Reaching the edge of the network
Published: 08 April, 2009
While mobile telecoms operators in mature markets are trying to squeeze more revenue from their users, in Africa and other developing regions they are looking to expand into hard-to-reach rural areas.
Wandering among the stalls of the GSMA Mobile World Congress in Barcelona, with their attendant scintilla of widgets and multimedia content, it would be tempting to think that the future of mobile telephony is not in voice, but in the bright lights of social networking, instant messaging and niche services – Japanese manga comics delivered to the phone, global positioning systems tagged with restaurant reviews, or any of the myriad services on offer.
It might well be, one day. But while Western operators are struggling to squeeze yet more revenue from each customer through applications and add-ons, operators in emerging markets are still working at the other end of the consumer spectrum.
United Nations agency the International Telecommunications Union released its latest information and communication technologies development index in March, which revealed the milestone statistic that half of the world’s population now pays to use a mobile phone.
Developing world subscribers led this growth, and the report noted that, generally, access to telecoms was improving globally. However, it cautioned that the “digital divide” – the gap between the most and least advanced countries – had tightened only slightly.
Dr Hamadoun Touré, secretary general of the ITU and self-confessed ham radio enthusiast, concedes that the digital divide is not simply a problem between developed and developing nations, but is also manifested between rural and urban populations.
“That’s the most difficult part – reaching the rural areas,” he says. “And that can be achieved only by having the proper regulation that will encourage more investment in the area, and more innovation. Franchising, using co-sharing of infrastructure – things like that that will enable us to reach the rural areas.
“It will not depend on the technology. It will depend on the business model. And you know, they have been very innovative so far, especially the mobile sector.”
Mr Touré cites the example of prepay, which became the predominant model for emerging market operators, as an instance where the major players abandoned their old orthodoxies to adapt to the challenges of low-income environments.
In some aspects, the barriers facing the operators now targeting the unconnected are, in extremis, the same as those they encountered when entering the African telecoms space: low average revenue per user, coupled with high customer acquisition costs; logistical difficulties in rolling out infrastructure; and the unavailability of low-cost handsets.
While many of these have been at least partly resolved for urban markets, they have always been harder to overcome in rural areas.
The retail cost of access is an obvious issue. Rural incomes are largely a fraction of urban ones. Many African nations have a relatively high ratio of rural to urban populations and, although societies are urbanising, the trend is likely to persist for a few years.
This year, for the first time, the ITU published its ICT Price Basket, a sum-mary of the cost of access to telephony and the internet. It showed that highly urbanised societies – Singapore topped the list – demonstrate the greatest affordability of access.
A recent report from the telecoms, media and entertainment practice at consultancy Capgemini demonstrates, however, that while poverty remains a major barrier to entry into telecoms, it is not simply that gross domestic product and mobile penetration are directly correlated.
The report says Angola and Albania, for example, which differ only slightly in GDP per capita, are worlds apart in terms of penetration, with Albania showing penetration of around 80 percent and Angola only about 20 percent.
Similar comparisons can be made elsewhere in the world.
The Capgemini report was based around 2007 figures from the ITU, and also compares affordability of calls. “In our view,” it states, “African markets are like any other nascent mobile market in that they exhibit high usage elasticity;ie, a decline in price will result in increases to both average minutes of use and subscriber numbers.” This is by no means a facile statement – many people used to believe that there was no demand for mobile telephony in low-income markets, though experience has proved that untrue.
Governments, through the encouragement of competition, have a major role in reducing prices, the report says. As operators are forced to compete on price, they must become innovative to grow their market share. At the ITU, Mr Touré agrees. “Policy is the basis,” he says. “If government is not involved in operation, and is a free and fair referee among the operators, it will have an impact.”
Like Mr Touré, Capgemini also advises the adoption of network sharing, which is complex. India, admittedly one country but with similar barriers, has been successful in this area, with 30-40 percent of all network sites being shared, according to the report. This means that the cost of putting the physical infrastructure of telecommunications – the base stations – in remote areas and then maintaining them is spread across a number of operators.
Geographical challenges
Geography can be the biggest barrier when putting in place this physical infrastructure. In countries as vast as the Democratic Republic of Congo, whose population has demonstrated a large demand for mobile telephony, spanning the distances between population centres is a colossal challenge. Many remote base stations operate in areas off the power grid and run on a diesel generator, which needs to be refilled regularly. The upfront capital and the operating expenditure are both high. In rural areas with no existing coverage, this capital expenditure would be the principal acquisition cost for the few customers it would cover, and operators would struggle to amortise the cap-ex, as well as justify the running costs, with such low average revenue per user.
Some companies, such as Sweden’s Flexenclosure, have taken lessons from the clean technology sector to rework the way that base stations are powered, and their solution – which looks to a layman like a shipping crate fitted with a windmill – uses cutting-edge wind turbine design, optimised for low wind conditions, to supplement the diesel generator and reduce op-ex. While visitors to some of Africa’s relatively remote regions – often the ones frequented by tourists – may find network coverage, “The technology behind it is so obsolete that there’s some guy driving for four hours in one direction to refuel the base station, then he’s coming back,” says James Kan, Flexenclosure’s VP of marketing, speaking in the shadow of one of his company’s turbines, which has twisted “macaroni” blades to maximise efficiency in light winds. “We foresee 120,000 new diesel sites being rolled out annually worldwide. If we do it that way, as an industry, by 2011 we will spend $17.3bn on diesel, based on a barrel price of $70,” he adds.
While diesel prices have dipped from last year’s highs, many expect them to rise again. “That’s $17.3bn just to let someone make a call. Not adding any value to your customers, not giving you any more loyal customers, not adding any content to make you more attractive, just fuelling your efforts.” In addition, by Flexenclosure’s estimates, the annual carbon emissions are equivalent to the annual emissionsof London’s traffic.
The Swedish company also uses network traffic management systems to deal with peak demand, so that no power – or diesel – is wasted. The system also includes solar panels, but Mr Kan says that this contributes little to the total power demand of the base station, as solar panels are too inefficient in terms of watts per dollar.
Flexenclosure’s “E-site” contains an Ericsson base station, which consumes 700W, which is low by most standards. VNL, an Indian company that has developed an emerging market voice network solution called World GSM, says this means that Flexenclosure and Ericsson have not solved the biggest problem.
“Traditional equipment vendors have approached it from more of a corporate social responsibility angle, or to be ‘green’,” says VNL’s Pär Almqvist.
“But we set out to provide connectivity and to do it in a profitable way – not to do it to show off or as a proof of concept, but to do it on a large scale.”
VNL also realised that green power was a prerequisite. We wanted to use solar or wind, but the power consumption for that has to be at a lightbulb level, basically,” he adds. “So that’s been the big journey: taking GSM, which is a huge, clunky system for the developed markets and turning it on its head, using off-the-shelf components and slimming it down to what it needs to be for these markets, then adding solar power to it.”
Applying solar to standard base station technology would mean using 70m-200m solar arrays, which could cost in excess of 200,000 Mr Almqvist says. To bring the cost and size to manageable levels meant scaling down the system to run at 15W. The “village sites” – designed, as their name suggests, to provide coverage for a village – can be daisy-chained along areas of population.
But, in line with Mr Touré’s thoughts, it is the innovation around the business model, rather than the technology, that Mr Almqvist thinks could get the system adopted, by minimising the risk to operators.
VNL calls the model “microtelecom”, operating on similar principles as micro-finance, which has worked successfully in rural markets. An operator provides the main network to which the village sites will link up to, and brands the service, as well as giving collateral and training to a local entrepreneur.
Microfinance or banking institutions provide the start-up capital and vet the business model. The entrepreneur, using some of his own risk capital, then markets the service locally and collects bills. The revenue is shared between the various stakeholders.
The VNL model might seem “too micro”, and Mr Touré’s infrastructure sharing too idealistic, but partnership agreements have been validated between operators using roaming agreements, and between local entrepreneurs and major telecoms businesses, through the distribution of airtime and in micropayment agent networks.
With more international competition entering the field in the past year, and possibly more to come, the market will be much more crowded in the cities, and operators will have to break their orthodoxies once more. Price wars will mean arpu will fall, and rural and low-income consumers – the last half billion – will be the only place to grow.
