and Bolivia, I met with very friendly people working for the Tigo-branded mobile operations of Luxembourg-headquartered Millicom International Cellular. For someone trying to secure top-level conference speakers, Millicom is a tough nut to crack. Having their executives speak in a public forum about company strategy or the company's view of technology choices is not something the group seems enthusiastic about.

This week, as picked up by Telecompaper, Millicom released Q4 2008 results and discussed its plans for the year ahead. The company reported fourth-quarter EBITDA up 31% percent from a year earlier to USD 406 million and revenues up 18% to USD 907 million.

Millicom met its target for an EBITDA margin of 45% in the period, but net profit fell to USD 66 million from USD 113 million a year ago, due to a net charge of USD 55 million for tax and forex losses. Total subscribers rose to 32.0 million at year-end from 30.6 million in the third quarter.

The company plans capital spending of USD 1 billion in the current year, down from USD 1.4 billion in 2008. Millicom says that it also plans to lower OPEX due to the challenging economic environment, and also expects a continued impact on results this year from the stronger US dollar. The cellco is also aiming to scale back its promotions in Latin America to focus more on higher value customers. Millicom says this is due to slowing subscriber growth in increasingly penetrated markets.

For me, this is very familiar territory. I have lost count of the number of presentations I have heard from companies in the broad customer management/billing/CRM space which urge operators in developing countries to be ready for market maturity. The mantra tends to go something like this: identify the highest-value customers, decide if you want to keep the less profitable ones (or have your competitors handle them), maximise the value of every customer, prevent churn.

In a number of the Latin American countries in which Millicom competes, market conditions do indeed seem to be at the stage where these kinds of issues need to be treated with some urgency. El Salvador broke the 100% mobile penetration barrier in December, up from 77.59% a year before. Other highly penetrated markets in the Millicom footprint include Guatemala (84.49%), Honduras (79.25%), Paraguay (81.21%) and Colombia (90.71%). In the Latin American arm of the Millicom empire, Bolivia stands out as a market with rather more room for growth, mobile penetration having reached 51.32% by December 2008, up from 40.96% one year earlier.

I am not clear whether Millicom intends to sharpen the focus on higher-value customers even in somewhat under-penetrated Bolivia - or whether reaching less affluent, lower ARPU population segments remains a priority there. If Tigo Bolivia does not go after these segments, there are other players who may be keen to step in.

It was in Bolivia that I met representatives of telecoms cooperatives. Collectively, these co-ops are the leading providers of local fixed telephony, ahead of recently renationalised national incumbent long-distance carrier Entel. The two co-ops we visited also bundle pay-TV services with fixed voice. Several of them offer mobile services as MVNOs. For me, the visits to co-ops in Santa Cruz (COTAS) and Cochabamba (COMTECO) were as much about fact-finding as about banging the drum for our Americas Com conference. I knew little about how these purely local telcos are organised and what their strategies are. I learned that a component of those strategies is to reach outlying settlements and bridge the urban-rural digital divide.

Moving north, Central America is home to the one Millicom holding which bucks the trend of building and buying mobile operations only. In this week's report, the company said that the fixed-line business it acquired in July last year is performing as expected.

This asset, the triple play cable TV group Amnet, operates coaxial and FTTH networks in Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. When this acquisition was confirmed, Global Mobile Daily speculated that "the move would appear to be aimed at Tigo being able to offer quadplay services in Latin America."

This week's report from Millicom indicates that the company is enjoying improving margins in Africa, where it plans to sell its Sierra Leone operation. I was curious about why Millicom would want to sell one African operation so soon after buying a licence in another market - in November the company announced it has been awarded the third national mobile licence for Rwanda.

On the face of it, Sierra Leone does not appear to be a wholly unattractive market. Mobile penetration has grown strongly in recent years - from 5.45% at year-end 2005 to 29.87% by December 2008, a figure which leaves good growth potential to be exploited. However, Sierra Leone is the lowest ranked country on the Human Development Index and seventh lowest on the global Human Poverty Index, and is known to suffer from endemic corruption - a challenging place to do business. Millicom has also fared less well than most of its rivals in the Sierra Leone market. Currently, the Tigo operation lags far behind market-leading Africell (36.04% market share), 2nd placed Comium Sierra Leone (31.78%) and 3rd placed Zain Sierra Leone (24.80%). Tigo's market share? Just 7.38%, ahead of only chronic laggard Datatel (0.01% ).

Millicom is not really going in the right direction in the battle for market share in Sierra Leone. In December 2005, Tigo had 9.15% of subscriptions. This fell to 7.92% a year later, rose to 9.17% by December 2007 and then dropping off again over the last twelve months.

Millicom generally does rather better in the smaller markets it serves, enjoying the top spot in El Salvador (pop. 7 million), Guatemala (pop. 13 million), Honduras (pop. 8 million) and Paraguay (pop. 7 million). It looks to me as though the combination of a small overall market size and a long struggle to carve out a decent chunk of that has finally made Millicom go cold on Sierra Leone in these challenging times.

Another market in which the company faces challenges is Senegal. In November, Global Mobile Daily reported that Millicom had begun arbitration proceedings with the International Center for the Settlement of Investment Disputes (ICSID) against the Senegalese Government, which had suspended the operator's license.

It was in the same month that Millicom announced the USD 60 million purchase of 15 year licence to operate in Rwanda. There is certainly room to grow there. Mobile penetration is low at around 13.5% and the population is only served by two incumbent operators, RwandaTel and the market-leading subsidiary of South Africa's MTN.

According to the GMD article, Marc Beuls, President and CEO of Millicom, notes that the Rwandan company can forge some synergies with its Congo and Tanzanian operations and also says that the country has a well developed road and grid infrastructure, which will enable the company to build out a network quickly and cost-effectively.

In these challenging times, Millicom seems to be an example of a telecoms group with far-flung operating units that is looking hard at these various operations and making context-specific business decisions rather than pursuing a one-size-fits-all approach to emerging markets worldwide.

Millicom's global emerging markets strategy examined