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Ringing In the Next Billion Mobile Consumers
A Road Map for Accelerating Telecom Growth in India
Report
The Boston Consulting Group (BCG) is a global manage-
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(1,1) -ICVRS1- TC India Billion_COVERS.indd 11/28/07 12:04:29 PM(1,1) -ICVRS1- TC India Billion_COVERS.indd 11/28/07 12:04:29 PM
Ringing In the Next Billion Mobile Consumers
A Road Map for Accelerating Telecom Growth in India
bcg.com
James Abraham
David R. Dean
Arvind Subramanian
December 2007
© The Boston Consulting Group, Inc. 2007. All rights reserved.
For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. Exchange Place Boston, MA 02109 USA
R I N B M C
Contents
Note to the Reader 4
Preface 6
Unmet Demand and Desires 6
Fundamental Transformations 6
The Next Billion: Why They Matter 8
Potential Growth 8
The Great Multiplier 8
The Next Billion: Who They Are 11
The Demographics and Characteristics of the Next Billion 11
The Needs and Aspirations of the Next Billion 14
The Profit Imperative 17
Improving Operator Economics 17
Lowering Handset Costs 17
Innovative Approaches 20
Developing Life-Enhancing Products 20
Reaching Out Through Distribution 22
Marketing Through Education 24
Unleashing the Organization 24
A New Opportunity: Banking Through Mobile Services 26
Push and Pull: The Two Sides of Regulation 28
Creating a Push: Universal Access 28
Creating a Pull: Universal Adoption 30
A Call to Action 32
For Further Reading 33
T B C G
Note to the Reader
The Boston Consulting Group is
committed to understanding the
needs and aspirations of consumers
in rapidly developing economies and
the ways in which companies can
serve them profi tably. This report
examines specifi cally how telecom
providers can serve these consumers,
whom we call the next billion, in
India.
We examined numerous ways to
serve the next billion—including
cross-industry collaboration and
improvements to products, distribu-
tion, marketing, regulation, and
infrastructure. We developed an
understanding of this emerging
group of consumers in India by
conducting 11 focus-group discus-
sions and nearly 40 interviews with
individuals in their homes; surveying
approximately 9,000 individuals;
visiting numerous rural and urban
communities; and holding discus-
sions with telecom operators. We
reviewed secondary research
materials and interviewed experts
worldwide. We also worked closely
with our colleagues in Latin America
and China to understand how
players in other emerging markets
are trying to generate growth by
penetrating this market.
A quick note about fi nancial fi gures:
Because this report focuses on India,
the fi gures included here are denom-
inated in Indian currency. To help
provide context, we off er a currency
conversion table below and include
U.S. dollar equivalents for some
fi gures in the text.
Indian
currency
U.S.
equivalent,
October 16
1 rupee 2.5 cents
1 lakh Rs 100,000 $2,541
1 crore Rs 100
lakh
$254,970
For Further Contact
The authors welcome your questions
and feedback.
James Abraham
Partner and Managing Director
BCG New Delhi
+91 124 459 7000
David R. Dean
Senior Partner and Managing Director
BCG Munich
+49 89 23 17 40
Arvind Subramanian
Principal
BCG Mumbai
+91 22 6749 7000
R I N B M C
If you would like to discuss this
report—as it pertains to India or to
other regions—please contact the
authors or one of the following
partners who have expertise in
technology and communications in
emerging markets:
Latin America
Marcos Aguiar
BCG São Paulo
+55 11 3046 3533
Central and Eastern Europe
Joachim Grendel
BCG Düsseldorf
+49 2 11 30 11 30
Middle East and Africa
Kamel Maamria
BCG Dubai
+971 0 4 509 6700
BCG Paris
+33 1 40 17 10 10
China and Southeast Asia
David Michael
BCG Beijing
+86 10 8527 9000
Acknowledgments
The authors acknowledge the
contributions of several colleagues at
BCG. We extend special thanks to
Patrick Ducasse, a senior partner and
managing director in the fi rm’s Paris
offi ce and global leader of the
Consumer practice; Ron Nicol, a
senior partner and managing
director in BCG’s Dallas offi ce and
global leader of the Technology &
Communications practice; David
Rhodes, a senior partner and
managing director in the fi rm’s
London offi ce and global leader of
the Financial Services practice; and
Miki Tsusaka, a senior partner and
managing director in BCG’s New
York offi ce and global leader of the
Marketing & Sales practice.
We also acknowledge the following
members of the BCG team for their
support in preparing and writing this
report: Satyan Dansinghani, Gustavo
Furuta, Brad Henderson, Ashish Iyer,
Vishal Kapur, Amrita Mahale, Hardik
Manek, Michael Meyer, Michele
Pikman, Shweta Sharma, Varun
Singhal, and Rafael Zapparoli. We
are also grateful to BCG partners
Neeraj Aggarwal and Alpesh Shah
for their invaluable advice to the
team, and to Indica Research for
helping us conduct primary consum-
er research.
In addition, we thank Marcos Aguiar,
a partner and managing director in
BCG’s São Paulo offi ce; David
Michael, a senior partner and
managing director in the fi rm’s
Beijing offi ce; Walter Piacsek, a
partner and managing director in
BCG’s São Paulo offi ce; and
Janmejaya Sinha, a senior partner
and managing director in the fi rm’s
Mumbai offi ce. Finally, we would like
to express our gratitude to the
following members of BCG’s edito-
rial and production staff : Barry Adler,
Katherine Andrews, Gary Callahan,
Dan Coyne, Mary DeVience, Kim
Friedman, Sharon Slodki, Sara
Strassenreiter, and Mark Voorhees.
James Abraham
Partner and Managing Director
David R. Dean
Senior Partner and Managing Director
Arvind Subramanian
Principal
T B C G
In rapidly developing economies (RDEs) such as
Brazil, China, and India, telecom operators have
grown by penetrating the high end of the market.
But today most affl uent consumers in these mar-
kets already use a mobile handset. The next chal-
lenge for operators, therefore, is to reach the less affl uent
consumers who either are not yet served or are served
inadequately and unprofi tably by existing business mod-
els. We call this group the next billion to contrast them
with the fi rst 2 billion mobile subscribers, who are wealth-
ier and tend to reside in more developed nations.
The economic boom in emerging markets has bypassed
this vast swath of people, whose potential to become vi-
able customers has been greatly underestimated and at
times misunderstood. Categorized by income, this group
sits just above the poorest of the poor and just below the
segment of consumers now profi tably served by commer-
cial enterprises. In short, the next billion are stuck in the
middle. They fl y above the sweep of government pro-
grams geared to meet the needs of the bottom of the
economic pyramid but hover below the radar of existing
business models that target the top.
The next billion can be found largely in Brazil, China, and
India, but the group also spreads across Africa and other
parts of Asia. If these consumers constituted a nation,
they would be the tenth-largest economy, with about
$1.1 trillion in gross domestic product (GDP)—ranking
a er Spain but ahead of Brazil, Russia, India, South Ko-
rea, and Mexico. In its development, the next billion “na-
tion” stands today where India stood in the 1990s and
China stood in the 1980s—on the cusp of high growth
and voracious consumption.
Unmet Demand and Desires
Despite the rapid growth in the ranks of the next billion,
these individuals represent a conundrum for businesses.
On the one hand, they demand products and services.
The early adopters in this segment report great satisfac-
tion with telecom products and services. On the other
hand, many technology companies consider this group,
when viewed through the lens of conventional business
models and metrics, unprofi table to serve.
This report highlights the steps that the industry and
regulators can take to increase penetration of this market
in India while ensuring profi table and sustainable growth
in the country’s telecom business. It identifi es potential
customers and explores their communication needs and
the current barriers to fi lling them. In the interest of brev-
ity and clarity, this report focuses primarily on telecom
operators and regulators, but our fi ndings are relevant
also for handset and network-infrastructure suppliers.
Increasing penetration in this market won’t benefi t only
telecom businesses; the spillover eff ects can also advance
the greater good of society. Exclusion from basic services
plays a signifi cant role in trapping people in poverty. By
broadening telecom penetration, therefore, operators will
boost not only their bottom lines but also India’s eco-
nomic and social foundation.
Fundamental Transformations
To reach the next billion consumers, telecom operators
and regulators must achieve three fundamental transfor-
mations in business and society.
Preface
R I N B M C
Business model innovations must transform the eco-
nomics of serving overlooked or neglected consum-
ers and yield products and services that suit their
needs. Business as usual will not reach these consumers.
Instead, telecom operators will need to revise their or-
ganizations, marketing, and distribution channels. They
will also need to change their products. If the next billion
consumers opt to make a sizable investment in a mobile
handset and calling plan, they will require ones that meet
both their practical and their aspirational needs.
Regulatory reforms and infrastructure enhancements
must unleash telecom operators and allow them to
extend their reach. Regulators will need to expand their
role beyond ensuring access to telecom services. They will
also need to promote market-based steps to ensure af-
fordability and adoption.
Wider, more ambitious improvements such as cross-
industry collaboration will be needed to usher the
next billion into formal consumer markets. Operators
will need to collaborate with players in other industries,
such as fi nancial services and consumer goods, in order
to develop innovative off erings and extend their reach
beyond the outer limits of traditional distribution
channels.
The size of the prize is gigantic for operators—as well as
for handset and equipment manufacturers—that crack
the code of reaching these consumers. At stake for indi-
vidual operators are several thousand crore rupees in an-
nual revenue—and signifi cant growth.
T B C G
The Next Billion: Why They Matter
Collectively, the next billion consumers are
too important to ignore. While the fi rst 2 bil-
lion mobile subscribers are geographically
dispersed, the next billion will be concen-
trated in RDEs. (See Exhibit 1.)
In recent years, RDEs—Brazil, China, and India in par-
ticular—have been powering world economic growth.1 In
India, real GDP has been growing at an impressive aver-
age annual clip of 8.4 percent over the past three years
and now exceeds $1 trillion. Also, the size of the consum-
ing class in India—a category identifi ed by the National
Council of Applied Economic Research and commonly
defined as households earning more than Rs 90,000
($2,250) per year—has more than doubled from about 35
million households in 1996 to more than 70 million in
2006. Although only about 1 in 20 of the fi rst 2 billion
mobile subscribers live in India, in the near future as
many as 1 in 6 of the next billion subscribers will be
Indian.
Potential Growth
Even though India and other RDEs represent the next
wave of global growth, the demand for mobile telecom-
munications is not guaranteed to expand in these areas.
As their income rises, poor households will not necessar-
ily purchase or be able to aff ord today’s products and
services.
India had about 160 million mobile subscribers as of
April 2007. If operators were to passively ride the rising
economic tide and population growth of India—and take
advantage of a series of traditional regulatory moves and
the falling price of handsets and infrastructure equip-
ment—they would likely enlist an extra 217 million mo-
bile subscribers by 2010, bringing the total number to 377
million. But such measures would fail to fully tap the po-
tential of the next billion. We estimate that additional,
innovative industry and regulatory reforms would enable
operators to profi tably serve another 144 million new
customers. These measures would bring the total number
of new mobile subscribers to 361 million and the total of
all mobile subscribers to 521 million—exceeding the
government’s stated target of 500 million. (See Ex-
hibit 2.)
In the following pages, we lay out several approaches that
would allow telecom operators to reach these consumers.
Many of these activities will require companies to imple-
ment radical rather than incremental change in their
business models and organization structures. Such chang-
es will demand a bracing commitment from the entire
organization—and change will not end at the organiza-
tion’s walls. Without help from business partners and,
signifi cantly, from regulators, businesses will be unable to
fully exploit the opportunity to serve the next billion.
The Great Multiplier
Telecommunications acts as an economic catalyst by im-
proving productivity. It enables farmers and traders to
gain quick and ready access to market prices, lowers
1. In our analysis, we defined RDEs in Asia as China, India, and the eastern part of Russia; in Central and Eastern Europe as Bulgaria, the Czech Republic, Hungary, Poland, Romania, the western part of Russia, Slovakia, and Ukraine; and in Latin America as Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Venezuela.
R I N B M C
0
600
500
400
300
200
100 160
217
377
144
521
April 2007(actual)
Momentumgrowth
Total in 2010 if operatorsadopt a passive approach
Additional growththrough innovation
Total in 2010 if operatorspursue new approaches
Subscribers added through existing trends and current momentum, such as ◊ Demographic shis
• increasing population• rising income • urbanization
◊ Increasing mobile penetration ◊ USO funding for mobile networks1
◊ Alternate channels for rural rollout ◊ Infrastructure sharing ◊ Reduction in capital and operating
spending and handset costs
Subscribers added through innovation, such as ◊ Regulatory measures to spur
adoption◊ Reduction in license and
spectrum fees ◊ New applications◊ New devices ◊ Cross-industry initiatives
Number of mobile subscribers (millions)
Exhibit 2. Business and Regulatory Innovations Could Expand Telecom Penetration to 521 Million Subscribers by 2010
Sources: BCG estimates; BCG analysis. 1The Universal Service Obligation (USO) Fund is financed with levies on telecom services.
0
China India Rest of Asia Africa Latin America Others
Number of mobile subscribers(millions)4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
December2006 (actual)
444136366177242
883
2,248275
241215
143 44
583 3,749
1,466
286320
581
377
719
2010(projected)
Exhibit 1. Rapidly Developing Economies, with Their Large Next-Billion Populations, Will Lead the Way in Telecom Growth
Sources: United Nations Development Programme; International Telecommunication Union; the Economist Intelligence Unit; Business Monitor Inter-national; Global Telecom Monthly; Wireless Equipment: Trends and Forecasts for a Transformational Technology, Cowen and Company, March 28, 2006; BCG analysis.
T B C G
transaction costs by eliminating the need for cumber-
some travel, and expands buyer and supplier networks.
“Business has never looked up as much as since I bought
a mobile handset,” a local business owner in Mumbai
explained in an interview with BCG. “Now my customers
call me whenever they need to place an order. It saves me
unnecessary traveling. Plus it’s convenient for my custom-
ers, giving me an edge over competitors.”
For all these reasons, expanded access to telecommunica-
tions has a positive eff ect on emerging economies. Spe-
cifi cally, according to a study commissioned by Vodafone,
economists concluded that for every ten mobile handsets
added per 100 people in a developing country, the coun-
try’s GDP growth rate would rise by 0.6 percent.2
This multiplier eff ect is benefi cial not only to developing
nations but also to telecom operators. Such players can
market the earning potential of mobile communications
to nonusers, who may be skeptical about the value of a
mobile handset. Moreover, operators can adopt creative
approaches that will tap the ability of a mobile handset
to generate economic activity. Operators ought to be
scanning the horizon and thinking of ways to collaborate
with other players to off er, for example, new forms of
mobile commerce and mobile banking. Finally, operators
can become good corporate citizens by extending tele-
com penetration to emerging consumer segments. Al-
though corporate social responsibility in itself is an insuf-
ficient reason for serving the next billion, Indian
companies are becoming increasingly mindful that their
long-term success is hitched to the ability of their nation
to bridge its economic and societal divides.
Reaching the next billion consumers will be diffi cult
work. But the prize is huge for the consumers themselves,
the companies that serve them, and the societies in which
they live. In India alone, the 361 million new consumers
who could be reached by 2010 represent potential addi-
tional annual revenues in excess of Rs 85,000 crore
($22 billion) for telecom operators. Understandably, the
prospect of this growth is attracting the attention of mo-
bile operators that are interested in acquiring local play-
ers. Vodafone’s recent acquisition of a controlling stake in
Hutchison Essar, India’s fourth-largest mobile operator, is
one case in point.
2. Africa: The Impact of Mobile Phones, the Vodafone Policy Paper Series, Number 3, March 2005. The authors of the study reached their conclusion by performing regression analysis on economic data from 92 countries for the years 1980 to 2003.
R I N B M C
The Next Billion: Who They Are
If national demographics were a card game, India
would be holding the following three aces:
A fast-growing population. ◊ The Indian govern-
ment estimates that the country’s population
will grow by 1.6 percent this year, compared with global
growth of less than 1.2 percent.
A young population. ◊ While Europe’s baby boomers are
approaching retirement, India’s population is entering
its prime. In 2015 the average age of India’s popula-
tion—30.1—will be more than one decade less than
the average age in many European countries. (See Ex-
hibit 3, page 12.) The country’s youth represents its
economic potential.
Rising incomes. ◊ The consuming class of households
earning more than Rs 90,000 ($2,250) is expected to
swell by 16 million by 2010. (See Exhibit 4, page 12.)
Meanwhile, the number of households in the econom-
ic cellar is shrinking, as economic growth pulls people
up the ladder.
Nevertheless, operators will need to do their homework
if they hope to take advantage of these trends and cap-
ture the next billion consumers in India. In particular,
they must strive to deepen their understanding of the
needs and aspirations of this large group.
The Demographics and Characteristics of the Next Billion
In India the 91 million households in the next-billion cat-
egory defy simple characterization. A typical household
in this segment in a metropolitan or large urban area
earns between Rs 60,000 and Rs 180,000 ($1,500 to
$4,500) annually. Given their lower cost of living, how-
ever, rural households and households in small or medi-
um-size urban areas could earn as little as Rs 40,000
($1,000) and still fall into the category. (See Exhibit 5,
page 13.) These income ranges are determined by a com-
bination of household savings, discretionary spending,
ownership of durable goods, and banking relationships.
On average, India’s next-billion households devote slight-
ly more than one-third of their annual spending to nones-
sential goods. Many of these households are, for example,
beginning to enter formal consumer markets by purchas-
ing their fi rst television, refrigerator, or DVD player. Still,
a large number of the next billion lack steady formal em-
ployment, which leads to volatility in their incomes. Many
also live in small houses with between 100 and 200 square
feet. Uninterrupted electricity and clean running water
have yet to reach many of these households.
Despite a large migration to cities in recent years, nearly
three-quarters of Indians—and an even greater share of
those on the lowest economic rungs—still live in villages.3
Vast diff erences separate urban and rural life, particu-
larly when it comes to wealth and mobile telecom cover-
age and penetration. Eighty-nine percent of the richest
households live in urban areas, and nearly half of them
are located in Delhi or Mumbai. The bottom of the in-
come pyramid is a reverse image of the top, with 82 per-
cent of the poorest households located in rural areas. (See
3. National Council of Applied Economic Research, The Great Indian Middle Class, 2004.
T B C G
< 0.9 2 5 10
20102006
>100
20
40
60
80
100
120
140
Income distribution, 2006 through 2010Number of households (millions)
Annual household income (Rs lakh)
Population is expected to grow by 80 million people, or 16 million households, from 2006 through 2010
Middle-income tier
Exhibit 4. Middle-Income Households Will Lead India’s Population Growth
Sources: National Council of Applied Economic Research (NCAER); Statistical Outline of India, 2005; BCG analysis.Note: Number of households are estimates and assume an average household of five; the distribution of households by income is based on NCAER’s figures for 2001–2002 and its estimates for 2005–2006.
Population: 58.3 million0
1020304050607080
average age: 42.8 years
India
Population: 1.2 billion0
1020304050607080
average age: 30.1 years
01020304050607080 Women Men
Population: 63.0 million
average age: 39.3 years
Germany
Europe in 2015
India in 2015
ItalyFrance
Population: 80.9 million
average age: 42.4 years
Population: 61.9 million
average age: 40.5 years
United Kingdom
01020304050607080
01020304050607080
Russia
Population: 135.0 million
average age: 39.1 years
01020304050607080
Women MenWomen Men
Women MenWomen Men
Women Men
Spain
Population: 41.2 million
average age: 41.1 years
01020304050607080
Women Men
Exhibit 3. In 2015, India Will Have a Much Younger Population Than Most of the Developed World
Sources: Euromonitor International; BCG analysis.
R I N B M C
Estimate of next-billion households, 2006
0
60
120
180
240
Metropolitanareas
Large urbanareas
Medium-sizeurban areas
Small urbanareas
Rural towns and villages
Small ruralvillages
Households whose income or location places them outside the next billion
Next-billion households
Annual household income, 2006 (Rs thousands)
Households already targeted with profitable offerings
More than 5 million
>1 million–5 million
>500,000–1 million
>100,000–500,000
1,500–100,000
Less than1,500
Population1
6 39 39 5,087 ~120,000 ~467,000
17 12 5 30 140
8 6 3 20 54
Number of cities,towns, or villagesTotal number of
households (millions)Number of next-billion
households (millions)
Exhibit 5. Both Income and Location Define India’s Next-Billion Households
Sources: Survey of 9,174 individuals in BCG’s next-billion-consumer research, 2006 and 2007; BCG analysis.1Population was the primary parameter used to sort cities, towns, and villages into these categories. We used population figures for 2001–2002.
Exhibit 6, page 14.) In addition, per capita spending in
rural areas is less than half that in urban areas. Whereas
only 54 percent of rural households have electricity, 90
percent of urban households do. Likewise, just 26 percent
of rural households own televisions, compared with 66
percent of urban households.
Mobile telecom statistics divide along the same line. Pen-
etration, defi ned as the ratio of mobile subscribers to to-
tal population, is about 40 percent in urban India, com-
pared with about 5 percent in India’s rural areas.4
Despite their demographic diff erences, the next billion in
India share two emotional and psychological characteris-
tics: their long-term optimism and the short-term prag-
matism that is forged by the necessary compromises of
their daily existence.
Long-Term Optimism. The next billion have a strong
desire to improve their lives and the lives of their chil-
dren, and they are taking charge of their destiny. More
than 45 percent of the approximately 9,000 Indians we
surveyed said that their lives have indeed improved over
the past two years, and 65 percent said that they expect
the next two years to be even better.
Almost without exception, the survey respondents told us
that children were better educated than their parents.
Women, until recently confi ned to the homemaker’s role,
told us that they were making plans to work so that they
could supplement the household income. Although many
of the survey respondents lived in smaller towns and vil-
lages, many also told us that they have traveled to larger
cities for religious pilgrimages, family visits, and other
reasons.
Short-Term Pragmatism. The gulf between the dreams
and reality of the next billion pervades all aspects of their
purchasing process. Contrary to popular belief, these con-
4. The rural penetration percentage is based on statistics provided by the Telecom Regulatory Authority of India.
T B C G
sumers do not blindly pick the cheapest option. Function-
ality, reliability, and durability are critical, as replacement
through a second purchase is not a viable option. Ulti-
mately, the income constraints of the next billion mean
that they cannot aff ord to make mistakes in their pur-
chasing decisions.
The next billion consumers delicately bal-
ance their household budgets each month
by cutting back on some expenses to save
up for others. Buying decisions are labori-
ously researched and planned over long
periods. One household we visited, for
example, had set aside savings over six
months to buy a color television set.
Every rupee counts. Therefore, these consumers seek
high-quality products that are aff ordable—not merely
stripped-down versions of existing products that target
the higher-income segments. Secondhand products, even
when they are available at deep discounts, are viewed
warily because they are not guaranteed by a warranty.
Clearly, it will not be enough to understand the “average”
rural or urban consumer, or the “typical” mobile sub-
scriber. India is a nation of diversity. And diversity de-
mands a detailed, nuanced, and highly segmented under-
standing of consumer behavior and needs—both of
which vary across age groups, income segments, and re-
gions. (For a qualitative view, see the sidebar “The Three
Faces of the Next Billion.”)
The Needs and Aspirations of the Next Billion
India’s diversity has vast implications for
the marketing campaigns, pricing, and prod-
uct and feature designs of telecom opera-
tors. Urban residents, for example, have
much greater exposure to mobile handsets
and will be much more likely to replace a
handset than to buy their fi rst one. In rural areas, both
landline and mobile handsets are much less common. For
example, even though all but about 35,000 of about
600,000 villages in India have a public telephone booth,
in many cases that booth is unreliable and located at
least a few kilometers from the households it is meant to
serve. Not surprisingly, consumers in urban and rural
markets are interested in diff erent features of a mobile
handset. Rural consumers value reliable service, but ur-
The next billion
do not want
stripped-down
versions of
existing high-end
products.
20
40
201
546
1,712
8,034
~62,000
~132,000
Urban householdsRural households
<90,000
>50 lakh–1 crore
>1 crore
Distribution of households by income(thousands)
Annual income(Rs)
Rural-urban split(%)
>20–50 lakh
>10–20 lakh
>5–10 lakh
>2–5 lakh
90,000–2 lakh
80
7030
6436
5248
1882
11
8515
7525
20
89
Exhibit 6. Income Distribution Tells a Tale of Two Indias: Urban Wealth and Rural Poverty
Source: National Council of Applied Economic Research, The Great Indian Middle Class, 2004.Note: Population figures are for 2001–2002.
R I N B M C
Although it’s impossible to condense and synthesize the lives of 1 billion individuals into three vignettes, the fol-lowing stories help to illustrate the experiences, aspira-tions, and needs of the next billion.
A Hard-to-Reach ConsumerAnju, 33, lives with her husband, his fi rst wife, and her own three children in a village near Barabanki, Uttar Pradesh. Her husband is a teacher. From the teaching salary and the family’s agricultural income, the family earns about Rs 10,000 ($250) a month, and it is comfortably meeting its needs.
Although Anju’s husband is a teacher, he is unfamiliar with many modern products and services, such as con-sumer fi nance or various types of insurance products other than life insurance. While he is aware of computers and the Internet, he has not used either. Neither Anju nor her husband has ever considered owning a computer. An-ju’s village has only four fi xed-line phones, but Reliance and BSNL provide mobile coverage there. Slowly, people in the village are acquiring mobile handsets, notably shop-keepers and traders who must travel signifi cantly for work. Anju and her husband have never used a mobile handset, and they do not feel the need for a phone. She calls her mother through the local pay phone and receives calls at the home of an acquaintance who owns a phone.
The Middle of the PackVarsha, 27, lives in a one-room apartment in a chawl (low-income tenement) in Mumbai with her husband, who works as a clerk, and their two children. The family has a monthly income of Rs 5,000 ($125), which leaves a surplus of about Rs 500 to Rs 800 ($12.50 to $20) a month. The couple have two primary communication needs: staying in touch with their family in Gujarat, about 600 kilometers away, and with each other when Varsha’s husband goes to work.
Varsha’s family does not own a landline phone, a mobile handset, or a computer. For outgoing calls, they rely on a local pay phone; for incoming calls, on a neighbor with a phone. The family has never used the Internet and is only vaguely aware of being able to communicate on a com-puter or browse on the Web. The children, however, are learning about computers at their English language school.
Varsha recently sensed the need for a handset when ter-ror attacks struck Mumbai’s suburban trains and she wanted to reach her husband to make sure that he was safe. She thinks that they can aff ord a mobile handset, especially if they monitor their minutes and continue to use the pay phone to make most calls. She is hoping that her husband’s employer will buy him a handset because his job requires him to be mobile. If not, they will buy one soon.
An Upwardly Mobile ConsumerPadma, 41, lives with her children in Vijayawada while her husband works 980 kilometers away in Mumbai. The fam-ily originally settled in Vijayawada when her husband went into business for himself in the city, but the venture did not work out. The family meets all its needs comfort-ably and saves between Rs 5,000 and Rs 7,000 ($125 to $175) a month.
The family has owned a landline phone for several years, and both Padma and her husband have a mobile handset in order to keep in touch with each other. Padma is economical: she uses the landline to make outgoing calls and limits mobile use to incoming calls, which are free in India.
The family does not have a computer at home, but both children know how to use computers and frequent a cy-bercafé for e-mail and other activities. Padma’s elder son lives outside the home and is studying medicine. Her younger son still lives with the family but expects to move out in two years. Padma does not know how to use a com-puter, and the family has no plans to buy one.
The Three Faces of the Next Billion
T B C G
ban consumers take reliability for granted and are more
interested in brand names and features such as text mes-
saging.
One of the primary challenges for operators will be to
persuade the next billion that a mobile handset meets
their pragmatic as well as aspirational needs. Although
our consumer research has found that more than 90 per-
cent of Indians without a mobile handset were interested
in the device, many of these individuals didn’t necessar-
ily think that they needed one. Whether they lived in ma-
jor metropolitan areas like Mumbai, affl uent rural areas
like Punjab, or developing areas like Orissa, most nonus-
ers said that they saw the top benefi ts of a mobile hand-
set as improved social status and the ability to speak with
family and friends without having to travel. (See Exhibit
7.) Few recognized the economic value of a mobile hand-
set. By contrast, nearly one-quarter of mobile handset
users cited access to business information as a prime ben-
efi t of owning the device.
On its own, building awareness about mobile handsets
will not increase penetration. The price of handsets cre-
ates a major barrier to entry, and our research and analy-
sis suggest that at current prices, penetration will actu-
ally remain quite low. The willingness to use mobile
handsets could increase signifi cantly, however, as the cost
of handsets decreases. Many operators and experts we
interviewed believe that a handset priced at Rs 1,000
($25) could unlock latent demand.
The monthly service cost, although less critical than the
handset cost, also presents a barrier. Until recently, typi-
cal plans required a monthly expenditure of more than
Rs 250 (slightly more than $6)—an amount that about 80
percent of the next billion were unwilling to spend. How-
ever, new pricing plans have reduced the minimum
monthly service cost for customers. Our research indi-
cates that at a monthly cost of about Rs 150 ($3.75), pen-
etration and usage would rise dramatically. Many new
subscribers, in fact, are already paying that amount.
Top three perceived benefits1. Improved social status (81 percent)2. Can call rather than travel to talk to
family and friends (9 percent)3. Improved relationships (6 percent)
Top three perceived benefits1. Improved social status (58 percent)2. Can call rather than travel to talk to
family and friends (26 percent)3. Useful in emergencies (8 percent)
Top three perceived benefits1. Can call rather than travel to talk to
family and friends (53 percent)2. Improved social status (24 percent)3. Faster communication (9 percent)
Rural Punjab (an affluent area)
Mumbai Rural Orissa (a developing area)
Exhibit 7. Nonusers Across India Cite Personal, Not Economic, Benefits of Handset Ownership
Sources: Survey of 5,049 individuals in BCG’s next-billion-consumer research, 2006; BCG analysis.
R I N B M C
The bedrock of improved penetration among
the next billion consumers is the creation of
profi table business models to serve them.
Although the mobile industry in India is
highly profi table overall, serving the next
billion is unprofi table. (See Exhibit 8, page 18.) As opera-
tors expand to sustain growth, their economics—and re-
turn to shareholders—will come under severe strain.
They must therefore explore alternative, lower-cost ap-
proaches to reach these potential customers.
Improving Operator Economics
Just over half the cost of serving low-income subscribers
is tied to handset and customer-acquisition and retention
costs. (See Exhibit 9, page 18.) Most of the rest of the ex-
pense relates to the cost of operating the network. The
return on an investment in a base station depends to a
great extent on the demographic profi le, population den-
sity, income levels, and telecom penetration of the par-
ticular region where it is located. Current cost structures
and income levels in India suggest that these types of
investments will have varying payoff s. In metropolitan
regions, for example, operators will recoup their invest-
ment in a base station within the fi rst year of operation.
Base stations in smaller cities and towns will take about
two years to pay returns. Most rural base stations will not
recover investment for ten years.
Finally, some remote and low-income regions may never
be able to support investments in mobile infrastructure.
The terrain and sparse population in these locales will
prevent conventional mobile networks from being the
best way to bring telephone service to the masses. An
opportunity exists, however, to reduce the cost of serving
rural areas by as much as 63 percent. Operators can con-
trol costs by taking such steps as reducing customer-ac-
quisition and retention costs, while equipment manufac-
turers can contribute by improving the performance of
antennas and base stations. (See Exhibit 10, page 19.)
Lowering Handset Costs
Although operators do not have direct control over hand-
set costs, they can and should work with manufacturers
to ensure that handsets are both economical and practi-
cal for the next billion consumers. The following practic-
es, some of them already in use, will help wring costs out
of—and impart additional usefulness to—handsets:
Evaluate the design and specifi cations of handsets to ◊
ensure that they meet the needs of the next billion
and do not contain extraneous features
Seek out sourcing and manufacturing opportunities in ◊
low-cost areas of India, making sure to take advantage
of incentives off ered by the central and state govern-
ments to encourage technology investments
Reduce complexity—and subsequent servicing costs—◊
by relying on standardized keypads, screens, and
other parts
Off er handsets on an installment plan that increases ◊
users’ payments over time as benefi ts also rise
The Profi t Imperative
T B C G
Profit per subscriber1 (Rs/month)
Breakeven
104
100
80
60
40
20
0
150
100
50
0
–50
–100
–26
–98
Below thenext billion
The nextbillion
Above thenext billion
95 million91 million18 million
Consumersegment
Number ofhouseholds
Percentage of Indian households that own a mobile handset
Rs/month
Exhibit 8. For Telecom Operators, Serving the Vast Majority of Indian Households Is Unprofitable
Sources: Survey of 9,174 individuals in BCG’s next-billion-consumer research, 2006 and 2007; industry interviews; analyst reports; BCG analysis.Note: Household figures are from 2006; penetration figures are from April 2007.1Profits were calculated by subtracting fully loaded capital spending and operating costs from average revenue. These are pretax profits and do not include the effect of interest payments.
Percentage of the cost to serve low-incomemobile subscribers in urban India
0Handset
cost1Customer-
acquisition and retention costs
Networkcapital-expense
allocation
Networkoperating-expense
allocation
Taxesand fees
Total
20
40
60
80
100
23
28
22
17
10 100
Exhibit 9. Handset and Customer-Acquisition and Retention Costs Make Up Half the Cost to Serve Low-Income Urban Users
Source: BCG analysis.1Handset cost reflects the lowest-cost handset in India.
R I N B M C
0Current
base costLower handset
costLower
customer-acquisition
and retention cost
Capitalspending
optimization
Operatingexpense
optimization
Tax relief Subsidy Potential costto serve aer
cost reductions
20
40
60
80
10015
10
15
10
15
10
5
2
8
5
5
3
60
37
Highest possible percentage of total cost to serve
Lowest possible percentageof total cost to serve
◊ Increase base capacity◊ Boost antenna performance
and increase cell radius◊ Eliminate need for shelters,
air conditioning equipment, and other infrastructure
Roll back spectrumand license fees
Subsidize capital spending up to 30 percent through the Universal Service Obligation Fund
Provide anultra-low-costhandset
◊ Increase customer life span through innovative options and products
◊ Redesign incentives and commissions◊ Improve distribution and reach
◊ Improve power management ◊ Outsource local management of
operations and maintenance◊ Explore innovative business models
Maximum percentage savingsMinimum percentage savings
Percentage of total costper rural subscriber
Exhibit 10. By Pulling Several Levers, Operators Can Significantly Reduce the Cost of Serving Mobile Subscribers in Rural Areas
Sources: Interviews with operators and analysts; analyst reports; BCG analysis.
T B C G
Innovative Approaches
Operators that can manage the paradox of
delivering the innovative products and
services that the next billion want at the
low prices they require will increase tele-
com penetration. To capture the loyalty of
the next billion, players will need to develop profi table
business models that combine deep consumer insight
with sharp economic analysis. Diff erent companies will
adopt diff erent models depending on the segment they
are trying to reach, but all the models are likely to em-
body four principles: developing life-enhancing products,
reaching out through distribution, marketing through
education, and unleashing the organization.
Developing Life-Enhancing Products
The mobile handset can transform the lives of the next
billion consumers in ways that it hasn’t for the fi rst two
billion. In interviews, recent adopters among the next bil-
lion extolled the virtues of the handset as an earning tool.
The stories of farmers and fi shermen using handsets to
check prices are well known. Even in urban markets, how-
ever, the mobile handset is changing livelihoods.
Ultimately, the next billion want products that match
their lifestyle and economic needs. A farmer, for example,
may want a rugged handset with a data feed that lists
wholesale prices at nearby markets. By contrast, an ur-
ban worker may care primarily about text messaging and
the look and feel of the handset. Operators and handset
manufacturers will need to design a full range of prod-
ucts and services that meet those needs and deliver both
aspirational and pragmatic value. Our research suggests
a few practical guidelines.
Off er economical packages. ◊ Many of the next billion ei-
ther are self-employed or otherwise lack steady em-
ployment. Operators therefore should “fi t the pocket”
of customers by lowering minimum recharge amounts
(the charge for buying minutes), off ering fl exible terms,
and encouraging free or low-cost trial use. Our research
suggests that consumers would likely purchase more
airtime each month if they could lower their minimum
recharge amounts, even if a higher per-minute charge
applied.
Incorporate lifestyle constraints into product design. ◊ The
next billion consumers tend to share mobile handsets
with family members, making prepaid family plans an
attractive option. In addition, the design of the hand-
set itself could appeal to fi rst-time users, with one-
touch dialing and the option to make a balance in-
quiry. Furthermore, with some of the next billion living
in dark, cramped conditions where continuous electri-
cal power is rare, many consumers would also value
long-life batteries, built-in fl ashlights, and the ability to
charge handsets from car batteries and generators.
Appeal to aspirations. ◊ Among other benefi ts, the mo-
bile handset is a status symbol for the next billion
consumers. Our research shows that the next billion
enjoy color screens, ring tone downloads, and other
cosmetic features that are apparent to those around
them. They care less about sophisticated so ware.
Strive for quality. ◊ The next billion value longevity and
sturdiness, and they will be put off if their initial expe-
rience with a handset is negative. The best-selling
handset in India is dust resistant, and it has a fl ashlight
R I N B M C
and a nonslip surface for humid weather. It is, in other
words, built to last.
What services will succeed among the next billion in In-
dia? As part of our research, we created an “average”
household budget in India in order to understand the
most pressing needs of these consumers. Essential items
such as food and shelter consumed the largest share of
the budget, followed by education, clothing, footwear,
and transportation. In most of these categories, we identi-
fi ed mobile handsets as having the ability to help meet
several needs, especially if the services could substitute
for inadequate rural infrastructure. (See Exhibit 11.)
Our analysis indicates that three broad categories of of-
ferings—voice, data, and services—will be important.
Voice. At its most basic level, the mobile handset will
provide connectivity to individuals and will make com-
merce possible by linking potential employers with em-
ployees or contractors. Take the example of a painter in
a major Indian city. Before he bought a handset, his
monthly income of Rs 4,000 ($100) was barely enough to
support his family. Since purchasing his handset, he has
managed his schedules more effi ciently and served his
customers more eff ectively. And he can check paint in-
ventory before wasting a day shuttling among stores. He
has more than doubled his monthly income and now em-
ploys two workers.
Data. Information can be a powerful economic lever, and
for many of the next billion the mobile handset will be
the best vehicle for accessing it. In India the National
Commodity & Derivatives Exchange, in association with
Wabot Labs, has launched a text-messaging alert service
that will allow farmers to track agricultural and commod-
ity prices. Other, more ambitious projects are under way
elsewhere. Last year, China Mobile Communications, a
wireless carrier, launched an integrated package that con-
sisted of text-messaging services, voice services, and an
Internet portal for rural areas. Farmers and fi shermen
can access the service to fi nd weather forecasts, pricing
information, and employment opportunities outside the
agricultural industry. By the end of October 2006, the ser-
vice had more than 12.7 million subscribers and daily
traffi c exceeding 1.6 million messages, 40,000 visits to the
Internet portal, and 20,000 voice calls.
Mobile handsets can substitute for current expendituresMobile handsets can supplement current expenditures
Average household budget in India in 2006
Percentage oftotal spent on each category
A handset can act as a substitute for travel
Educational tools and applications are already available on mobile handsets
Mobile handsets have made most other channels of communication obsolete
Mobile handsets offer multiple entertainment options, including games and music and movie downloadsRemote-medical-monitoring applications are under development
Essentialitems (food
and shelter)
Education
Alcohol andtobacco
Toiletries
Medical
Entertainment
Durables
Communication
Transportation
Clothing and
footwear
36
14
9
8
8
7
6
5
4
3
Many handsets include a radio, a camera, or an MP3 player; low-end models include a flashlight, a calculator, and an alarm clock
Exhibit 11. Mobile Handsets Have the Potential to Help Indians Meet Their Fundamental Needs
Sources: BCG consumer research; BCG analysis.Note: We calculated the average household budget by analyzing the responses of 1,285 Indians from urban and rural areas. The percentages were calculated assuming a monthly budget of Rs 5,378.
T B C G
Services. New forms of mobile banking and commerce
are the most obvious candidates to emerge in this realm.
Rural India is primarily a cash economy because resi-
dents don’t have bank accounts or access to other pay-
ment methods, and, as we explore more fully in a later
section, the mobile handset can help make sophisticated
banking and payment services available. Already, the
next billion consumers are more likely to have a mobile
handset than an active banking account. To persuade the
next billion to bank by handset, manufacturers will need
to make a simple device, and operators and banks will
need to integrate services tightly.
Reaching Out Through Distribution
Distribution networks wrestle with the inherent tradeoff s
between coverage, cost, and control. To serve the next
billion, players will need to eliminate this tradeoff . Hand-
set manufacturers and operators will need distribution
channels that extend deep into inner cities and the coun-
tryside, o en outside the orbit of traditional telecommu-
nication stores, and occasionally beyond the reach of
public roads. These extensive distribution networks will
need to be viable at low volumes and low prices. And fi -
nally, operators and handset manufacturers will need to
have adequate control over pricing, stocking, and service.
The following recommendations should help mobile play-
ers juggle these multiple factors to develop eff ective dis-
tribution networks:
Broaden reach. ◊ Operators can leverage existing low-cost
and well-established channels and build partnerships.
Manufacturers and operators, for example, could look
to the postal service to distribute recharge vouchers for
prepaid connections. (See the sidebar “Pushing Bound-
aries.”)
Although mobile telephony off ers many benefi ts to the next billion, this group of consumers will embrace the technology only if the price is right and the services meet their needs. But their needs can run the gamut from plain-vanilla voice calling to fi nancial services, educational tools and applications, and market information. And that means handset makers and operators will be able to de-sign products and services for this segment only if they collaborate with players outside their industry. Such col-laboration and partnerships will likely follow one of three paths: enhancing the off ers, improving the economics, and fi lling the gaps.
Enhancing the Off ers. Players could work across indus-tries—with fi nancial institutions or consumer-electronics, consumer-goods, and other companies—to create innova-tive packages and bundles of products and services. FM radios bundled into mobile handsets, for example, are proving to be a major draw. Other services could include retail banking, inventory management, market informa-tion, and education. Such services would increase the util-ity of the mobile handset.
Improving the Economics. To lower costs, operators should consider sharing infrastructure or outsourcing net-work operations to equipment vendors, as noted earlier.
But as new services are launched, other benefi ts from sharing may arise. In payment or market-information net-works, for example, the margins on transactions will be low, and in order to build scale, it may make sense for competing networks to be interoperable.
Filling the Gaps. Existing business models are ineff ec-tive at reaching the next billion. Operators and manufac-turers will therefore need to devise new approaches. To create economical and effi cient distribution channels, mobile players will likely need to collaborate with self-help groups, microfi nance institutions, and post offi ces. Likewise, to off er payment and fi nancial services, opera-tors will need to align with fi nancial institutions or other players.
Collaboration requires careful thought and planning, es-pecially when the arrangements are meant to be long-term. Several principles should guide the design of any partnership.
Defi ne the benefi ts and logic of collaboration. ◊ This impor-
tant step ensures that all parties share the same clear
expectations and are able to manage the collaboration
accordingly. They also need to understand that the ben-
efi ts may accrue at diff erent times to each party. For
Pushing Boundaries
R I N B M C
example, a consumer goods company that makes its
distribution network available for handset distribution
should receive immediate marginal revenue, even
though the benefi ts would likely take time to fl ow to the
handset manufacturer. The collaboration agreement
should try to address these expected returns.
Clarify the responsibilities of collaboration, including costs ◊
and investments. A corollary of detailing the benefi ts of
collaboration is establishing a fi rm understanding of its
costs, investments, and responsibilities. Although costs
and investments are straightforward, responsibilities
can be tricky. All parties need to fully understand their
duties for management, staffi ng, real estate, and infra-
structure. In many cases, a partnership will rely on the
existing investments and infrastructure of one or both
partners. The partnership agreement must assign costs
and benefi ts for these investments.
Establish a clear governance structure. ◊ Many parties pay
insuffi cient attention to the details of decision making,
expecting that as the collaboration evolves, so will roles
and responsibilities. While partnerships, alliances, and
collaborations should be fl exible, experience shows that
all parties need to have a fi rm understanding at the
outset of who makes decisions, how disagreements are
resolved, and who is responsible for external aff airs,
such as dealing with regulators and the news media.
Agree on the treatment of confi dentiality and other parties. ◊
Collaborative arrangements serving the next billion can
be either exclusive or open. Tying up an existing distri-
bution channel closes it off for competitors. Not all ar-
eas of collaboration, however, are unique. Some pieces
of infrastructure serving the next billion should be le
open to ensure interoperability and build volume. All
mobile operators might be better off , for example, rely-
ing on a single payments platform to off er mobile bank-
ing and commerce and then competing on the product
off ering and customer service. In these cases, the col-
laborating parties can maintain both competitive ad-
vantage and confi dentiality only if they agree on wheth-
er or how other parties will be allowed to enter the
collaboration.
Collaboration will become an essential part of serving the next billion. Mobile operators and handset manufacturers simply will not possess all the capabilities, technologies, and infrastructure necessary to serve this segment profi t-ably. But they must proceed wisely. Careless collaborations could lead to poor business economics and short-lived ser-vices that will leave the fi eld open to other players.
Lower costs. ◊ Reduce breakeven volumes by combining
volumes with other players that are also trying to
reach the next billion. Many fast-moving consumer-
goods companies are already experimenting with new
distribution networks to reach the next billion. They
would likely be receptive to “renting” excess capacity
on their networks to handset manufacturers.
Eliminate intimidation. ◊ A mobile handset is still an un-
familiar product to many of the next billion consum-
ers. By placing an operator at recharge kiosks at regu-
lar hours, carriers could help educate customers and
ease any discomfort they may have about using the
facility to purchase minutes.
Capture discretionary spending. ◊ Consumer goods compa-
nies have long targeted their customers’ impulse pur-
chases. Mobile operators could follow suit by making
arrangements with supermarkets that allow their cus-
tomers to buy prepaid minutes with change from their
weekly shopping trips.
Work around infrastructure constraints. ◊ In India, Hindu-
stan Unilever has tapped into the distribution power
of self-help groups to sell soap, toothpaste, and sham-
poo in villages.
We foresee several ways in which operators and handset
manufacturers can take advantage of these distribution
principles to make inroads into the next-billion market.
Among them are channels for handsets, mobile pay
phones, and village phone operators.
Channels for Handsets. ◊ Rural residents are already mak-
ing high-value purchases at various local stores, farm
equipment shops, and so-called empowerment cen-
T B C G
ters, which help farmers with new technologies and
new ways to enhance their income. These outlets have
earned a high degree of trust and would be ideal ven-
ues for educating consumers about telecom services.
They could also provide a presence in some of India’s
most remote areas.
Mobile Pay Phones. ◊ Shyam Telecom, an
innovative mobile operator, has
equipped a fl eet of about 200 rick-
shaw drivers in the city of Jaipur, the
capital of Rajasthan, with mobile call-
ing offices. The drivers offer basic
phone, fax, and printing capabilities.
Under this arrangement, drivers earn
extra income, consumers gain aff ord-
able access to phone service, and the operator gener-
ates network traffi c.
Village Phone Operators. ◊ In Bangladesh, Grameen Tele-
com has equipped individuals with mobile hand-
sets; for a small fee, the individuals can make the
handsets available to others for both incoming and
outgoing calls.
Marketing Through Education
Although the economic benefi ts of a mobile handset are
irrefutable, they are not well understood by nonusers.
One of the primary challenges for operators and handset
manufacturers will be to educate nonusers and persuade
them that the handset has not only an aspirational value
but also a pragmatic one. Operators and manufacturers
will need to inform these potential customers and estab-
lish credibility with them, thereby generating new de-
mand rather than simply serving existing demand.
Marketing to the next billion should seek to eliminate
misconceptions about mobile handsets and build trust
among a segment of consumers with low levels of educa-
tion and little exposure to technical gadgets. Successful
companies will make mobile handsets less intimidating
overall. Consider that one consumer we interviewed re-
marked, “I would not buy a prepaid card because my
brother once le his handset switched on all night by
mistake, only to wake up to see that it had drained off all
its minutes.”
Operators and manufacturers should follow sev-
eral steps.
Off er advice. ◊ Educate customers about basic functions
and features and the economic benefi ts of mobile
handsets.
Encourage use.◊ Design pricing and promo-
tion schemes that encourage trial peri-
ods and move to traditional plans as us-
ers realize economic benefi ts.
Be creative. ◊ Leverage advocacy by relying
on self-help groups in villages and other
referral programs. Hindustan Unilever’s
Project Shakti, which enlists poor women
to sell products in remote regions, now reaches 80,000
villages in India and accounts for about 15 percent of
the company’s rural sales.
Support fi rst-time users. ◊ Handsets could have a tip for
the day appear when customers turn them on and
could be packaged with illustrated user manuals.
Brand for trust and identifi cation. ◊ As fi rst-time custom-
ers, the next billion are unlikely to have an existing re-
lationship with an incumbent operator or a handset
manufacturer. They are therefore willing to associate
unfamiliar products with familiar brands. This willing-
ness aff ords players an opportunity to extend trusted
brands by, for example, establishing a partnership with
a trusted consumer company in order to sell service.
Alternatively, operators might consider developing an
entirely new brand for this segment.
Build relationships. ◊ If companies lose the trust of new
customers on their fi rst purchase, they may never re-
gain it.
Unleashing the Organization
When the next billion were a small part of the overall
consumer base, it made sense to consider them as mar-
ginal consumers. Now, however, they are an engine of
growth for many operators and are starting to make up a
sizable portion of the overall consumer base. No longer
marginal, the next billion will require operators to make
Nonusers must be
persuaded that the
handset has not
only an aspirational
value but also a
pragmatic one.
R I N B M C
investments, create structures, and pursue entirely new
approaches that focus on this group.
Each organization must respond to this imperative by
targeting this segment through a separate division, unit,
department, or structure. Such a structure must be ca-
pable of developing targeted business models and must
be unburdened by the infrastructure that focuses on the
existing consumer base.
Several carriers have tried to develop this segment by
adding a reporting line in existing marketing organiza-
tions. But over time, many of these lines were either
closed or folded back into the mainline marketing func-
tion when business did not materialize as quickly as ex-
pected. These early experiments, however, did unearth
several lessons, including the following:
The next billion will require specifi c and targeted in-
vestment. Although urban low-income consumers can
be served using existing network infrastructure, rural
consumers will require the rollout of additional network
infrastructure. And both subsegments will require invest-
ments in new products and services, customer service,
marketing, and distribution.
Collaboration is critical. As fi nancial services, data net-
working, education, entertainment, and instant access to
market prices become important to the next billion, op-
erators will need to enter partnerships to off er these ser-
vices. Such partnerships could be forged with fi nancial
institutions, consumer goods companies, multimedia
companies, distribution networks, and local institutions
such as self-help groups.
Regulations may aff ect organization structure. Regu-
latory frameworks could require the formation of sepa-
rate structures to off er new sets of services. Likewise,
telecom regulations may impose licensing and fee ar-
rangements that simply make it unprofitable for
operators to off er new services. Instead, such services
might thrive in a separate unregulated or less regulated
entity.
In cra ing new organization models to serve the next
billion, companies should consider the following design
principles:
Create accountability. ◊ The next billion need a champion
within the organization. Some companies may choose
to create a separate unit led by a senior executive, but
other approaches will also work. A respected market-
ing manager with suffi cient decision-making power
could also lead programs and processes to capture the
next billion consumers. In either case, it is essential to
embed specifi c accountability into the structure.
Get help. ◊ Develop networks to design and incubate new
off erings, distribution, and marketing programs. The
business unit or structure dedicated to the next billion
should have the freedom to collaborate with competi-
tors and players in other industries.
Embed low costs into the organization. ◊ Companies should
establish shared-services structures that allow the busi-
ness dedicated to the next billion to access capabilities
across the organization. They should also engage in
only those activities along the value chain that they
can handle profi tably or economically, outsourcing all
others or collaborating to fi ll in the gaps, even if this
approach diff ers from the one used to serve traditional
segments. This freedom to “make or buy” is critical:
the enterprise must maintain a laserlike focus on low-
cost delivery.
Establish clear governance. ◊ This business unit or struc-
ture must establish and follow clear governance rules
so that it not only succeeds but also conforms with the
broad principles, guidelines, and approaches of the
parent corporation. These rules are especially impor-
tant for managing partnerships and arrangements
with third parties, both of which will require clear de-
cision-making rights and mechanisms for handling
dispute resolution.
Even though the product, distribution, and marketing
challenges of reaching the next billion may seem to be
the most pressing, a company will never fully reach these
consumers if it fails to conduct a thorough and thoughtful
examination of its organization and relationships. The
next billion demand structures and processes geared
to them.
T B C G
A New Opportunity: Banking Through Mobile Services
In India the mobile handset could do for banking
exactly what the personal computer did for bank-
ing in developed markets: provide massive im-
provements in accessibility, ease of use, and trans-
action costs. But there is one critical diff erence.
Whereas Internet banking has become a complementary
banking channel in developed markets, the mobile hand-
set could become the only banking channel for many con-
sumers in India—particularly the next billion.
With such a critical role to play in bringing banking ser-
vices to the next billion, telecom players should begin
exploring opportunities to collaborate with fi nancial in-
stitutions and to radically alter the economics of serving
this segment.
Most of the next billion consumers could be considered
part of the target market for banking through mobile ser-
vices. (See Exhibit 12.) Our survey found that 25 percent
of households in this segment had neither a mobile hand-
set nor a savings account with a bank. An off ering that
provided both banking and telephony services would sat-
isfy two core needs at once. Our survey also found that
many of the next billion were unlikely to have a strong (if
any) relationship with a fi nancial services provider but
may already be tied to a telecom provider: among the
next billion, mobile handsets currently outnumber bank
accounts. For the 29 percent of these consumers who
have a mobile handset but lack a savings account, the
mobile handset could become their primary banking
channel. Our survey further found that 11 percent of the
next billion had a mobile handset and a savings account
that they used infrequently, mainly because of the incon-
venience of having to visit a branch.
To the next billion consumers, more so than to their
mainstream counterparts, some industry boundaries will
seem arbitrary. They won’t necessarily see banks as the
only rightful providers of payment and transaction ser-
vices, for example, particularly if a telecom operator can
provide them through a more convenient, accessible
channel.
This mindset could be a great advantage for mobile car-
riers, particularly as the list of fi nancial services that can
be performed on a mobile handset keeps growing. With
the right technology, a mobile handset can execute credit-
card transactions, balance inquiries, direct debits, and bill
payments. It could also be used as a debit card at an ATM,
with security provided through multiple passwords and
remote deactivation to give customers peace of mind.
Personal loan payments could also fi nd their way onto
mobile handsets. With easy access to a customer’s pay-
ment history and savings balance, a telecom player would
be in a strong position to assess credit risk and monitor
and collect loans. Of course, several major hurdles stand
between mobile handset players and the ability to sell
loans, including the development of sophisticated risk-
management skills. But as the industry expands into
other areas of banking, this opportunity may become at-
tractive enough to justify the necessary investment.
In light of all these developments, it’s not surprising to
fi nd that telecom players in several markets have already
made inroads in traditional banking strongholds, includ-
ing payments and savings—two of the most attractive
revenue and profi t pools for banks. In Kenya, Safaricom’s
rapidly growing M-PESA account allows easy money
R I N B M C
transfers through mobile handsets. Telecom customers
can deposit money into an account on their mobile hand-
sets and transfer the funds to other mobile handset us-
ers—even in remote areas. The operator’s local agent can
convert the money into cash, allowing people to avoid
cumbersome and costly dealings with banks. In Zambia
a telecom company, Celtel, introduced a service that al-
lows customers to make purchases, pay bills, and transfer
funds on their handsets. The service, Celpay, has been
popular. Two percent of Zambia’s GDP was transferred
through Celpay in 2006. Areas with little or no fi nancial-
services infrastructure now have a way to participate in
the banking system through mobile telecom networks.
Operators and banks should not see each other as adver-
saries. Players from each industry can share portions of
their off erings and value chains in ways that provide mu-
tual benefi ts—specifi cally, more attractive, targeted prod-
ucts and lower costs.
To be sure, operators still have work to do—and regula-
tory reforms to advocate—before they can provide com-
prehensive banking services. If they succeed in creating a
competitive mobile-banking off ering, however, they could
fi nd themselves on the verge of explosive growth result-
ing from a confl uence of factors:
The growth of mobile subscribers is outpacing the ◊
growth not only of banking customers but also of per-
sonal computers and Internet users.
Many telecom consumers have few links to fi nancial ◊
institutions. As a result, telecom providers will not
have to battle incumbents head-on to win the banking
business of many subscribers.
Mobile banking will boast much lower costs and great-◊
er convenience than traditional banking products,
making this option economical and attractive for both
users and providers.
India’s vast market presents an opportunity to create ◊
unparalleled scale, which telecom companies could
use to pry open other emerging markets—and eventu-
ally enter developed markets. If it were to launch a
comprehensive mobile-banking product, a pioneering
telecom player could transform the landscape of retail
banking not only in India but also around the world.
23 million 26 million 17 million 15 million
25 29 11 19 16
Ownership of mobile handsets and savings accounts by next-billion households, 2007
Have neither amobile handset nora savings account
Have a mobilehandset but nosavings account
Have both a mobile handsetand a savings account
Use accountinfrequently
Use accountfrequently1
Have a savings account but nomobile handset
Percentageof next-billion households
Target market for banking through mobile handsets
10 million
Exhibit 12. Mobile Handsets Could Become the Primary Banking Channel of the Next Billion
Sources: Survey of 4,125 individuals in BCG’s next-billion-consumer research, 2007; BCG analysis.1Frequently is defined as at least once a month.
T B C G
Push and Pull:
The Two Sides of Regulation
In India, telecom regulations have focused on uni-
versal access, a holdover from the early days of
telecom regulation, when the costs of building a
network were prohibitive. Back then, to encourage
investment, the government awarded a franchise
to a monopoly provider. Regulation was o en a balancing
act of ensuring that the monopolist deployed the pro-
ceeds from profi table customers to subsidize unprofi table
or hard-to-reach customers.
This approach, built on the assumption that adoption
would follow access, may have worked when landline net-
works were the only mode of telecommunications and
there was signifi cant pent-up demand. But its ability to
spur the adoption of mobile services in India has been
limited. Mobile handsets are suffi ciently unfamiliar and
costly to large segments of the next billion. Competition
in the wireless segment eliminates the ability of providers
to subsidize less profi table segments. Consequently, gov-
ernment needs to assume a larger role in promoting the
benefi ts of telecommunications. While the government
should continue pushing universal access, however, it
should also be pulling customers onto the phone network
in order to spread the benefits of mobile communi-
cations.
Creating a Push: Universal Access
The government’s primary method of promoting univer-
sal access is the Universal Service Obligation (USO) Fund,
which is fi nanced through a 5 percent levy on telecom
revenues. (See the sidebar “A Brief History of Regulation
Promoting Universal Access.”) The USO is an important
tool, but the government will need to do more. Although
about 70 percent of the population currently has access
to mobile networks, that access reaches fewer than
150,000 of India’s approximately 600,000 villages. With
more than Rs 9,000 crore ($2.3 billion) in USO money
currently available, the government ought to be able to
push coverage to 80 percent of the population by 2010,
but unless additional steps are taken, the remaining 20
percent are unlikely to gain access to phone service in the
near future. We believe that there are several promising
ways to push adoption further still: spectrum allocation,
mobile virtual network operators, infrastructure sharing,
and innovative licensing.
Spectrum Allocation. Available spectrum is in short
supply in India, and the government must deliver on
promises to release spectrum currently being used by de-
fense services for commercial purposes. In 2006 the Tele-
com Regulatory Authority of India (TRAI) helped clarify
and coordinate the proper allocation between the com-
mercial and military use of spectrum. But there is more
to do. An independent government agency should man-
age spectrum and should conduct research on the impli-
cations of new wireless technologies for spectrum man-
agement. The government could, for example, explore
having diff erent operators share spectrum for lower-pow-
er GSM frequencies—an approach adopted in the United
Kingdom. It should also allocate spectrum more broadly
and clarify rules regarding its use.
Mobile Virtual Network Operators (MVNOs). The gov-
ernment should consider allowing more players to enter
the mobile business. The current USO system restricts
more than three operators from serving a rural market,
which means that existing operators cannot sell their
R I N B M C
The push for universal access in India began with the adoption of the National Telecom Policy of 1994, which focused on attracting private investment into mobile tele-communications while also limiting competition so that the incumbents could build scale. The New Telecom Poli-cy of 1999, by contrast, sought to spur competition by re-moving licensing requirements that advancing technology had rendered irrelevant. Both policies had a positive ef-fect in urban areas, where rates fell and subscriber acqui-sition accelerated. (See the exhibit below.)
Since neither of those watershed policies brought the telecom revolution to rural India, the USO Fund was es-tablished in 1999. A 5 percent levy on telecom revenues was imposed to promote universal access. Unfortunately, in the early years the government subsidy was limited to
the build-out of landline infrastructure rather than mo-bile networks. Not surprisingly, 99.5 percent of the USO subsidies fl owed to the state-owned incumbent, Bharat Sanchar Nigam Ltd. (BSNL).
The government recently started to allow USO subsidies to be used for wireless infrastructure—a good idea that has been overdue for some time. Already in India today, there are almost four times as many mobile customers as landline subscribers, and that gap will only widen. Cer-tainly, when the next billion consumers in India decide to purchase their fi rst phones, most will opt for a mobile handset. And the marginal cost of adding a new mobile subscriber is about Rs 3,200 ($80), compared with about Rs 9,800 ($245) for a landline customer.
1998–2004◊ The ceiling on the number of operators was eliminated, creating fierce
competition◊ License fees were set as a percentage of revenues ◊ Additional spectrum fees were set as a percentage of revenues◊ A USO Fund levy was begun to subsidize rural telephony
2004–2006◊ Different license and spectrum fees
were set for rural and urban India◊ Mobile telephony was brought
under the purview of the USO Fund
Mobile subscribers
Mobile subscribers(millions)
Revenue per minute
Telecom tariff order
Introduction ofcalling-party-pays tariff Lowering
of rural accessfees
15.5
4.2
7
3.2
131.9 1.5 0.95
16
1.91.20.9 3.6 6.5
2.9
33.6
52.2
98.4
0
2
4
6
8
12
14
16
18
1998 1999 2000 2001 2002 2003 2004 2005 20060
15
30
45
60
75
90
105
10
Revenue per minute (Rs)
NewTelecom
Policy of 1999in effect
Regulatory Changes Have Transformed the Telecom Market in India
Sources: Citigroup Investment Research; BCG analysis.
A Brief History of Regulation Promoting Universal Access
T B C G
spectrum to alternative providers such as MVNOs. Al-
though MVNOs have traditionally operated in urban
markets elsewhere in the world, they might be able to
bring innovative business models to rural markets
in India.
If operators are allowed to trade spec-
trum, a new era could be unleashed in
telecommunications. Local entrepreneurs
could penetrate the niche segments of
the market that have not been served by
established national players. Local
MVNOs, which possess a deeper under-
standing of their customers’ needs,
should be able to develop products and
value-added services that suit local re-
quirements, thereby boosting demand. Such deep knowl-
edge will be especially important as networks spread to
sparsely populated areas and have excess capacity.
Infrastructure Sharing. The government should pro-
mote ways of ensuring that operators’ capital investments
are deployed eff ectively. As a fi rst step, it should require
Bharat Sanchar Nigam Ltd. (BSNL), the incumbent land-
line operator, to make its infrastructure—particularly its
backhaul, or the connections that allow wireless traffi c to
be brought back to the central switches—available to mo-
bile operators at fair rates.
In many areas, wireless operators would need to install
several kilometers of fi ber optic cables or build expensive
microwave links in order to deliver service, and it would
be uneconomical for wireless operators to make these
backhaul investments for their exclusive use. BSNL,
meanwhile, has a vast network of underutilized fi ber-op-
tic cable running across the country. Besides the incum-
bent telecom operator, Indian Railways and several elec-
trical utilities also have fi ber optic networks that could be
opened to wireless players for backhaul.
Innovative Licensing. The government could develop
creative programs that would encourage rural develop-
ment of mobile telephony. For example, it could off er
operators a rebate on license fees in proportion to the
investments they make to construct rural networks. It
could also off er rebates depending on the number of sub-
scribers served in designated rural areas.
Creating a Pull: Universal Adoption
How can government promote demand without creating
market distortions? One option is for India to launch an
initiative similar to the i2010 program, which was de-
signed in part to spur broadband adoption in Europe.
The key elements of i2010 are education,
awareness, and e-government initiatives.
With the overarching goal of developing
a compelling package of services, i2010
has three primary aims:
Creating a single European information ◊
space
Increasing investment in innovation and ◊
research in technology and communications
Fostering inclusion, better public services, and a higher ◊
quality of life through technology-enabled public
services
India’s initiative could emphasize mobile rather than
broadband adoption. The government, for example, could
encourage Indians to use mobile handsets to verify land
records and property registrations, pay taxes, access gov-
ernment bulletins, and issue emergency weather warn-
ings. Such applications would improve the reach and
quality of public services and reduce transaction costs
and time. Automating government will not be easy, how-
ever. The National Knowledge Commission, an advisory
board to India’s prime minister, has recommended that
the government institute administrative reforms and
make organizational changes before developing mobile
services. It contends that simply moving the current proc-
esses to an automated platform would backfi re.
The government could also take several steps to make it
easier for Indians to enter the formal banking market
through mobile handsets. The cross-industry nature of
mobile banking services, in particular, will force regula-
tors to confront important questions. When handling a
mobile payment, for example, would banks be allowed to
charge a small fee for sending the text message that acti-
vates a transaction? Alternatively, could operators levy
fees on banks based on a percentage of mobile transac-
tions? If the current regulations were reformed, operators
The government
could help Indians
enter the formal
banking market
through mobile
handsets.
R I N B M C
themselves could conceivably store money, especially in
prepaid accounts, and pay interest to customers.
More generally, what would qualify as revenue from mo-
bile telephony? Would revenue from banking be treated
as revenue that is subject to license fees as a telecom
service? Which elements of banking would be regulated
by the telecom regulator, TRAI, and which by the tradi-
tional banking regulator, the Reserve Bank of India? Op-
erators should start having these conversations with regu-
latory authorities sooner rather than later.
The government could take even more creative steps—
for example, developing a secondary market in rural mo-
bile subscribers, a market similar to those that exist for
mortgages and other forms of consumer credit. Each year,
the government could require carriers to acquire a set
percentage of rural customers, either directly or by pur-
chasing a portfolio of subscribers from the secondary
market. In such a scenario, niche operators would be able
to build businesses in rural areas with confi dence. Each
year, the government could increase the minimum num-
ber of rural subscribers that must be covered, until satis-
factory levels of telecom penetration were achieved.
Of course, the same outcome might also be achieved by
paying carriers a direct government subsidy that is based
on the number of rural subscribers they serve. Yet creat-
ing a secondary market ensures that urban subscribers
rather than the government eff ectively subsidize rural
subscribers.
By contrast, the use of government subsidies to spur
handset demand may make sense. Consumer research
suggests that handset costs are o en the most signifi cant
barrier preventing the next billion from purchasing a mo-
bile handset. In light of the high incidences of the and
corruption in other direct government subsidies in India,
handset subsidies might sound radical, yet they could
work if routed through operators.
A change in taxation policy could also help spur adop-
tion. Most handsets in India today are sold without ser-
vice because handsets bundled and sold with service are
subject to license fees and, for that reason, are not widely
available. Yet bundled handsets help promote adoption
because consumers are not forced to make two separate
purchases. The government should therefore try to make
it as easy as possible for consumers to enter a store and
leave with a fully functioning handset.
The Indian government should also consider how its
policies for taxing telecommunications, including license
and spectrum fees, aff ect the aff ordability of telecom
products and services. Today’s levies and duties, for ex-
ample, can amount to more than 20 percent of an opera-
tor’s adjusted gross revenue. These sums are passed on to
the consumer in the form of higher rates. Even if policy-
makers do not want to undertake a review of the taxation
model for the entire telecom industry, they could at least
try to reduce the tax burden in rural areas. Given the mul-
tiplier eff ect of investments in telecommunications, the
government should be willing to forgo its short-term pay-
off from the mobile boom in exchange for longer-term
economic returns.
T B C G
A Call to Action
The next billion consumers are materially dif-
ferent from their more affl uent peers. They
live lives of constraint. Low or volatile in-
comes, limited living space, and unreliable
power and water supplies are just a few of
their challenges. Yet they harbor aspirations and demon-
strate behaviors that are very similar to those of the more
affl uent classes, on whose door they are knocking. They
want a better life for themselves and their children.
The innovative approaches described in this report could
form the bedrock of new growth opportunities for mobile
operators and other players bold enough to experiment.
The fi rst companies to establish workable and scalable
business models will achieve a running advantage through
superior economics and long-term customer loyalty.
More so than operators’ current customers, the next bil-
lion will see dramatic transformations in their livelihoods
when they acquire handsets and mobile services. As their
livelihoods improve, they will have more disposable in-
come. Mobile operators can then off er additional services
in partnership with players from other industries. This
virtuous cycle will create competitive advantage for those
that crack the code of profi tably serving the next billion.
This battleground, however, appears to be riddled with
contradictions. How can players upgrade the quality and
durability of their products yet keep costs down? How
can a distribution network that has extensive coverage
not be saddled with higher costs? What would a market-
ing program that is equal parts education and sales look
like? At the risk of generalizing a complex undertaking,
we leave you with four fi nal suggestions:
Treat the opportunity to serve the next billion as a ◊
business with defi ned accountability. Do not let the
opportunity slip away.
Understand these consumers’ needs—in particular, ◊
the products and services they value.
Analyze the economics of the value chain to assess ◊
opportunities to reduce costs.
Design a new organization model that fosters experi-◊
mentation, focuses on core activities, and encourages
collaboration with other industries.
Contrary to common perceptions of this group as a small,
dispersed segment, it in fact represents a large aggregate
opportunity—an opportunity that is growing faster than
the underlying economy of India. The players who create
the right business models will win. The rest will remain
spectators.
R I N B M C
For Further Reading
The Boston Consulting Group
publishes other reports and articles
that may be of interest to senior
telecom executives. Recent examples
include:
“Decoding the Next Billion Consumers”Opportunities for Action in Consumer Markets, November 2007
The Next Billion Consumers: A Road Map for Expanding Financial Inclusion in IndiaA report by The Boston Consulting Group, November 2007
“New Rules for the Next Billion”Opportunities for Action in Technology & Communications, October 2007
The Next Billion Consumers: A Road Map for Accelerating Telecommunications Growth in BrazilA Focus by The Boston Consulting Group, October 2007
“The Next Billion”A Perspective by The Boston Consulting Group, June 2007
“The Next Billion Banking Consumers”Opportunities for Action in Financial Services, June 2007
For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com/publications.
To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe.
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