Communications development in emerging markets: creating the right ecosystem

Vodafone Group Public Policy Emerging Markets Team

Rob.Borthwick@Vodafone.com+44 79 79 55 00 54

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Access: a key political issue

“South Africa's telecoms has reached a point where the number of SIM cards in circulation is roughly equal to the population. That does not mean everyone has a cellphone, since some people own two or three cards, but it means most of the addressable market is covered.”

Pieter Uys - Vodacom CEO quoted in Business Day SA 18 November 2008

• In developed markets advent of competitive mobile services has “solved” access to telephony for poor customers, especially in urban areas. It also made text-based messaging widely available, and widely used, for the first time.

• What lessons, if any, are there for emerging market policy makers from significant mobile communications growth around the world?

• In particular how can emerging markets, such as in Africa, be successful in providing universal access to communications? What characteristics bring success?

• The key enabler of universal access is ensuring the communications ecosystem support service delivery, including to poorer customers, and in rural areas. In other words adopting a coherent set of policies which seek to achieve, and support, a “competitive high-water mark” in access to voice and data communications.

• There can be a role for Universal Service interventions, which are well targeted and based on pre-defined objectives. However, policy makers must ensure they are getting the most from the market, before intervention.

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What do we mean by access?• Access debates range across two different policy areas.

• Policy makers are concerned to ensure access by lagging members of society to services used by the majority of the population. Exclusion may be due to poverty, living in a rural area, disability (or a combination).

• There are also more general developmental concerns regarding more rapid / more widespread deployment of new or “emerging” information and communications technologies used by SMEs and/or high-spending consumers.

• The core of universal service policy is how to address exclusion of lagging minority in society in the services used by the majority.

• In contrast how to encourage the deployment of new services (including ones not even thought of yet) are really industrial / R&D policy.

• Both areas are important and the first stage in addressing these in emerging markets is the same: creating a robustly competitive communications ecosystem – where multiple operators strive to serve customers and policies facilitate this.

• Access will expand where policies enable competition to flourish, for example, spectrum availability, but will struggle where policies weigh down the sector, for example, limits on network roll-out or taxation which penalizes mobile.

• Having the right communications ecosystem reduces the gap (if any) which either universal service policy or industrial policy must subsequently fill.

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Emerging market policy makers have a choice of ecosystem

Ecosystem so far…

• Poorly performing fixed / state-owned monopolists & inadequate technology

• Entry of competitive mobile providers

• Dynamic mobile sector – addressing progressively poorer telephony / SMS segments in search of marginal profit

• Pre-pay commercial models dominate / no periodic charge addresses access including where call patterns focus on inbound use.

• Handset subsidies target wealthy segments but re-use / re-cycle of handsets increases access throughout the market

• Better than policy makers ever anticipated in serving the poor, especially the urban, insecure and recently migrated poor

1. Extension of successful market-led inclusion:

• Eco-system based on effectively competitive mobile networks

• Market flexibility: additional spectrum availability plus re-farming; encouraging commercial network sharing

• Repeat SMS “bundling” dynamics for new services – key to rollout of internet access

• Tax at “average” national levels. Focussed use of US Taxes on passive infrastructure to extend rural and communal provision

2. Intervention limits sector’s inherent capabilities:

• Interventions in search of obsolete market models (splitting services and infrastructure) reduce value in integrated providers

• “Unified or converged” models which complicate sector regulation while simultaneously neglecting spectrum reform.

• Voice termination model devalued – service costs fall increasingly on poorer segments whose total cost of ownership rises

• Sector cost base increases: taxation and spectrum costs increase (to fund general budget); US Tax imposed without clear rationale: poorer users taxed to fund emerging service use by few

or

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Understanding the ecosystem: “convergence myths”

Developed markets are typically characterized by extensive fixed infrastructures.1. Regulators have striven (over time) to increase the degree of competition to these2. Key interventions have been: fixed incumbent interconnection including call termination

wholesale origination and unbundling3. But competition has only emerged and been held above water by regulation. And future

direction unclear as fixed incumbents migrate to NGA to combat unbundling4. Mobile has largely been on the sidelines of this process5. Key evolution in developed fixed markets is not convergence (of fixed/mobile access)

but bundling of retail services and duplication of platforms.

Convergence more wished for than widely seen (to date). Expect emerging markets to see:1. The same bundling of retail services and duplication of platforms2. But not convergence of (fixed and mobile) infrastructures3. Expect mature market to be multiple radio-delivered systems, plus business orientated

fibre in city centres and business-dense urban areas.

Mass market service delivery will use mobile (or at least radio-based) model.Regulatory models should anticipate this approach.

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Understanding the ecosystem: regulatory regimesEmerging markets are embracing reform intended to support “converged” services. We see:1. Removal of vertical market-specific licenses, accompanied by introduction

of multiple, complex “unified” licenses based on horizontal lines of business.2. Failure to incorporate competition / market power tests as a basis for economic

intervention.3. Migration of spectrum licenses / allocations to new “unified” frameworks without

providing for technology and service neutrality or introducing real reform4. Universal Service Taxation where purposes of funds collected are unspecified or

unclear and/or where funds are not utilized.More regulatory instability than regulatory reform. A better model is to adopt:1. common technologically neutral authorizations for all parties removing need for

individual licenses;2. all services permitted under a single authorization where many requirements would

only be triggered by either business activity or market power analysis;3. separate spectrum permissions which are technology and service neutral and which

are tradable;4. universal service approaches which first encourage the operation of the market and

only intervene to address exclusion above the “competitive high water mark”.So a simpler model for regulators to manage and for providers to compete within

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For radio-delivery: access to spectrum is vital input

Ensure licence renewals / reform continue spectrum allocations.

Re-farming on technology neutral, service “family” basis.

1. Countries make best use of existing national spectrum

Release free spectrum in current bands to be used by existing / new operators.

Allow spectrum in other bands to be used, where there is demand.

Consider national “Digital Dividend” spectrum: who is using UHF and for what?

3. Allow market tooperate flexibly

Ensure spectrum liquidity by permitting trading.Give regulatory support to network sharing.

2. Countries provide new spectrum

Three objectives Positive activities

“Converged” licence reform leaves spectrum questions open / uncertain.

Uncoordinated spectrum use.

Suitable spectrum remains idle, while networks subject to congestion.

Spectrum remains in use by providers who may place low value on it / have low incentives to operate efficiently.

Increasing spectrum costs above market levels / Auctions primarily designed to maximize state income.

Negative activities

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Understanding the ecosystem: SMS “bundling”

Why is SMS so successful?

• Regulatory discussion of universal service rarely mention SMS.

• But SMS is an amazing universal service success story. It is used by more customers in the world than voice. Total cost of ownership is low. SMS has included a previously almost wholly excluded group: profoundly deaf users.

• What dynamics drive this success?– High value to customers

– SMS terminal capability bundled with voice

– Terminals re-used / re-sold multiple times

– Coverage follows that of voice

– But usage characteristics different to voice

– Low incremental cost to expand network supply as demand grows

• A new way of communicating supported by mainstream mobile business model.

What to expect with new services?

• SMS approach can be duplicated in emerging markets

• Network capabilities become available to serve high-value segments, but once available can be used by all, and will progressively expand as demand grows.

• Handset capabilities enter high-value segments of the market (and may be subsidized) and percolate down to lower-value segments – which is what poverty-related inclusion is…

• Expect this to mean personal transactions on the internet – web browsing, e-mail etc. will become available to poorer customers – as SMS

• Not universal fibre access at XMbit/s but is a pragmatic way of providing mass household and personal connectivity in emerging markets.

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Termination revenues are important to the economics of serving low usage customers and to the viability of extending coverage to more rural areas. Many, typically lower income, customers receive often receive calls from more affluent employers, friends or family members.

Graph 2: Ratio of incoming to outgoing revenue for subscribers in each outgoing value band

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Bill per month (Rs)

Punjab Delhi Mumbai

For these low usage customers, more revenue is generated from terminating calls to them than from their outbound calls

Understanding the ecosystem: voice termination

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Taxation: the elephant in the room

Taxation vs.

penetration

Average compared to

national economyHigh Very high

Voice penetration 100%+

Broadband 50% +

Typical EU countries are here

Voice penetration 80%+

Broadband 5% +

Voice penetration 50%+

Broadband > 5%Typical emerging markets are here Some are here

15-20% 20-40% 40%+Indirect taxes

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In summary

Widening communications access in emerging markets depends on continuation and improvement of the current ecosystems

Access policy is not a stand-alone area. All aspects of regulatory / competition policy impact the availability of services and the resources used to support them.

Competition between vertically integrated providers– single regulatory model based on world as is.

Intervention based on market power

What policy framework?

Spectrum availability and reformUnderstand how inclusion is supported commercially

both for new customers and new services

Strengthen the ecosystem

Poverty-related exclusion should be addressed in time.Focused iUS intervention to promote more rapid rural access

Role of USintervention?

Are burdens consistent with aspirations?

Taxation at significantly above average levels in the national economy. Consider impact on new customers / services.

Annex: A structured approach to universal service

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Move to focussed universal service interventions• Policy makers envisage 3 types of customers whose communications needs may not be met by

the market:

1. too poor to buy (poverty); 2. too expensive to serve (rural access); and3. unable to use mainstream products or services customers (disability).

• Mobile has a highly positive story to tell in terms of inclusion in all these categories.

• Poverty examine historic trend in service take-up over-time. Understand roles of both taxation and voice termination in growing / sustaining access. What do we expect in next few years (credit crunch permitting) and once we return to trend? The gap in emerging markets will be smaller than you think and can be addressed through informal, shared provision.

• Rural access – also positive – compare with historic fixed service deployment in emerging markets. Allowing the market to operate will go a long way to continue this trend. Again what is the impact of taxation and voice termination policy? Rural access Targeted US taxes may assist in the supply of shared passive mobile infrastructure in rural areas associated with communal provision.

• Disability press operators to ensure availability of offers to key segments: “speaking” software for blind customers; SMS / IM for (literate) deaf customers. Mobile has already meant that wheelchair access has disappeared as an issue.

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1. Customers who are too poor to buy

• A primary area of social / regulatory concern in many industries.

• In 1999 Oftel identified customer groups “whose needs might not be met without the intervention of the Regulator”. These were: people – “on low incomes; - who use the telephone

infrequently; – in short term rented accommodation; - in remote rural areas; – in areas of urban deprivation; with disabilities; and – of pensionable age (principally of concern when they fall into one of the

above).”

• By the early 2000s mobile service competition had delivered for 4 of these 6 groups. Pre-pay services with no periodic charge have essentially “solved” telephony access for poorer, more vulnerable groups in developed markets.

• Few customers in core EU counties now do not have telephony access for cost reasons. There is no poverty-related digital divide in mobile in developed markets where Vodafone operates. Plus universal SMS bundled “for free”.

• Emerging markets can replicate this by adopting the right policy approach.

• We now see scope for similar competitive dynamic with 3G offerings. Expect to see pre-pay data services – delivered by mobile – providing a high proportion of internet access among poorer consumer segments. Three key dynamics – recycle / re-use of subsidized equipment from higher-end segments, replication of the SMS effect for new services and competition between mobile and fixed USB / PC build-in-broadband offerings.

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2. Customers who are too expensive to serve

• Competition in mobile means being able to make and receive calls successfully is the vital non-price issue.

• Extensive rural/urban migration means that rural coverage can drive service choice among urban consumers

=> coverage is a key dynamic of competition and drives wider rural access

• Also real market outcomes show geographically averaged prices so in practice mobile competition bites equally in rural (expensive to serve) and in urban (low cost to serve) regions. Averaged prices is not something commonly seen in other “vital” industries such as for food or fuel supply.

• Not as unambiguous as the “virtual elimination” of poverty-related access problems, and the subject of interventions in certain markets, but still a public policy success.

• Scope for similar competitive dynamic with 3G coverage.

• Can encourage this dynamic by:– Spectrum reform (re-farming / releasing new spectrum / trading etc.);– Permitting network sharing between operators on commercial terms;– Using universal service funds to invest in passive infrastructure (masts, towers etc in

unserved, but inhabited, areas)

• And – potentially – support communal provision of pay-phones, data access in the meantime.

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3. Customers unable to use mainstream services• Disabled customers are not a single group. There are a range of distinct segments

which need appropriate product responses.

• In particular, contrast age and disability. Elderly customers’ needs are not distinct from the needs of the general population – unless as a consequence of disability. Penetration rates in adults reflect lifestyle choices and marketing and should not be a political or public policy concern.

• To increase inclusion among disabled customers operators should offer propositions (terminal equipment / handset and /or accessory and price plan) designed to meet the needs of customers in key segments:

• Development of these propositions needs to take place against a market background of increasing choice of communications approach – for both able-bodied and disabled customers.

• In the past telephony was essentially the only telecommunications service. This is no longer true with text and internet-based communications now as important – and a key reason why the inclusion of disabled customers has increased over time.

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Focus on disability• In practice priority segments are decided

politically to reflect perceived exclusion / disability group lobbying. So (in order):

1/ Profoundly deaf customers

2/Associated groups: deaf-blind & speech impaired customers / with partial hearing.

3/ Blind customers / with partial sight

4/Elderly customers may also be seen as important. However, not obviously excluded - special provision may be more about home care in developed societies than requirements in emerging markets

• Lack of “voice” marginalizes groups such as customers with poor motor function or cognitive impairment.

• Operator response – ensure a range of products offered which meet the needs of disabled customers more widely

Poor grip / motor function

Partial sight

Partialhearing

Cognitive impairment

Speech impaired

Profoundlydeaf

Blind

Deaf-blind

Incr

easi

ng

seg

men

t si

ze

Elderly

Increasing influence

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Alzheimer patients and dependent people(> 800.000)

Mobile “Talks” /Mobile Magnifier

Blackberry VF Accesible IM service

Around 3000customers

Emporia

Mobile Tel y Simap

Example propositions [source:

Vodafone Spain]

Blind / Visually impaired(> 800.000)

Deaf /hard of hearing(> 900.000)

65+ años / limited hand ability (> 7 Millions)