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By Wang Deqian & Foo Fangyong

The telecom industry's rapid development over the past few years is reflected by a global mobile phone penetration rate of almost 50% - or 3 billion people. However, the contrast between countries distinguished by economy and development is vast: the mobile phone penetration rate is approaching 100% in some developed countries, but remains as low as 1% in some emerging markets.

In India, for instance, the urban areas exhibited a mobile phone penetration rate of around 40% by the end of 2006, while its rural areas achieved less than 2%. China's overall mobile phone penetration rate reached 38% - or 500 million mobile subscribers - by early 2007, but with rural areas averaging just 12%. In 2005, African mobile phone subscribers accounted for 6.5% of the continent's population, and this is expected to merely double by the end of 2008. Latin America saw an overall mobile phone penetration rate of 43% by the end of 2006, but the variation between countries was huge. Haiti and Cuba, for example, managed only 5% and 1% respectively. Given these figures, emerging markets offer enormous potential for future development and are as such becoming hotly contested battlefields among the world's telecom players.

Emerging markets are mainly distributed in developing countries with rich natural and human resources, many of which are also prominent tourist destinations including India, China, a number of African countries and Latin America. Economic globalization is stimulating rapid economic growth in these countries, and meanwhile the telecom industry, as an integral facet of a nation's infrastructure, is faced with great opportunities and potential for development. The characteristics that nascent development imbues, such as population dividend, increased population mobility, a burgeoning middle class with high disposable income, and a large low-income population, can create tremendous demands upon telecom services.


Population mobility: the opportunities

In many developing countries large-scale population mobility results from regional economic imbalances, and, recognizing this, some operators have derived commercial opportunities from the demographic phenomenon and gained market success.

In China, for example, around 100 million farmers have left their inland villages to seek employment in coastal cities. Focusing on these migrant workers, China's mobile operators launched low-cost mobile phones, prepaid services, and tariff packages in order to cater to their communications needs. Now, for most of these people, mobile communication not only forms a feature of their working lives and but also plays an essential role in maintaining family contact.

Shenzhen, the home of Huawei's headquarters, is a definitively modern coastal city that exemplifies China's economic miracle. Thirty years ago Shenzhen was a fishing village with a population under 100,000. Huge and sustained migration from other provinces has spearheaded its transformation into a bustling metropolis housing over 10 million people, with an average GDP exceeding US$10,000.

Chinese New Year sees an annual mass exodus of over 2 million people as a relatively high percentage of the city's inhabitant return home for family reunion in around 10 days. Accordingly, operators offer roaming service discounts and ensure that subscribers can still enjoy services outside of Shenzhen without changing SIM cards. New Year's Eve sees long-distance telecom traffic quadruple as residents who stay in Shenzhen call relatives in their hometowns. Unsurprisingly, operators compete for a share of the associated revenues by offering incentives such as discount packages for long distance calls.

According to World Bank statistics, global migrant workers sent about US$93 billion back to their own countries in 2003. This figure describes the second largest capital flow in developing countries, second only to direct foreign investment. Research in Mexico, moreover, reveals that US$1 remitted from abroad creates US$3 worth of domestic. In addition to promoting domestic economic development, migrant workers also create massive international communications demands, and some multinational operators have customized solutions to seize this opportunity and expand the telecom operation space.

In countries such as the United Arab Emirates and Saudi Arabia, the number of migrant workers exceeds the native populations. The strong drive to regularly communicate with those back home has been broadly restricted by high tariffs. However, one middle-eastern multinational operator who provides services mainly to Muslim countries realized the mutually beneficial opportunity and, already in possession of decent network coverage, implemented a tariff package for migrant workers. They offered a low-cost evening charge 50% cheaper than the similar services of other operators, recognizing the fact that not only are people more likely to call friends and family at night, but that networks are also less congested during this time. The multinational network has assisted the operator to reduce settlement fees and lower costs, and a secure competitive edge has been obtained by targeting a market segment that combines a relatively low income with enormous communications needs.

In some countries multinational telecom traffic and services are generated via large-scale religious activities and travel to popular tourist destinations. For example, Ramadan and Hajj are two of the most important events in the Muslim calendar, and the latter sees about four million pilgrims gather in Mecca annually. An operator in Saudi Arabia launches telecom service promotions ready for each Hajj festival and, thanks to the equipment configured by Huawei, subscribers can obtain a local number after roaming to their own networks, meaning SIM card changes are unnecessary to enjoy usual phone services charged at local rates. Subscribers benefit from user-friendly prepaid services for telecom and recharging services, and no multinational settlement fee is required since local numbers are used.

To explore the huge opportunity that population mobility can bring to telecom operations, Huawei has developed a series of solutions tailored for multinational and trans-regional operations. These solutions include:

Multinational service solutions which provide products to facilitate multinational roaming voice and data services, multinational platforms for SMS and data delivery, and next generation contact centers.

Multinational core network solutions include softswitch-based comprehensive international gateway offices, multinational great core network that is based on R4 softswitch architecture, and signaling networks oriented to All-IP evolution.

Multinational bearer network solutions bear all voice and data based traffic and services on a multinational backbone IP network.

Huawei's holistic IP based network solutions extend to intelligent networks as well as core and bearer networks, and have been successfully deployed by China Mobile and many other global operators in a variety of locations world-wide. Domestically, Huawei equipment is employed during traditional Chinese festivals to smoothly process 10 times the amount of normal traffic by using just 20% device redundancy and, abroad, Huawei's softswitch solution successfully sustained peak traffic during Hajj in 2006. The proven performance capabilities of Huawei's solutions fully demonstrate their maturity and reliability.


Population dividend benefits

A population dividend occurs when the percentage of working age individuals rises while the birth rate falls. It is characterized by relatively rich labor-force resources and a light burden from senior citizens, and represents a golden period for a country's economic development. Many developing countries are currently benefiting from a population dividend which is spurring both consumption and progress.

China, for example, has about 300 million people under 30 years old who form both the catalyst for economic development and its main beneficiary group. During the past three years, the average income for 20-29 year olds has increased by 34%. Youthful vitality combined with a high disposable income and intrinsic optimism creates a demographic group with the largest consumption potential in China. In terms of the telecom market, this group are not only trend setters, but more readily acceptant of new telecom services - especially data - and are thus the key consumers responsible for promoting innovation and development in the communications field.

Some operators target young people by assessing their purchasing power and behaviors, and customizing their solutions to maximize revenue. This is illustrated by China Mobile's M-ZONE brand which was launched in 2001 and specialized in providing youth-oriented services. The number of M-ZONE subscribers to date has exceeded 100 million, and statistics indicate that data service usage under the M-ZONE brand has far exceeded that of other service providers. Data services now account for over 20% of China Mobile's total revenue, and the contribution from young people is demonstrably large.


Middle class strength

Recent years have healed the Asian-Pacific economy following 1997's financial turmoil with rapid, sustained economic growth averaging 8% in the world's two largest countries, China and India. Africa has in turn enjoyed an economic upturn exceeding 5%, which has been stimulated by the discovery and exploitation of large oil and gas reserves and the recent launch of mass infrastructure construction including railways, highways and health, sponsored by EU and UN.

Though developing countries possess low average GDPs, they have large populations and rapid GDP growth which is swiftly expanding their middle classes. According to an approximate calculation regarding purchase power parity (PPP), around 1.7 billion people globally earn an average income exceeding US$7,000, and nearly half of these live in developing countries, with more than 240 million in China alone.

This burgeoning middle class possesses immense purchasing power, and their telecom service demands are running parallel with their equivalents in developed countries. If telecom operators can seize the opportunity afforded by the rapid expansion in developing regions and meet these communications requirements, their commercial potential will be greatly extended.

Telecom solutions for developing countries should differ from those in developed countries. It is unnecessary to deploy the most advanced technologies firstly in developed countries' markets since the existence of a complete networking infrastructure brings with it an overweight historical burden that renders the application of new technologies costly and difficult. Conversely, developing countries benefit from relatively less legacy network features, and it is more viable to smoothly and cheaply apply the latest technologies.

An international telecom operator in Africa, for instance, has deployed WiMAX on a large scale, covering numerous countries including Namibia, Botswana, and Angola since 2006. The market has reacted favorably to WiMAX Internet access, and WiMAX subscribers now greatly outnumber fixed network ADSL subscribers. Operators in countries such as South Africa, Nigeria, Uganda, and Russia have adopted EV-DO data cards for Internet surfing through wireless broadband. Their ARPU values remain over US$60, with some reaching US$100. According to Huawei's 2006 research in Namibia, over 30% of broadband users shopped online, second only in volume to web browsing.

Nevertheless, technologies and applications that have proven successful in developed countries often fare badly in developing countries. One South African operator imitated a European model for 3G service deployment and subscriber expansion. However, unsatisfactory commercial gains resulted from unsuitable terminals, coverage, services and tariffs. The operator then shifted its business direction by prioritizing data card service development and won some success.

Another example exists with the smaller, power-efficient distributed base stations that have been widely applied in Europe. When deployed in Africa, these base stations exert less obvious advantages because the continent features sparse local populations and station locations are easily acquired. Moreover, frequent power interruptions enhance the suitability of base stations that use solar or biological energy instead.


The gold at the bottom of the pyramid

Low-income individuals form the wide base in the pyramid of wealth and great possibilities are offered by their large numbers and potential communications demands, especially rural dwellers.

In order to effectively serve the masses who rank at the lower end of the financial league and to make a profit, a tailored and appropriate strategy is essential. Both China Mobile and Sri Lanka's Dialog recognize that reaching a nation's rural poor requires more than simply offering "an existing portfolio of products and services." The challenge rests with identifying the pivotal point where market access is gained by transforming limitations into opportunities.

With the help of the right vendor, operators are able to re-invent themselves and their products to take advantage of opportunities presented by low-income groups.


China Mobile: exploring the green fields

Mobile services in China's large and medium-sized cities are going saturated and so China Mobile has recently focused upon the development of the rural market. 90% of China's landmass is rural and is occupied by 745 million - or 57% - of the nation's 1.3 billion people. In September 2007, China Mobile acquired approximately 6.1 million new subscribers, of whom a great many derived from the rural areas. The total number of subscribers reached 350 million, winning China Mobile the largest subscriber base among all global mobile operators. The growth of the rural market is emerging as a new fountain for China Mobile's revenue stream and, according to its interim report in 2007, the rural market now accounts for over 50% of new subscribers.

Yang Wenbin, a farmer in Hubei, was quick to offer praise to China Mobile rural service: "The village service is great for me. I earn more thanks to the simple messages that give me the information I need." While Mr. Yang cultivates cotton across 15,000m² of farmland, he has tended to under price his yields due to limited access to market information. After China Mobile's services penetrated his village in 2006 and Mr. Yang joined the village service platform, he was able to sell his cotton at a 20% higher price than before due to a more up-to-date understanding of market conditions.

Mr. Yang's village is one of 30,000 villages that have been covered by China Mobile's wireless service during the past three years. China Mobile invested about US$1.65 billion in rural market expansion to provide universal communications services to China's remote areas by the end of 2006.

The village service platform mentioned by Mr. Yang is one of many customized services offered by China Mobile in its effort to assist farmers improve their livelihood. Besides providing market information, the platform also supplies the latest information regarding agricultural modernization, health care and education. Considering the low literacy level among farmers, China Mobile has gone as far as establishing special contact centers where farmers can call in to submit or update their agricultural products' information, which is then transmitted to buyers.

In terms of accessibility, China Mobile cooperates with terminal manufacturers to provide low-priced customized mobile phones ranging from US$27 to US$67, some of which are even free given a certain amount of tariff is prepaid. China Mobile's thorough planning and inception has successfully promoted the popularity and use of mobile phones among farmers. Clay Chandler, a senior writer for Fortune comments: "The company's strategy reflects the wisdom of C.K. Prahalad, a famous corporate management guru who believes that inspiring the mass poor can be rewarding; dubbed as the fortune at the bottom of the pyramid."

These efforts have resulted in remarkable success as shown in China Mobile's fiscal year 2006 (FY2006) report which attributes the year's bullish growth to three main reasons, one of which is the rural market's rapid development. This helped boost its number of subscribers by 22.1% to 301 million. Half of the new subscribers hailed from China's vast countryside. The average revenue per user (ARPU) increased in the fourth quarter (4Q) of FY2006 to US$12.00, up from the third quarter (3Q) level of US$11.60.

Compared with the previous year and despite its increased investment in developing rural mobile telecommunications, China Mobile has managed to maintain high profitability with only a slight dent in earnings before interest, taxes, depreciation and amortization margins (EBITDA). This takes into consideration huge asset write-offs and one-off promotion campaigns aimed at existing customers in FY2006's 4Q. However, the slight fall in EBITDA was well off-set by China Mobile's higher than expected net income, which recorded a 23.3% rise. This demonstrates that the huge addition of the rural population with low ARPU has not adversely affected China Mobile's profits, but has in fact instigated a valuable growth source.


Dialog: serving the 1-minute subscribers

Despite being the last entrant to Sri Lanka's mobile telecom market, Dialog has managed to surpass its competitors and become the market leader, commanding an impressive 60% market share in the mobile arena and a staggering 73% of total industry revenues. To date, Dialog's network provides the widest coverage in Sri Lanka, spanning 70% of its land mass and 90% of its inhabited areas.

Innovative tariff plans and services combined with the rapid expansion of coverage areas across all Sri Lankan provinces resulted in the company reaching the milestone subscriber base of 3 million by November 2006, which rose to 3.11 million by the end of the year.

At the end of FY2005, Dialog's blended and prepaid ARPU were US$6.71 and US$4.10 respectively. FY2006 saw its blended ARPU drop by 5% to US$6.36, while its prepaid sector grew by 1.5% to US$4.16. Dialog's strategy to "transform mobile telephony to a broad-based commodity affordable and available to citizens from all walks of life" has clearly helped position them as the fuel to drive rural market development.

In order to compete in a more intensified market setting and to stimulate the adoption of mobile services in rural areas, Dialog adopted the investment philosophy of "serving the 1-minute subscriber". Dialog has since regarded "profit per minute" and "profit per subscriber" as lead guidance parameters when designing their solutions' packages.

Implementation of this philosophy led Dialog to alter its cost structure to ensure profitability, as evidenced by their OPEX-to-revenue performance ratio which described a 1% increment over FY2005 by the end of FY2006. In July 2006, Dialog introduced an aggressive tariff reduction of up to 30%, but still chalked up a 54% EBITDA margin in FY2006's 4Q, a 5% improvement over the same period in FY2005.


Huawei: a partner in accessing the fortune

China Mobile and Dialog have both proven that profits are not compromised after investing in and developing the rural market. Both operators have identified that rural subscribers are as capable contributors as their richer urban counterparts, despite an income gap of up to 300%.

In terms of its valuable contribution to China Mobile's and Dialog's rural successes, Huawei shares the belief that unlocking the huge potential of a rural population is best achieved by providing scalable, state-of-the-art solutions that hammer down OPEX. This goes far beyond merely offering ad-hoc equipment boxes for simple voice services, which some may view as more appropriate for poor, rural areas. In Tibet, Huawei helped China Telecom to save US$1.6 billion by providing customized wireless solutions as opposed to conventional cabled access. Moreover, Indonesian STI realized its nationwide wireless coverage of 13,677 dispersed islands with assistance from Huawei.

Customized for rural communications, Huawei's solutions prioritize low investment requirements, short construction times, simple maintenance, wide signal coverage and a variety of value-added services. With increasing numbers of operators adopting Huawei's solutions in rural market development, Huawei has managed to become a strategic partner key to finding the gold at the bottom of the pyramid.


Village Phone: a telecom model tailored for the poor

The Village Phone (VP) model demonstrates an exemplary method of providing telecom service to the poor. Many enterprises, such as banks, hesitate when confronted with doing business with the poor. Muhammad Yunus, the 2006 Nobel Peace Prize winner, founded a bank named Grameen Bank that is specially oriented to those on low incomes. His bank has challenged inherent banking ideas across the industry via its successful results, as illustrated by non-performing loan (NPL) statistics in Bangladesh. With the banking system as a whole plagued by a very high NPL rate, Grameen Bank's hovers around the extremely low level of 5%, despite the fact that its loan volume equals that of Bangladesh's largest commercial bank. The success of Grameen Bank is defined by its adherence to a series of key premises:

Belief that the poor are trustworthy: Bank loans are granted based on trust, not on assets.

Simplified process: People can pay back their loans by smaller installments, such as weekly payments for a one-year loan, which can help mitigate pressure and risks for debtors.

Organizational innovation: To guarantee that small credit loans can be paid back, Grameen Bank requires that each loan applicant join a support team consisting of people who have the same economic and social background, and who possess similar goals. A corresponding incentive mechanism is established and every eight teams are centralized to hold regular meetings with bank staff. The director of the centre – normally an elected group leader - is responsible for handling centre affairs, helping individual teams to solve problems beyond its capabilities, and cooperating closely with bank appointed personnel. This group + centre + bank staff loan model is an innovative financial mechanism, replete with wisdom, transparency and success.

When providing communications services to the poor, operators may encounter the following problems: Can those on a low income afford to buy and use a mobile phone? Can investment be protected given low traffic flow?

The Grameen Bank holding company, Grameen Telecom, incorporated with the Norwegian operator, Telenor, to jointly establish GrameenPhone. Based on the successful experience of Grameen Bank and through VPs, GrameenPhone has created a multi-win business model for VP operators, subscribers and telecom operators.

Devolved responsibility places the members of a poor community as its VP operators, who approach Grameen Bank for loans to purchase telephones and call traffic from Grameen Telecom. The latter gets favorable wholesale discount from GrameenPhone. VP operators then use profits gained from the price differential to pay back their loans plus relevant administrative fees. After these costs, they still make a decent profit. It thus achieves low-cost operations under the concepts of "no subscriber acquisition cost (No SAC)" and "no subscriber retention cost (No SRC) ".

The VP operator fulfills the roles of both the sales channel and business center by serving the villages in which its staff live, and surrounding districts. Subscribers can go to a VP operator's house to make phone calls and, if there is an incoming call for a subscriber, a VP operator can take the telephone to the subscriber's house. For reserved calls at an appointed time, subscribers can wait at a VP operator's house. During market time, a VP operator can sell telephone services to market attendees. Although each subscriber's traffic and ARPU are very low, one telephone - specifically one SIM card - actually accumulates the traffic of many subscribers, giving rise to a relatively high ARPU.

To date, there are more than 260,000 VP operators in over 50,000 villages who generate over US$200 million in revenue for the company, and women operating phones through GrameenPhone earn a daily income of at least US$2 from this business. In addition to helping these women achieve economic self-sufficiency, the GrameenPhone network, which virtually spans the whole of Bangladesh, has brought its citizens closer to each other. Telephones, which were a rarity 15 years ago are now everywhere in urban areas, and a commonplace in rural areas as well.

This model has been copied and adopted by other countries. In general, it embodies the following features:

Low-cost networking: including low-cost network coverage and transmission.

Low-cost channel: demonstrating via the VP and Grameen Bank models how to adopt low-cost channels and encourage subscribers to become operators.
Low tariff within the community: switching local calls directly through the same base station, thus lowering the tariff for subscribers.

Low-cost recharge: reducing the cost of scratch cards by promoting electronic recharging, and reducing recharge costs by balance transfer.

Low-cost promotion: adopting word-of-mouth, message and family marketing accompanied by advertisements using mobile publicity units, walls and mountain plains.

Stimulating demand: using low-cost, small-unit recharges measured in seconds, implementing recharge rewards, promoting wireless public phones and mobile phone bars to accumulate traffic.

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