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Emerging Markets - Leapfrogging to success with mobile Panel Session 19 September 2005, Marrakech Susan Sweet Ovum
© The MOCCA Consortium, Page 2 Agenda 10:30 - 10:45 Introduction and overview of Think Tank Findings, Susan Sweet 10:45 - 11:15 Building Cost Efficient coverage, Bodil Josefsson 11:15 - 11:45 Leapfrogging to success with mobile, Francis Osakonor 11:45 - 12:00 Questions
© The MOCCA Consortium, Page 3 Think Tank meetings Thematic focus for each meeting: l TT1 the social, cultural and economic impact on user requirements l TT2 the impact of user requirements on technology l TT3 government policy and regulation and its relation to end user requirements two case studies presented two scenarios discussed and developed www.ist-mocca.org
© The MOCCA Consortium, Page 4 Think Tank Delegates Representatives from 7 countries across Asia, Africa and Latin America l Dominican Republic l Ecuador l Mexico l India l Nigeria l South Africa l Tanzania Expertise from stakeholders: mobile operators, a university, investment advisors
© The MOCCA Consortium, Page 5 Defining the customers (users) Top 1 - 2% of the population the masses people outside the formal economy Government
© The MOCCA Consortium, Page 6 Social, cultural and economic impact on customer requirements Language requirements require handset adaptation for different character types requirements of women for handsets include weight calculators, also important for social inclusion and participation in society money is spent on what is immediately available some cultures have an aversion to voicemail, a solution is a missed call alert social value of the mobile
© The MOCCA Consortium, Page 7 Social, cultural and economic impact on customer requirements -2 Unemployment, underemployment, political turbulence, country location, limited financial networks and low purchasing power all impact user requirements creates a need for different business models, innovative services (e-payments), very low denomination pre-pay cards
© The MOCCA Consortium, Page 8 Impact of user requirements on technology Western regional influence creates diverse mix of technologies, but no significant differences in underlying technology requirements but low cost solutions are important Issues to address include: l electricity shortages l limited backbone networks l wide range of terminal types needed and variety of prices l simplicity, long battery life, highly durable
© The MOCCA Consortium, Page 9 Government policy and regulation and its relation to end user requirements Policy issues l proactive approach vs reactive or non-existent approach l mobile services - a key to growth or a luxury service? l The impact of import duties, high taxes and spectrum fees on handset costs, subscription fees and call charges The role of regulation l importance of a stable and reliable regulatory environment for investment and user security
© The MOCCA Consortium, Page 10 Government policy and regulation and its relation to end user requirements -2 A strong legislative framework and independent regulator are very important to promote l fair competition l control interconnect charges (and indirectly retail prices) l ensure the correct use of universal service funds to reach rural and remote customers l assist with infrastructure development at backbone level where none exists
© The MOCCA Consortium, Page 11 Key Recommendations Mobile and wireless services must be seen as a necessity, not a luxury the use of mobile phones as mobile payphones is greater in emerging markets the pre-paid model will continue to be very important new forms of partnerships will be needed in high risk countries creation of a level playing field is key
© The MOCCA Consortium, Page 12 Thank you! Susan Sweet Ovum Susan.Sweet@ovum.com
Building cost-efficient coverage September 19th, Marrakech Bodil Josefsson, Ericsson
© The MOCCA Consortium, Page 14 Outline Case study Cost-efficient coverage Capacity growth
© The MOCCA Consortium, Page 15 Population in GSM Markets without coverage Population with GSM coverage, but no subscription GSM Subscribers 2,200 2,600 1,400 Non GSM Markets Cost efficient coverage World population 6.4B GSM provides global coverage
© The MOCCA Consortium, Page 16 Case study Background Developing Market Annual license fees ~ 1M USD Total number of subscribers ~ 300 000 GSM market share ~ 26% Net addition per month ~ 20 000 Churn ~ 6% per month Typical tariff ~ 0,27 USD Interconnect fee ~ 0.07 USD ARPU ~ 22 USD MoU ~ 85 min EBITDA ~ 20%
© The MOCCA Consortium, Page 17 Source: Ericsson analysis CAPEX DEPRECIATION OF CAPEX MINUTE FACTORY O&M, POWER, TRANSMISSION, SITE RENTAL Subscriber acquisition Other business related NETWORK OPERATION Subscriber acquisition and retention Subscription management Network related Interconnect and roaming TOTAL COST BEFORE INTEREST AND TAXES FEES TO OTHER OPERATORS M&S ADV/PROMOTION HANDSET SUBSIDIES COMMISSIONS DISTRIBUTION SIM CARDS CUSTOMER SERVICE BILLING, BAD DEBT … CALL TERMINATION OUTBOUND ROAMING ACQUIRING / RETAINING CUSTOMERS & SERVICE DELIVERY Overheads GENERAL & ADMINMANAGEMENT HEAD OFFICE ETC. Average Mobile Operators Cost Structure
© The MOCCA Consortium, Page 18 Scenario 1 (Base Case): No Expander solutions used in cell planning 50% of Sites connected to power grid Powered from back-up generator 30% of time 17kVA generator sets + 15000 btu A/C units 50% of Sites solely using power generated on site 2 x 17kVA generator sets + 15000 btu A/C units Generator consumes 3 liters Diesel per hour 1 liter of delivered Diesel costs $0.83 Scenario 2 (Expander Solutions): TCC 4-Branch Rx Diversity SmartRange TMAs Scenarios 1 & 2: Reducing the number of BTS sites
© The MOCCA Consortium, Page 19 Scenario 3: Smaller A/C units and Generator Sets: 2 x 7.5 kVA generator sets on each site + 9000 btu A/C units Generators consume 1 liter Diesel per hour Scenario 4: Using RBS 2106 instead of RBS 2206 (23 sites) Capex: Higher cabinet cost is offset by savings on shelter and A/C Opex: improvement in power consumption with eco-cooling Scenario 5: Running BTS sites on Bio-Diesel instead of Petro-Diesel Biodiesel = Alcoholic trans-esterfication of vegetable oils, resulting in Glycerol and Fatty Acid Alcohol Esters, commonly know as Bio- Diesel. 1 liter of delivered Bio-Diesel can cost 20-35% less than Diesel Scenarios 3-5: TCO improvements on site level
© The MOCCA Consortium, Page 20 Results from African GSM Case Study Results Base Case 53 Sites Expander 41 Sites Base Case: $38.39 per sub per year = $3.20 per month Expander Radio Solutions: $29.78 per sub per year = $2.48 per month 7.5 kVA Generators: $26.70 per sub per year = $2.22 per month RBS 2106 with Eco-Cooling: $25.53 per sub per year = $2.13 per month Biodiesel: $25.13 per sub per year = $2.09 per month
© The MOCCA Consortium, Page 21 TCO RAN $2.10 Total Expenses $4.65/sub At this cost level, an ARPU of $5.80 per month would provide EBIT of 20%* *excluding goodwill amortisation TCO CN/SN $0.70 25% 75% Network Operations Capex (Depreciation) TCO Network Operations $2.8060% Subscriber Management Interconnect / Roaming Marketing & Sales General & Administrative 40% Business Operations $1.85 Relating TCO to ARPU (an Extrapolation)
© The MOCCA Consortium, Page 22 Network issues Coverage at lowest Total Cost of Ownership Mobile Softswitch Shared Networks Transmission Network Radio Access Network Radio Network Core Network Transport Network
© The MOCCA Consortium, Page 23 Radio Network Different approaches Low priced RBS Low cost Site Lowest TCO for the whole Network
© The MOCCA Consortium, Page 24 Radio Network Fewer sites for rural coverage CAPEX & OPEX reduced with > 30% - 70 dBm Urban indoor -77 dBm Suburban indoor -90 dBm Rural 52 sites 29 sites Same capacity!
© The MOCCA Consortium, Page 25 Functionality for coverage enhancements Downlink enablers: High output power MS receiver sensitivity Uplink enablers: RBS receiver sensitivity TMA 4-Way RX diversity MS output power Common enablers: Low frequency Antenna Gain Tower height Design marginal
© The MOCCA Consortium, Page 26 Expand with speed, flexibility and control Any capacity – any media Scalability for future growth Balance the cost for aggregation vs bandwidth Leased lines Microwave Satellite Fiber Transmission Efficiency requires a network perspective
© The MOCCA Consortium, Page 27 Population in GSM Markets without coverage Population with GSM coverage, but no subscription GSM Subscribers 2,200 2,600 1,400 Non GSM Markets Capacity Growth World population 6.4B GSM provides global coverage
© The MOCCA Consortium, Page 28 Utilize the full potential of a limited spectrum 1 2 3 Take advantage of a large spectrum Build for coverage and plan for capacity Grow radio networks 3 scenarios
© The MOCCA Consortium, Page 29 Combine Coverage and Capacity Add capacity easily TRX:s for Coverage combined with TRX:s for Capacity in same cell Maximize site grid Start with coverage 11 1 1 1 1 2 2 2 22 2 44 4 -> A traffic expansion with 1440% without any new sites ! -> With AMR HR: +2880% without any new sites
© The MOCCA Consortium, Page 30 Conclusion The network view (=fewer sites) gives lowest TCO Flexible capacity growth Future proof investments No compromise on quality!
Emerging Markets - Leapfrogging to success with mobile Panel Session 19 September 2005, Marrakech Francis Osakonor Anderberg International South Africa
© The MOCCA Consortium, Page 32 Market Growth in Africa/ Emerging Wireless is the dominant network with higher penetration than the fixed network in the developing world Mobile is becoming the universal service Market growth will be very fast with the leapfrogging of technologies Deploy / Implement new technology – enough critical mass of new mobile usage Develop the technology and applications in Europe but usage will be wider in emerging markets Distinct requirement of developing markets Government policy has a big effect on market growth in developing regions ( mobile as a development tool ) New business models called for in developing markets, predictability difficult, yet experience has shown huge growth
© The MOCCA Consortium, Page 33 Leapfrog Scenario Definition of leapfrog: l To skip from one generation of technology to another (2G to 4G and bypassing 3G) This does not have to happen quickly but rather the process of going from 2G to 3G is by passed thus the technology evolution is different to developed markets. Eg in some markets the first and last phone for use will be the mobile phone. l An alternative is that developing countries actually move more quickly in implementing a new technology than the developed countries. l To evolve from one service to another (applications may leapfrog from say X to Y) Another form of leapfrog was the literary/educational leapfrog where Internet and digital information enables developing regions to skip the requirement for books/libraries and still develop Intercept – this means that technologies and services evolve and follow the leading /mature markets but may do so quite quickly and more quickly than the developed country experience Not all developing markets will leapfrog either technology or serv
© The MOCCA Consortium, Page 34 Market Segments There are two or sometimes three market segments l The rich people who want the expensive services and can pay for them l The mass market with a very low ARPU and to whom services migrate slowly l The government is the third market segment To the groups in the market (rich, poor and government) one must add the group of people who are not in the market at all. An approach oriented purely on market consideration will miss out this part of the population. There is the possibility of the emergence of the 4 th market driven by policy rather than margins (less than USD1 per day large part of the population) Remove commercial burden from operators to afford the 4 th market opportunity to use services
© The MOCCA Consortium, Page 35 Defining the customers- (Users) Top 1 - 2% of the population comparable to Europe the masses with less than USD10 ARPU people outside the formal economy Rural vrs Urban dwellers. Lifestyle changes in surprising ways. Initial adoption sluggish but accelerates faster than developed market Huge numbers of users in the lower segments Government
© The MOCCA Consortium, Page 36 Usage/Applications -1 For services, there may not be a distinct requirement whereas for applications, there are very distinct requirements A given application could be deployed at different times in different markets, as it may be the cheapest option at any given time Electronic payment and money services are much more important in developing environment than in Europe Service usage and applications are very different to Europe (e- money etc) Application of payments- No second rate solutions Limited language ability and limited ability to use a complex device Calling party pays, changes the traffic model and allows mobile network to afford having customers with limited number of outgoing calls (reverse charge)
© The MOCCA Consortium, Page 37 Usage / Applications -2 Applications and content will drive market growth, emanating from emerging markets, and mobile wireless has overtaken fixed in usage Emerging markets leapfrog technology application with Usage patterns been main driver in the next 10 years – India, China & Africa Developing countries relying on same technology and similar basic services differentiating on applications Convergence for generics - differentiating on applications Leading-edge users differ – in developed countries business is the first usage customer, in developing countries governments are more important as they have a need for low-cost essential services Roll-out of e-whatever is faster – Mobile and other e-services are faster and cheaper than the options existing in developed countries (eg library)
© The MOCCA Consortium, Page 38 Emerging Markets Business Model-1 Capital investment is a barrier for growth in rural areas Differentiation of technology is not evident Business models are different (operator and user) depending on the country There is no one single recipe for developing countries – ARPU can be high in rural areas as there is no option of using a fixed network, but can be very low in others due to purchasing power or population density Strong segmentation of the markets- different financing models Role of government is very important in developing regions Small business drives usage with calling party paying and pre- paid business models dominating Franchises are widely used for distribution – Distribution cost as a variable cost counted by heavy investment in electricity and security infrastructure
© The MOCCA Consortium, Page 39 Emerging Markets Business Model-2 Return on Investment vs Universal Access –private models can be sustained only if they have positive return on investment. Lack of subsidies and infrastructure punishes penetration in rural/poor areas Access to credit- lack of credit evaluation tools and credit bureau result in use of the pre-paid model- 90 % of customers are prepaid. In this context Recovery of investment is strongly influenced by incoming traffic (calling party pays) Prepaid customer is a price hunter- this results in low customer loyalty and high turnover/churn Fixed and Variable expenses in the business model –operators are transforming what is usually considered fixed costs into variable, taking advantage of outsourcing several areas which in developed countries are usually kept under the operator structure- Call centre, Activations, Distribution of prepaid cards and Sales usually outsourced to small businesses and franchises Handsets: Subsidizing handsets is a problem when there is little customer loyalty. Very strong grey market not controlled by the operators
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