Academic journal article The McKinsey Quarterly

Connecting the Unconnected

Academic journal article The McKinsey Quarterly

Connecting the Unconnected

Article excerpt

Cooperation among stakeholders could extend mobile-communications networks to millions of new customers in emerging markets--with rewards for all involved.

For the many millions of people in emerging economies who don't have telephone lines, mobile-communications networks could bring immense benefits. Low-income customers could not only make telephone calls, perhaps for the first time, but also gain access to such lubricants of economic growth as modern banking and information services--things they can't afford at present.

Some mobile operators in emerging markets have already built networks to serve the affluent, and other companies plan to follow. But so large is the number of low-income people that they too could potentially be served at a substantial profit on even the slimmest of margins. Why haven't mobile operators extended their networks to cover these potential users? The answer is mainly that the operators cannot yet build and run their networks at a price the masses can afford.

Then network operators are hardly the only party interested in cheaper mobile networks. Governments want the economic growth that mass mobile communications promise. Banks and other companies want networks to be extended to provide profitable services to a huge, previously inaccessible market. And local entrepreneurs in poor regions would welcome the opportunity to act as franchise managers of the mobile last mile.

If mobile operators, governments, mobile-services providers, and local entrepreneurs were to cooperate, they could create low-cost mobile networks that would be economically attractive to them all. It will be a difficult but worthwhile task. In India alone, low-cost mobile networks serving an additional 25 percent of the population (up from the current 3.5 percent) could bring as much as $10 billion in revenue to their stakeholders in 2006--on top of the $25 billion in revenue forecast for the telecom services industry that year. Mobile operators are the stakeholders most likely to get the ball rolling, just as they did in developed markets.

Reducing the operators' costs

Wireline networks are so expensive to build that few people in emerging markets can afford to use them. Only 3 percent, 8 percent, and 10 percent of the populations of India, Peru, and China, respectively, subscribe to wireline services, compared with a European average of 56 percent. At $350 to $500 per subscriber (excluding the handset), the cost of building a mobilecommunications network is about half that of wireline networks--but still too high for operators to roll out mobile networks to the masses.

The cost of mobile networks can be reduced in a number of ways. As a start, operators could design "no-frills" networks, for not-so-affluent people, that used the allocated spectrum efficiently and cost-effectively. Designing a network so that it could cope with a maximum (but realistic) peak-time load of 0.04 erlangs, [1] for example, instead of the conventional but perhaps overcautious 0.06 erlangs, could reduce costs by up to 20 percent.

Operating costs too can be cut. China, where the number of mobile subscribers has grown from 7 million in 1996 to more than 100 million today, provides an example. The two Chinese operators still achieve earnings before interest, taxes, depreciation, and amortization of 50 to 60 percent, even though the operators' average revenue per user has dropped from $560 in 1997 to below $200 at present as the customer base has expanded to include more low-income users, who make fewer calls.

These margins are possible in part because of the low operating costs of the operators. By deriving most of their revenue from prepaid cards, they have slashed the large fraction of recurring costs incurred through billing, bad debts, and customer relationship management. By allowing handset retailers to manage their customer relationships, they have limited the cost of acquiring and keeping customers. …

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