White Paper
10-21-2009
Investing in 4G Networks for Developing Countries
By Haig Sarkissian, Principal, Wireless 20/20
Fourth-generation wireless network technologies are entering the market at a time when the cell phone industry has reached a steady state. Annual shipments of cell phones in developed countries have been steadily declining for the past few years due to high rates of penetration. Mobile communications passed a milestone when it broke 50% household penetration globally at the end of 2007. With growth in penetration levelling off, the remaining growth likely will be found in emerging markets. Will 4G technologies such as WiMAX and long-term evolution be able service their needs?
Some of the promises of 4G include higher spectral efficiency, which translates into the ability to serve more users in a given spectrum; lower cost of infrastructure equipment; and an all-IP core infrastructure. All of these should enable operators to serve price-sensitive markets where 2G and 3G networks have had limited success. This in turn should enable service providers to construct successful business cases with lower average revenues per user (ARPU). One of the enablers for 4G is going to be the availability of low-cost handsets and terminal equipment. Without proactive investments in the development of low-cost handsets, 4G might be relegated to serving the needs of developed countries and thus be left out of the larger-volume opportunities presented in emerging markets.
Emerging Markets
Low-cost products and services are typically targeted to the bottom of the pyramid (BOP). In economics, the BOP is the largest, but lowest, socio-economic group in a country. In 1998, Professor C. K. Prahalad defined the BOP as the 4 billon people who live on less than $2 per day, typically in developing countries. This situation has not changed since in the last 10 years.
“Four billion people who live in relative poverty have purchasing power representing a $5 trillion market,” according to a report by the IFC, the investment arm of the World Bank Group. A further 1.4 billion people with low and middle incomes wield $12.5 trillion in purchasing power. These segments combined, with incomes up to $3,000 in purchasing power parity, make up the economic BOP. The communications market for the global BOP segment is valued at $30.5 billion, according to the IFC.
The two regions with the lowest mobile penetration rates are South Asia and Sub-Saharan Africa. Their combined 2.3 billion inhabitants represent 35% of the world’s population. In 2008, India and Sub-Saharan Africa accounted for 32% of all mobile subscriber net additions. For the years 2009 through 2012, they are expected to contribute 44% of total net additions. ARPU levels in emerging markets have been dramatically decreasing because of increasing competition, price reductions and a second wave of customer acquisition from predominantly lower-income segments.
Price pressure will increase as markets become more competitive. Some African markets - such as Benin, Côte d’Ivoire, Democratic Republic of Congo and Uganda - have five or more licensed operators. In India, some areas already have 13 licensed operators due to the recent award of additional 2G licenses; and the planned allocation of 3G, WiMAX and mobile virtual network operator licenses will further increase competition. Customers in emerging markets are principally prepaid customers. Confronted with budget constraints, their ability to pay for service and a handset is limited. Growth is only possible by lowering prices. High prices restrict strong penetration in the low-income segment. A customer with a budget of $1-$2 per month for telecom services will only be able to make 6-12 minutes of outbound calls per month in Africa. Such low usage levels will not provide incentives for poor segments in Africa to invest in a handset and SIM card. Per-minute service rates must be affordable. At $0.014 per minute (as of the end of 2008), Indian revenue per minute is among the lowest in the world. One dollar buys 70-100 outgoing minutes a month - a great value proposition for Indian consumers. Research by Nokia and others shows that in order to penetrate the BOP, handsets have to reach sub-US$20.
New, more spectrally efficient 4G technologies such as LTE and WiMAX could fill the gap if they can meet the cost challenge. These technologies can support two times the user capacity in the same spectrum. Coupled with the all-IP core network, they could offer significant cost reductions, which could lower the per-minute cost of offering voice service.
Investing in Emerging Markets
Emerging markets have attracted significant investment from international mobile operators - and many players were rewarded with growth in subscribers and revenue. Now, however, these markets are maturing, posing a different challenge. ARPU levels, already low, are expected to fall significantly for three reasons:
- The next wave of customers will primarily be low-income.
- Operator competition will continue to increase primarily due to new entrants in the market using new technologies to offer competitive services.
- Consumers will face higher budget constraints given the global economic contraction.
ARPU is expected to drop from $6 today to $3 by 2013 in South Asia and from $12 to $6 in Sub-Saharan Africa. Research by Nokia, Smile, UJet and other service providers targeting the BOP has shown that communicating is a basic necessity for human beings, just like food, shelter and medicine.
Low-Cost 4G Handsets
Voice-over-IP (VoIP) represents a significant opportunity for service providers to offer competitive services over properly designed 4G networks. In developing countries with poor cellular infrastructure or high per-minute prices for cellular usage, 4G service providers have the opportunity to offer VoIP as a primary service.
Yet 4G faces several challenges in order to be a viable transport for VoIP. On the financial front, the cost of building and operating VoIP-over-4G networks has to be justified with the revenue derived from such services. In order to increase penetration of VoIP in developing countries, the cost to offer it has to be lower than the price a prospective subscriber is able to pay for the service. Thus, revenue per subscriber has to be larger than the sum of the cost per subscriber over a set period of time. These costs can be outlined as follows:
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The cost of VoIP/WiMAX devices (handsets or customer premises equipment);
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VoIP-related operational expenses; and
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The cost of a VoIP-over-WiMAX core network infrastructure amortized over time.
The first of the financial challenges is the availability of ultra low-cost VoIP handsets that would operate over the 4G network. First-generation WiMAX/LTE chipsets were not focused on creating low-cost VoIP handset options, leading to end-user devices in the $150-$300 range. A new generation of 4G chipsets has enabled a class of hand-held 4G VoIP devices that will be priced significantly less than US$100.
Using the WiROI Tool, an analysis was done to demonstrate the impact of deploying such a network with and without VoIP. A summary case study shows that a WiMAX deployment in a developing country could see the majority of its subscribers take VoIP service. Many would take VoIP as their only service, while others would take VoIP/Internet service bundles. Figure 1 above shows that VoIP revenue can represent a significant portion of the total revenue generated by the service provider.
Investment in 4G Handset Development
If 4G technology is going to penetrate emerging markets, there is a need for investment in chipsets that enable ultra-low-cost VoIP on 4G handsets. According to the WiMAX Forum, there were 468 WiMAX deployments in 139 countries as of March 2009. Seventy percent of these operators are greenfield service providers that are planning to offer WiMAX services. A recent survey administered by the WiMAX Forum Network Operator Working Group indicates that the majority of these service providers (90%) would like to offer VoIP services in addition to Internet service. The same survey highlights the need for low-cost handsets as a key enabler of strategies to reach the BOP.
In summary, there is a recognized need for low-cost handsets in order to serve the BOP. If this need is met, it is anticipated that the market size for these handsets can exceed 223 million units per year in 2012. A formal market forecast is not yet available for the low-cost handset market segment, but bottom-up analysis indicates an upside of 200 million units by 2012.
For more information, send an email to Haig Sarkissian.
Media Contact:
Robin Bestel
610-428-5845
robin@wireless2020.com
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