ASIA!

Yet conditions for those living on the poverty line have hardly improved*. Then a bunch of phone service providers entered the picture. Armed with nothing more than the desire to make money, in six short months they have helped to create an ultra low cost handphone that could change the life of more than a billion struggling poor for the better.

And it doesn’t cost taxpayers worldwide a single cent.

 

Origin

The story of the cheap phone, started innocently enough. In the September of 2004, the GSM Association (GSMA) met some of its members to address a serious concern.

GSM, the global system for mobile communications, is used in most mobile phones in the world. For years, phone sales had been stimulated by China and India. But in the second half of 2004, it was clear that any Chinese or Indian who could afford a mobile already owned one. Global demand for mobile phones could stall at 630 million units annually.

To the GSMA, the solution was obvious.

Some 80 per cent of the people in the world have access to mobile phone networks. But most could not take advantage of it because they could not afford a phone. So why not make a phone they can afford?

The association roped in nine mobile service providers for an unique experiment.

Together, the ten floated a global tender for a cheap and reliable phone, cheap in this case was below $40. The service providers had committed to buy a large quantity from the winner of the tender to help push down cost. Motorola won the tender, competing against 17 other vendors.

Ben Soppitt, Commercial Director of GSMA, told Asia! the initial arrangement with Motorola was to sell six million of its C117 family of phones in six months, the period of the tender.

But demand had far exceeded expectation. In the period from April to September this year, sales should ‘easily exceed 10 million,’ Soppitt said.         

 

A SURGE IN DEMAND

And that is only the beginning. The Motorola C117 is an impressive basic phone: it provides voice and SMS (text) services, and includes a calculator, alarm clock and currency converter in a body slightly taller than a credit card. It has more than eight hour of talk time and a standby battery time of two weeks.

At $40 it is also substantially cheaper than the cheapest phone in most developing countries, which seldom go below $65. This difference of $25 has opened up a huge market among people to whom every dollar counts.

Encouraged by the response to the C117 range, GSMA will call another global tender. This time competition is expected to be much fiercer, now that Motorola has demonstrated it could make money producing cheap phones.

Everyone phone manufacturer of note, from Nokia to Samsung to Benq, which is in the process of swallowing Siemen’s handphone business, is said to be keen to get a cut of the developing market pie.    

The bar for tender will also be set higher. For one, the winner is likely to be asked to provide a more diverse range of phones. Soppitt, who has been busily visiting emerging markets in Asia to drum up support, explains that variety is essential as ‘the market will not be served by a manufacturer saying I’ve got one cheap, market-entry level phone.’

The GSMA will also demand a lower selling price. The next tender could see the handsets retailing at $30 or below. By the end of next year, prices should range between $20 and $25, said Colin Bareham, GSM’s director of marketing projects.

Every price reduction creates new markets. At around $20, or $25, GSMA expects to sell 100 million to 150 million phones every year, a total of 1.5 billion in the next decade.

There are now around 1.5 billion mobile users worldwide, mostly in the First World. By 2016, the number could double to 3 billion, spilt equally between the rich and the poor countries.

 

THE DIGITAL DIVIDE

Making a billion or so handphones available in the Third World would go a long way to raise the living standard there.

The world today is increasingly linked by common concerns: trade, defence, terrorism, AIDS, bird flu, mad cow disease, SARS (severe acute respiratory syndrome), education and social issues, to name a few.

In the fast changing global economy, information is the key to prosperity. Most up-to-date information today is in digitised form: they are sent and received as emails, instant messages and phone text messages or SMS. These are readily accessible to people in the developed countries, but out of reach to most in the developing and underdeveloped ones.

This is the digital divide that separates the have and the have-not. Bridging it has become the priority of the UN and others eager to eliminate poverty in the Third World.

Except they are going about it the wrong way.

On March 14 this year, the UN launched a ‘Digital Solidarity Fund’. The money is to finance projects that will narrow the ‘uneven distribution and use of new information and communication technologies.’ It will also attempt to ‘enable excluded people and countries to enter the new era of the information society’. In short, UN is trying to put as many personal computers in the poor countries as possible.

The fund will no doubt benefit PC makers, but probably not many other besides. The problem of setting down PCs in poor rural areas – of the 1.1 billion people in the world who exist on $1 a day, three quarters eke out a fragile livings cultivating small plots of land – is that to use a PC, you need literacy and a constant supply of electricity. And it is the lack of these two that define the poor.

A handphone, on the other hand, is different. To use it, all you need to do is to be able to talk. As the Motorola C117 shows, it can also exist for weeks without a power point. It is usable by almost everyone on earth.

Also,the overwhelming response for the C117 shows that, given a chance to own a handphone, almost no one will refuse the opportunity. When it comes to helping to close the digital divide, the handphone is a far superior instrument than the PC.

 

METCALFE’S LAW REVISITED

What can the phone do for people in the Third World? So far, most answers put forward are pretty standard fare.

The Economist, for example, list the following as things that are desirable: farmers can use the phones to call several markets to get the best price; small businesses use them to shop around for supplies; in Zambia and several countries in Africa phones are used for cashless payments.

Put another way, the phone will help those in the Third World emulate how business and work is done in the First World.

Initially, things will probably move along the way predicted by the Economist. But the dynamic could change when more and more people in the poor countries become phone owners.

The network for developing countries could take on a life of its own, independent of that in the rich nations. To understand  what might happen, one needs to look at the prescient sayings of an American telecom pioneer called Robert Metcalfe.

Metcalfe, who turns 60 next year, is well known for three achievements. The two relatively minor ones are the invention of the Ethernet, and the founding of 3Com, a pioneering telecom networking company.

Metcalfe is much better known for his ‘law’ which says,   Metcalfe says that the value, or power, of a network increases in proportion to the square of the number of its users. Simply put, people will always find extra use of a network when a new user comes around.

(A ready example is that when there only two person, they can only talk to each other. Add one more, and you have three possible connected pairs who can gossip about the third person behind his or her back.) 

In developed countries, Metcalfe’s Law has been demonstrated time and again.

Business will grind to a stop if suddenly all mobile phones stop working. Social life will suffer. Parents have no means to contact their children. People separated by distance but are only a call away will be isolated.

 

BOTTOM OF THE PYRAMID

Now think of the impact of a network with the similar number of users in the Third World. What will happen when 1.5 billion of the struggling poor are connected to each other?

No doubt these people will use the phone primarily to improve their lot. They will compare buying prices and suppliers, look for jobs and make cashless payment, if possible.

The network also enables the growth of indigenous business and industry. This is already happening, on a small scale, as a result of micro-lending.

Micro-lending, which started in South Asia, specialises in lending out small sums (typically less than $100) to help village women starting business.

A popular business arising from micro-lending is the ‘telephone lady’ who buys a phone and leases it out, by the minute, to people in one or more villages. The availability of a phone, among 100 people or more, has helped to improve many lives. In ten years, one out of three or four could posses a phone.

The market for the world’s poor is huge, but largely ignored by the multinational corporations, says C K Prahalad, a professor at the University of Michigan’s Stephen M Ross School.

Prahalad, a much-quoted author on rural marketing, said there are 4 billion people, each earning less than $1,500 a year, at the bottom tier of the global wealth pyramid.

These people are the disadvantaged lot: they have little access to clean water, electricity and other basic necessities of life. They also do not usually hold legal titles or deeds to their assets. This makes it near impossible for them to acquire credit. More importantly, they are hard to reach through conventional means of communication and distribution.

Living in isolation and unable to access loans, the poor rely heavily on the informal or grey economy. And they pay a high price for it, such as the exorbitant interest rates they have no choice but to fork out in order to get short term loans.

The widespread use of the mobile phone can go a long way to correct the situation. Once instant communication become commonplace, the cost of loans will come down. Market conditions will be brought up to date and transactions over a distance will become possible.

OBSTACLES

The seed is planted for the Third World to be linked – among its people, and to the First World. But obstacles remain. The biggest problem, according to the GSMa, could come from the respective governments themselves.

“Three factors decide the cost of using a mobile phone,’ Colin Bareham of GSMA explained. “The cost of the handset, the cost of the services and taxes. In some countries, tax could account for 70 to 80 per cent of the total cost.’

He is quoting a well known fact. People in poor countries tend to spend a large proportion of their income on telecommunication than those in rich ones.

Often it is due to taxes. In Pakistan a few years back, it was reported that the government was toying with the idea of taxing only the handphone owners, on the not unreasonable assumption that those who could afford a mobile would afford to pay taxes.

This is a perception the GSMA is trying hard to change. “Governments in developing countries tend to see mobiles as luxury, and not agent of change. This is no longer the case,’ said Ben Soppitt.

The association is conducting a survey among the developed nations. It intends to publish a benchmark study on mobile tax regime around the world in September, at the 3GSM World Congress Asia in Singapore.

With the study, Soppitt intends to lobby the governments to ‘remove high custom duties (on telecom equipment), high handset sales tax, and high tax on services.’

He is confident of presenting a good case.

‘If the governments insist on taxing phones, I would suggest a selective scheme, where the high end models are subject to taxes while the entry levels ones spared. In doing so, the governments would help to encourage the poor to grow their business and, in the long run, increase their tax base. It is a win-win situation.’

 

*According to the UN, the richest 20 per cent in the world accounted for about 70 per cent of total income in 1960. In 2000, the figure reached 85 per cent. Over the same period, income for the poorest 20 per cent fell from 2.3 per cent of total to a miserable 1.1 per cent.