IGADD

Up until 2002, neither business nor government elites had incentives to close the Digital Divide. But Asia’s wireless revolution turned that reality upside down. Powerful supply chains are rushing towards the bottom of the market, hoping to get the mass of citizens locked into their cellular platforms. Some national governments and international aid agencies now see these wireless alliances as their best hope for bringing skills and jobs to the rural poor.

The scale and vigor of the wireless revolution can hardly be overemphasized. With mobile phones at 1.4 billion, they now exceed the fixed line phone network (with 1.3 billion handsets) that took a century to establish. Though the telecom industry fell into trillion dollar debt in 2001, mobile phone services in emerging markets caused industry profits to rebound to an all-time high in 2006. Consumer spending on communications worldwide is growing faster than any other category of retail expenditures.

Asia is by far the most dynamic global center of the surge in mobility. 500 million new cell phones a year were purchased in Asia since 2003. In an effort to exceed that figure for future years, marketers seek price reductions that would make phones affordable for another 500 million Asian users. The big IT corporations and telecommunications companies have established R&D experiments to cut the cost and price of cell phones. A thriving business of selling used cell phones emerged. Prepaid cards are now used by a majority of cellular users in Asia. This finance innovation has enabled an even lower income level of user to have access to the precious phones.

Between 1999 and 2005, China’s mobile connections jumped from 75 million to an estimated 400 million – the most sudden surge in telephony in history. The best guess of analysts is that by 2007, Chinese cell phones will more than double again to 700 million. India’s jump increasing by million per month, is expected to be proportionally greater, from five million to 43 million through 2006. That will represents only 5% penetration of Indian markets. That may not seem like much, but it is sizable enough to serve as a staging ground for marketers to consider ways of reaching rural areas and, within this decade, cell phones could pervade the 350,000 Indian villages which contain the largest concentration of world’s poor.

In Indonesia, which investors fled after the Bali bombing, connections jumped by 250% soon after the terrorist attack. Recently, Indonesia’s telecom sector attracted billion-dollar foreign investments in anticipation of historic efforts to link the archipelago to the wireless explosion.

Gartner Dataquest says the whole Asian region is set to advance from 328 million connections in 2001 to 708 million in 2006, making it the world’s most dynamic growth sector. Researchers at Gartner, Forrester and IDC researcher firms predict a billion Asian wireless connections by the end of the decade. That means connected populations would jump from an average of 15% today to close to 40% in 2008.

Can this revolution be sustained, so that marketers are able to reach ever-lower income spheres of the market? Certainly, there is no room for complacency. In the 90s in Europe and America, investors placed their bets on Third Generation (3G) technological innovations, expecting to reap revenues from pricey “value-added services,” interactive devices and applications that surely would be embraced by users. But they miscalculated. Most value-added services proved frivolous, or, like mobile banking, redundant, since it was too easy to bank the old-fashioned way using ATMs. Why watch interactive TV on your cell phone when you can flop in front of the TV at home? Without much to offer customers, they got saddled with $1 trillion debt.

Asia may follow the same path. A danger sign is that the average income per phone connection in China has already been cut in half as lower-income customers signed on, paying less and less. “Some of us wonder if competitors will chase each other into a deflationary dead-end”, said a Motorola manager. As markets spread all the way to rural enclaves, which applications could conceivably have practical value? Who will pay for the value-added services? What processes are going to be employed to generate the needed content? “These are the questions we’ve all been asking ourselves in the industry”, says Wye Ken Saw, who oversees wireless strategies for Microsoft in Asia/Pacific. “The truth is that no one has a clue”.

Many experts interviewed for this report insist that today’s pattern of alliances or “enterprise ecosystems” are too narrow to accommodate the demands of the future. They should be broadened to include, not just the standard business-to-business supply chains, but government reformers, entrepreneurs, and multinational corporations – and perhaps NGOs and academic institutions.

From the point of view of today’s business strategists, there is an easy-to-understand reason for a new class of wireless alliances: they may well be needed to bring costs down to the point that cellular technology can be affordable to ever-lower-income segments of the markets. One study by McKinsey & Co researchers in India suggested the cost to establish the infrastructure for a wireless network is now US$800. With some ingenuity, they thought entrepreneurs would be able to get the network price down dramatically to $450 by late 2004. To get the price to drop further, they say, wireless entrepreneurs must partner with governments or other industries that want to do business with the poor, such as banks. These third parties would subsidize handset or wireless-subscription costs to get access to rural consumers, allowing the cost to drop again. The price could drop further, to $250 or lower if entrepreneurs would work with NGOs in experimental “shared-use” efforts: handsets with slots for smart cards could be shared among villagers. This sort of engineering would allow four times the current users to own a handset. The cumulative impact of such innovation, says McKinsey, is that another 32% of the population could afford cellular phones, creating an additional 300 million connected Indians.

Beyond Price

According to Intel’s Tony Salvador, the effort to bring technology deeply into emerging markets creates the basis for an explosion in local content that is created by users themselves. In fact, Salvador argues that IT and telecom companies, as they approach low-income users, should set aside what they think they know about customers and investigate to the distinct and complex environments of informal economies where most low-income users live.

How to Relate with “Informal Economies?”

Dissemination of technology into the country-sides also forces structural changes in ownership in rural areas. Peruvian Hernando de Soto sees IT as essential for helping poor farmers gain access to ownership over their own land by gaining formal title to properties whose ownership is unclear. The de Soto concept dovetails nicely with thinking emerging from market-developers in the IT industry because it bolsters the case for those who argue that the future of the industry lies in penetrating informal economies, (which will release) the poor from the vicious circles that de Soto laments. For example, an academic coalition in Bangalore India invented a product called the Simputer (the name resulting from the compression of the word “simple” and “computer.”) It became the precursor for a nonprofit device called One Laptop Per Child, designed to be adaptable to the varied realities of informal economies.

Grameen Phone Was the First Wireless Alliances to Profitably Serve the Poor

Many of the national and state-level government officials who promote such alliances seek allies among networks of ICT-savvy entrepreneurs in this own countries. Throughout the developing world, a new generation of entrepreneurs is coming to view low-income markets as their greatest opportunity for building new markets that circumvent entrenched interests. For them, wireless is a classic example of a “disruptive technology that overcomes trenched interests. This trend is clearly illustrated by GrameenPhone (GP). This Bangladeshi cellular business, 51% owned by Norwegian telephone company Telenor, is by far the most famous and successful for bringing the benefits of digital technologies to the rural population in a poor country. Formed in the mid-90s,” it has attracted $300 million in investments and had produced a respectable $40 million in profits in 2002, which have been rising steadily every since. It utilizes the micro-credit program of affiliated Grameen Bank to distribute cell phone services in small villages and communities. GP services are already in 25,000 villages, making telephones accessible to 40 million people who had no such access before.

How could such an initiative possibly succeed? A review of its history clearly reveals that the key to its success is its unusual strategic alliance. It includes, not just the standard business-to-business supply chain, but also alliances with reformist government agencies, international finance organizations, and a powerful local NGO.

GP was founded by Iqbal Quadir, an American-educated native of Bangladesh. He so impressed Harvard’s Kennedy School dean Joseph Nye after a meeting at Davos that Nye invited Quadir to lecture at Harvard on how new technologies can change the problems and prospects of developing countries. Quadir, a Wharton MBA with subsequent experience in investment banking in New York, designed an effective mechanism to distribute services in the rural areas of Bangladesh. By having borrowers of Grameen Bank provide cellular retail services in their communities, Quadir created an economic model that allowed the poor to purchase telephone services on a per use basis while creating job opportunities for these retailers.

Even though it is now several years old, Grameen’s strategic alliance still remains a classic example of the innovation that can emerge from unusual strategic alliances that link the separate motives of public and private partners. Quadir spent three years finding a telephone company that would partner with the Bank in pursuit of his project, increasing the needed power and resources. After being rejected by many telephone companies, Quadir ultimately convinced Telenor from Norway, to partner with Grameen Bank. With this partnership in place, the project won a cellular license from the government of Bangladesh. But Quadir did not stop there. He then used the credibility of Grameen Bank and Telenor and GP’s cellular license to win, through a competitive bidding process, a long-term lease of a fiber optic network from Bangladesh Railway, an arm of the Government of Bangladesh. Thus GP’s cellular network, built around this fiber optic backbone, is the fruition of a successful private-public partnership. Subsequently, Quadir proceeded to fund the project from International finance Corporation, Asian Development Bank, Commonwealth Development Corporation of Britain and Norwegian Agency for International Development. All in all, Quadir integrated and wove resources, funds and expertise of four shareholders, four international lenders and an arm of the government of Bangladesh, namely Bangladesh Railway, to produce what is now the largest telephone company in Bangladesh.

Thanks to Quadir’s efforts as well as those of other wireless entrepreneurs who have disrupted power structures in other countries, the strategic alliances for wireless in developing countries have already broadened. So far, these alliances have been created around diffusion of voice technologies, that is, basic phone service; though these same alliances could broaden much further to create value-added services needed by the poor.