Chris' Original Blogbeque

A fresh, vinegar-based examination of life

Cell Phones part 2

Posted by Chris on October 8, 2007

I wrote over here about my new cell phone and the different structure for cell phone business in India v. America. The US is probably in the minority, actually. I don’t know how Europe or other long developed countries, but the majority of countries and the global population would be using pre-paid system (I could be wrong, this isn’t an academic paper).

Why is this? I can think of several reasons. First, for poor(er) people, it is more affordable. No provider in the US is interested in offering a $10/mth plan with 60 minutes, which would not be profitable here, but in other countries that is what the consumer can afford and it is profitable because of lower costs.

Second, cell phone usage is more practical than social in many cases. When you pre-pay you are less likely to chat away, yes, but I think the causality is the other way around; the usage of cell phones is often for business purposes or to quickly connect and coordinate with someone. Many developing societies are very mobile, but that mobility is often the result of either poverty (migration to urban areas) or war/conflict (refugees). They might wish to call home, if anyone is left there, but don’t have the means and are usually struggling to survive. In the US, we “go off” to college, search nationwide databases for jobs, etc… our mobility leads to us wanting to connect with those who are far away and we have the material prosperity to afford liberal usage of mobile technology.

Third, here in Kolkata at least, there is not a pre-existing widespread landline phone infrastructure. People were not accustomed to paying the monthly phone bill for a set amount. In the US, I think consumers would have been very slow to adopt pay-by-use mobiles and the first company to offer an affordable monthly plan would likely have won many customers. But it wouldn’t surprise me in the least if a cell phone is the first phone many people own in a developing nation.

Last, cash flow. I was reading the annual report of Millicom who is operating in countries like Sri Lanka, Laos, and the Congo, and they mentioned that some users recharge the phone balance several times a day, as their business/livelihood gives them the cash. One might spend the same amount, in relative dollars, that I do on my monthly bill but could never afford to pay it all at once. And if they come up short, they have the option to not purchase more minutes and have a liability to pay.

A reason that does NOT explain pre-paid: that different corporations are operating in these countries. At first, that may have been the case, but like any growing industry there is consolidation and entry by the major players. As I said in the other post, my phone is Hutch, just bought by Vodafone which is literally one of the biggest companies in the world. Vodafone has either bought or operates businesses in many countries all over the globe, including Verizon in the US. I don’t know if they started these businesses or acquired them, but the consolidated corporation is employing different strategies in different locales (or allowing its subsidiaries to each determine its strategy).

This has some implications you of which may care to take notice. More and more people are investing their money overseas—these large corporations, whether familiar like Vodafone or unfamiliar like Millicom, are seeing larger growth in developing economies than in the US. I’m reading about some of these corporations now and a few months I had already acquired some shares in an Indonesian company. I am not in the business of making stock recommendations because it is risky, so I won’t name the company, but the only downside of reading more about this will be that you just know more about other parts of the world.

To grow a cell phone business in the US, one must develop more gadgets, GPS, etc… there are not too many new customers to find. And we are seeing that. In fact, Nokia just bought Navteq, a Chicago-based company that supplies the map database information for the map you see on Yahoo or Google or in your car GPS. I don’t need all those gadgets on my phone but was very interested because the rumors of acquisition drove up the Navteq shares I owned.

Cell phones in developing areas are more than a sign of globalization and consumerism that many fear. According to a recent article in Business Week, “evidence suggests that access to communications boosts incomes and makes local economies far more efficient.” An example given was fishermen who call into marketplaces for prices. They go to the place that gives them the best price and the efficiency of the market leads to less fish thrown away which means lower costs for buyers.

Another boon from mobile growth are that these businesses are building up the infrastructure, building towers and laying down fiber-optics cable. The article suggests that this will lead to better broadband internet connections.

A few other interesting tidbits: cell phone hardware is a bit cheaper here but the minutes really aren’t. Not everything is cheaper in India. iPods here are the fourth cheapest in the world; the US is the second cheapest. A lot more goes into cost than the margin the company gets. Anyway, that is not the reason poor people are using these phones, you cannot explain it away merely by price.
India is passing strict laws on driving and talking on mobile. In fact, a court just sentenced people in Mumbai to a day in prison, no joke.
There are 3 billion phone subscriptions today; Nokia estimates that by 2015, there will be 5 billion and that 2/3 of the population will have a phone.
Millicom’s model charges on a per-second basis. They sell plans in some countries that are the equivalent of as low as 20 cents US and these are the most popular. The company reports that these smaller amounts are leading to more revenues per user.

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