Emerging markets: The unconnected masses

The world’s advanced mobile markets, perhaps understandably, draw a majority share of industry attention. In these countries the latest technologies are used to showcase the most sophisticated services on the handset manufacturing community’s most cutting edge products.

In numerical terms, however, this level of attention could be judged disproportionate. There are now more mobile users in developing markets than in developed. According to figures from Informa Telecoms & Media (ITM), China and India alone accounted for 55 per cent of total, global net additions in the first half of 2007. ITM also predicts that the total subscription base in the Asia Pacific region will double between 2006 and 2012.

In emerging markets, then, continued growth was the story of the year, with annual user base increases in some developing markets exceeding 200 per cent in the year to June 2007.

It was a year that saw the continued expansion of regional players, and further moves by developed market operators to carve themselves a share of the opportunities for rapid subscriber uptake. For these international investors, there is considerable motivation. Carriers that restrict their focus to emerging markets will probably see their global market share decreasing as uptake in high growth territories continues. This in turn could impact on carriers’ economies of scale.

“Those operators that are continuing to see growth in emerging markets are, I think, becoming more influential in global purchasing and what applications and services vendors and software providers are developing,” says Leslie Arathoon, VP research at Pyramid Research.

Such concerns may have been behind moves like Vodafone’s acquisition of Indian carrier Hutchison Essar, first announced in February. “Vodafone has been shrewd and so has Telefonica,” says Sean Collins, chairman of the global telecommunications and media practice at KPMG. “I don’t think many people realise that, in terms of subscriber numbers, Telefonica now has a business in Latin America that is the same size as the whole of the Telefonica group was back in 2001. In the space of six years they have created a new Telefonica.”

Keen to stake their claim, carriers have made high profile commitments. In October, Vodafone and Orange were among a group of operators that pledged to invest more than $50bn in Sub-Saharan Africa over the next five years in a bid to drive mobile coverage to 90 per cent of the region’s population. Alongside the European pair were MTN and Zain (formerly MTC), players that each boast substantial pan-African and Middle Eastern footprints.

With the substantial expertise that local players have built in these markets, the dominance of Western players remains very much in question. And financial muscle is not an issue for Zain, at least, which paid $6.1bn this year for a licence to operate in Saudi Arabia.

The operators that made the $50bn Sub-Saharan pledge recognised that there are many people in the region – 350 million, in fact – who are within current coverage areas but who remain unconnected. Devising a business model that makes it feasible to offer service to these people, a vast number of whom will not have mobile connectivity because they simply cannot afford it, is challenge enough. But further growth is becoming increasingly difficult to manage as operators bid to extend their coverage footprints into more rural areas.

This is true in emerging markets in all parts of the world, and Vodafone’s search for a network share partner in India following the Hutchison Essar acquisition illustrated the drive towards collaboration among operators in developing territories.

The poor condition or non-existence of fixed infrastructure in developing markets is widely felt to be an encouraging sign for the wireless industry. Demand for broadband may well be nascent in many of these markets, but the corporate sector – traditionally the early adopter – needs connectivity. Although not everyone feels that these markets are thirsting for broadband internet access, Stephane Boyera of the W3C Mobile Web Initiative is convinced that the demand is there.

“I think that there were the exact same question five years ago about mobile telephony, and some people were questioning the profitability emerging markets could offer. They thought that developing countries were too poor to afford mobile telephony, just considering the cost and not the return on investment that could happen,” Boyera said while speaking at the 2007 AfricaCom event in Cape Town in November.

“People have an incredible tool for development: operators, handset manufacturers, service providers, mobile telephony equipment manufacturers: they are all making money, and are even considering that emerging markets are the most promising source of revenue for the future,” he said. “So clearly I’m convinced that the profit will be here, if appropriate economic models are found, and is the prices are well set.”

This is a more open opportunity in terms of technology choice and standards than the one that was presented in the markets that pioneered wireless broadband.

“The emergence of alternative broadband access technologies, such as iBurst, TD-CDMA and WiMAX, all claiming to deliver high data rates at lower cost is opening up new opportunities for operators’ future data strategies and technology choices,” notes Devine Kofiloto, principal analyst at ITM and emerging markets specialist.

“That the most dominant of these – WiMAX – is billed as having the potential to become a disruptive technology continues to make headlines. For GSM and CDMA operators yet to go down the evolutionary path of WCMDA and EV-DO, these viable alternatives have also raised uncertainties as well as opportunities,” he adds.

Developing markets are certainly driving handset industry growth, as even the leading vendors expand their lower tier ranges to include models that shift in far greater bulk than the high end products. Nokia’s Q207 results contained the revelation that the sub-Eur50 segment of its portfolio had grown to more than 50 per cent of its overall device volume.

The GSM Association’s 3G for All handset project, a follow-up to its Emerging Market Handset initiative, saw Korean vendor LG launch a low cost WCDMA handset in June of 2007, which was targeted at developing markets as well as low end segments in more advanced regions.

And despite an already powerful downward pressure on unit prices, costs will be driven still lower, says Kofiloto. “We are likely to see more pressure brought to bear on the major vendors to expand their brands to lower price points, hence making them more affordable to a larger mass of low-income yet brand conscious consumers,” he says.

The emerging markets are just as important for infrastructure vendors as they are for their carrier customers. But, says Sean Collins, developments in these very markets could place yet greater pressure on a Western vendor community that is already being squeezed in its core business areas.

“Just look at the numbers and the quality of the graduates coming out from the major Chinese universities, for example, the number of bright Chinese students, studying sciences in major western universities, or the graduates coming out of the Indian institutes of technology,” he says. “What you see there is a building block for a generation that will be making its mark within five or ten years of coming up from those educational establishments. That I see as being a bigger factor than the short term shift in contracts towards Chinese vendors such as Huawei and ZTE.”

While developing markets certainly pose a good number of challenges to the operator and vendor communities alike, the unique growth opportunities they represent will force all parties to innovate in order to bring provision.

These markets will prove important also because of their lack of infrastructure across other sectors. Millions of residents in developing countries are un-banked, for example, and mobile technologies are proving key to the filling of that void. A variety of m-payment and m-banking initiatives were deployed or gathered pace in 2007 and these innovations will undoubtedly find their way – in one form or another – into developed markets, lending even greater importance to the emerging market sector. Experience of new technologies and ideas as well as subscriber growth is driving operators from across the globe into these markets.

But all carriers – domestic players, or expansionist overseas groups – are dependent to a large degree on national regulators if they are to succeed. Regulators are being lobbied by operators and their interest groups at all levels of business, from the cost of licences, to handset import duties, foreign ownership caps and interconnection rates. Decisions taken by these government bodies will be key to the successful development of the sector.

There are manifold challenges to operating in developing markets, from the practical -availability of power – to the more abstract; business models, pricing, regulation. But 2007 proved that operators’ appetites for continued growth are undiminished. It also showed that those carriers that have enjoyed historical dominance internationally would be wrong to assume that success will be automatically forthcoming as they strive to grow their footprint yet further.