Document(s) 3 of 21

In the time of integrated government owned monopoly or in the 'bad old days', the picture regarding demand was very clear: it was there; it was unsatisfied. People waited for longer than 10 years for a fixed phone; they had to seek the intervention of politicians and officials to obtain a connection; in many cases, bribes had to be paid to multiple parties.

Tremendous progress has been made in meeting unsatisfied demand. Figure S1.1 illustrates the growth in the total number of telephone subscribers in South Asia between 1995 and 2004.

Figure S1.1
Total Telephone Subscribers: South Asia (1995–2004)

Source: ITU (2005).

In the first instance, emphasis had to be on removing the artificial constraints preventing demand from being met. With manifest demand being met in some areas, particularly in urban areas, the question of the nature of the remaining unmet demand becomes important. Do the dimensions of the existing service offerings correspond to what the remaining unconnected actually want?

Conventional thinking would focus on the price of getting connected and staying connected. Without question, price is important; but price is not everything. The success of prepaid telephony, first in mobile and now even in fixed, is evidence that what people want is not simply lower prices. Even when prepaid call charges were higher than post-paid, the demand for prepaid was higher. Basket calculations for monthly expenditure on telecoms for lower-end users indicate that prepaid is now the cheaper option in many countries, as illustrated in Figure S1.2. Perhaps the ability to control or minimize expenditure on telecom allowed through prepaid connections, also evidenced by the lower Average Revenue per User (ARPU) generally found among prepaid subscribers, contributed to its popularity.

Figure S1.2
Comparison of Sri Lankan Prepaid and Post-paid User Baskets, Calculated on a Monthly Basis for Lower-end Users (September 2006)¹

Source: Tahani Iqbal at LIRNEasia.

Telecom policies and regulations assume that demand is known. This is understandable because demand, especially for new products and services, is extremely difficult to determine.

Economics has a simple solution. Whatever succeeds in the market is in demand; what does not succeed is not. The market is the best discovery process. There is no reason for anyone other than a supplier to expend resources on researching demand.

In public policy, not all goods and services are created equal. Some are merit goods. Some have significant positive externalities. For these or other less justifiable reasons, public policy may seek to expand supply of certain goods and services.

The focus of the first two chapters is on the strategies used by those at the bottom of the pyramid (BOP). In Chapter 1, the choices made by BOP users among fixed, mobile and public access modes are discussed. Chapter 3 presents a case-study of the Jaffna district of Sri Lanka, a unique 'between-conflict' society (at the time of the survey).

Chapter 1 shows that significant use of telephones exists in the 11 locations studied, despite official numbers of subscribers per hundred inhabitants in India and Sri Lanka being less than 25 percent of the population at end of 2005. In the Sri Lankan locations, only 0.3 percent of those approached were excluded because they had not used a telephone in the previous three months; in the Indian locations, the corresponding percentage was 12. Within the samples, 77 percent of those who were in the lower income group (less than US Dollars [USD] 50 per month) used phones but did not own them. Among those in the relatively higher income group within the locations (USD 50–100 per month), 49 percent did not own the phone that they used.

The results also show that most of the owner-respondents or subscriber-respondents are 'newbies'; in India, 31 percent of the owners/subscribers in the seven locations had a mobile connection for less than six months; in Sri Lanka, the corresponding percentage was 16. In the Jaffna district of Sri Lanka, as Chapter 3 reports, 100 percent of the overwhelmingly large number of mobile customers had their connections for less than three years.

In effect, the BOP research is a study of people who have recently joined the market for telecom services as direct customers and those who are about to join. In the new world of low ARPU and high profit mobile telephony in South Asia, this is a critical market segment which is likely to drive revenue growth and market share. For example, In India, as in March 2006, blended ARPUs for Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA) (both mobile) were USD 7.82 and USD 5.47, respectively, and Earnings before interest, taxes, depreciation and amortization (EBITDA) per subscriber was approximately USD 45, according to TRAI (2006). Dialog Telekom, Sri Lanka's largest mobile operator's blended APRU for the first quarter of 2006 was USD 6.85, while its EBITDA per subscriber was approximately USD 9.93 in 2005.

It is reasonable to assume that the factors that influence the choice of mode (Chapter 1) as well as the strategies used, after getting connected, in the course of using the service (Chapter 2) are broadly the same for those who are about to join the market in similar circumstances'. Operators can design better services for this market segment using the knowledge generated by the BOP research. Equipment manufacturers can profit from this knowledge to improve the designs of their starter and low-cost handsets (GSMA, 2005).

The key finding of Chapter 2 is that those at the BOP do not use as many economizing 'strategies' as one would expect, observing the behavior of middle-class teenagers, for example. The authors suggest that this is caused less by ignorance, than by the constraints within which they communicate. The fact that most of the users communicate through other people's phones—for financial considerations or otherwise—is an obvious constraint. That they are most probably calling people in similar circumstances, for example a relative who is also dependent on the use of someone else's phone, limits the strategies that can be employed. The authors also point to the fact that only 31 percent of the study group had access to multiple modes of communication, contributing to the low use of strategies. The modes that the majority of this group have access to—(private) fixed and public phones—only exacerbates the situation. Public phones come with several additional constraints, for example, difficulties in accessing them at night.

People like to save money if it can be done without too much inconvenience. As phones continue to spread through the populace, it is likely that the constraints, especially those related to ownership and access to phones by the called parties, will become less significant. Therefore, the findings of Chapter 2 should not be interpreted as suggesting that cost-saving strategies are irrelevant. Rather, they should be understood as showing the constraints within which those at the BOP operate, not only in terms of communication, but even in terms of strategies.

In liberalized environments, policy makers and regulators need not get involved in the nitty-gritty of service design. That is the province of operators. The introduction of 'lifetime' prepaid mobile connections in India, albeit not uncontroversial,² is one response by operators to the inconveniences experienced by prepaid customers when their credit balance reach zero—evidenced by the difficulties cited by prepaid users in the BOP study. However, because telecom markets are far from perfect and extant public policy assumes that greater access to telecom is desirable, policy makers and regulators may wish to pay attention to the barriers faced and difficulties experienced by subscribers in obtaining services and using them, as described in Chapters 1 and ². Although a significant proportion of users within the localities studied appeared to be using brand new handsets, a well-functioning second hand market could assist as much as the GSM Association's low-cost handset initiative (Khan, 2006). The financing of new connections did not seem to be a large barrier to owners, with few making use of installment schemes. The higher entry barriers to consumers in the fixed telephony market, especially in Sri Lanka, seem worthy of the policy maker's and regulator's attention. Even here, the introduction of low per-line cost CDMA technology and competition have already lowered connection charges from USD 200 to around USD 100 for the new entrants. How the Sri Lankan incumbent manages to attract customers despite connection charges that are almost double that of competitors is a question that the research reported in these chapters does not answer. This is so despite a larger number of complaints about the process of getting connected as well as complaints about the service, as compared to mobile services. Hopefully, the follow-up research being conducted by LIRNEasia will shed light on this counter-intuitive outcome.

The barriers faced and difficulties experienced in the shared use of private phones were considerable, given that almost two thirds of those studied relied on other peoples' phones. Phone owners complain about the inconvenience caused by others using their phone, even when they receive a fee for providing the service. Those who use others' phones complain of the distance that they have to travel to the nearest phone as well as the amount they have to pay for a phone call. These problems can only be eliminated when every household has access to its own phone. However, in the meantime, policies that promote public access points can be implemented, as in India, where 'public call offices' or PCOs (which can even be free-standing roadside desks equipped with a telephone and a signboard) are given discounted call rates to provide telecom services; leaving room for a small profit to be made by the reseller. In 2006, India had over four million public access points throughout the country (TRAI, 2006, p.11), also evidenced by the relatively higher reliance on public access points in the Indian localities, seen in Chapter 1. However, if reliable and cost-effective infrastructure is not available, policies to promote public access to telecom will be less than effective.

Notes

¹ Price baskets were developed from Organization for Economic Co-operation and Development (OECD) methodology, to compare the relative affordability of mobile telecom access for low, medium and high users (only low users are reported here). The OECD methodology was adapted for the actual minutes of use (MOU) as reported by the largest operator (operator average outgoing plus incoming MOU) for Sri Lanka and by TRAI (average outgoing MOU) for India and, applying average minutes of use for the 'medium user', while applying the ratio of low:medium:high used in OECD methodology to obtain the respective baskets; baskets were also adapted for prepaid connections, taking into account incoming call charges (applicable in Sri Lanka) and SMS usage.

² http://www.lirneasia.net/2006/03/lifetime-free-prepaid/

References

Dialog Telekom (2006). Business Performance—1Q 2006. Retrieved July 21, 2006, from http://www.dialog.lk/corporate/downloads/1Q%202006%20Investor%20Forum.pdf

GSMA (2005). GSM Association Defines New 'Ultra-Low Cost' Handset Segment To Connect The Unconnected. GSMA Media Release, Tuesday, February 14, 2005, Cannes, France.

ITU (2005). The Internet of Things. ITU Internet Reports, 2005. Retrieved from http://www.itu.int/osg/spu/publications/Internetofthings/InternetofThings_summary.pdf

Khan, A.S. (2006). Stolen handsets: Emerging Challenge in Mobile Markets. Presentation made at APC Regional ICT Policy Consultation, Dhaka, April 19–21, 2006. Retrieved October 10, 2006, from http://www.lirneasia.net/wp-content/uploads/2006/10/ASKhan%20Stolen%20handsets %20Dhaka%20APC.pdf

TRAI (2006). The Indian Telecom Services Performance Indicators for Financial Year Ending 31st March 2006, 28th June 2006. Retrieved July 20, 2006, from http://www.trai.gov.in/trai/upload/Reports/26/Report%20QE%20Mar-06%20Part%20I.pdf

Document(s) 3 of 21