In many emerging countries it is easier to roll out a modern mobile network than the miles of copper required for a fixed line network. Mobile offers low income subscribers more affordable prepay mobile telecommunications combined with a degree of cost control not possible with fixed line. These factors help explain the phenomenal growth of mobile subscriber numbers in emerging markets such as Africa. where according to the International Telecommunication Union (ITU) mobile subscribers have jumped by 58.9 per cent in the period 1999-2004, representing almost three in every four (72.9 per cent) telephone subscribers in the continent.
To maintain this strong growth, and bring the social and economic benefits of telecommunications to more of what the ITU describes as 'the least wired continent on earth; the affordability of mobile telecommunications needed to be improved. Pradeep Shrivastava, vice president marketing at Idea Cellular agrees, stating that in the Indian market. "which has prepaid ARPU in the range of $4-$6 monthly, and low disposable incomes, traditional handset cost of $50-$60 for entry level has continued to remain a major barrier for the majority of potential mobile users. For several years, emerging market operators have sought low cost handsets to stimulate subscriber growth. But, largely due to low individual order quantities, their enquiries to handset vendors met with little success.
In October 2004, the GSM Association (GSMA) launched the Emerging Markets Handset Programme (EMHP) with the objective of creating a sustainable ultra-low cost handset segment to help 'the unconnected' access mobile telecommunications and assist the social and economic development of emerging market countries. Eligible operators could join the initiative, combining handset volumes and technical requirements into a Common Specification. Ben Soppitt, Director of Strategic Initiatives at the GSMA, explained to Informa Telecoms & Media that, although there were stated volume targets of six million handsets for each of the EMHP, these volumes were not guaranteed.
However by aggregating quantities, vendor attention was focused on reducing device costs to levels which had not been previously achievable. Ten concrete proposals were submitted for the second EMHP, four more than in the first process, and the Steering Committee again selected Motorola as having the best overaU offering. One year on from Motorola's announcement as the winner of the first EMHP, what has been the market impact of Ultra-Low Cost Handsets? Ben Soppitt advised that operator interest in the first - EMHP - was greater than originally thought with "a total of 17 operators, including nine Steering Committee members taking part in the Prograrnme.??? Despite this level of operator interest, in mid-October Motorola announced at its Q3 analyst briefing that it had shipped only about half of the six million handsets expected under the first EMHP, somewhat behind the original timetable announced in February 2005.
Operator' feedback from Egypt and Algeria has shed some light on the market effect of Ultra-Low Cost Handsets. Orascom Telecom appears to have been one of the more dynamic operators involved in the EMHP. In March 2005, Informa Telecom and Media's Middle East and Africa Wireless published an interview with Naguib Sawiris, Orascom Chairman revealing that his company was to purchase 40 per cent of the initial EMHP shipment. Orascom's Senior Manager of Operations Control, Ayman Youssef, explained at Informa Telecoms & Media's Ultra-Low Cost? Handset conference that, as handset subsidies are open to abuse by the distribution chain, and not justified by the economics of many emerging markets, the operator chose to distribute these handsets "with the least mark-up' in order to pass on the maximum benefit of the reduction in? handset cost.
Thanks in part to Orascom's lower margin approach to distribution, mobile penetration was significantly increased in Algeria. Connections there were increased from 3,000 to 6,000 a day. Indeed, by the end of Q305, thanks to 20 percent reductions in the handset retail price and accompanying cuts in connection fees and airtime costs, mobile penetration in Algeria stood at over 32 per cent, significantly up on less than eight per cent in mid-2oo4 and below two per cent in 2003. Before June 2005, Orascom's Egyptian subsidiary Mobinil was selling an Alo Magic bundle, comprising Motorola ClI5 handset, prepaid SIM card, 10 free minutes talk time on activation and one year's local handset warranty, for approximately $58. From Q305, with SIM-only prices falling from about $14 to approximately $9.50, the Alo Magic bundle price also reduced to about $52. Both offers have helped boost Mobinil's Q3 2005 subscriber numbers by 27 per cent compared to the previous quarter.
While a large part of Mobinil's subscriber growth may be attributed to the reduced cost of SIM -only, in addition to increased subscribers, Mobinil has experienced a positive secondary effect to the arrival of Ultra-Low Cost Handsets. Black market, second hand and refurbished devices all compete against the sale of new handsets via official channels. By offering its Also Magic handset bundle at the low price point of $52, other official and unofficial handset retailers were obliged to reduce their prices across all tiers. Some black market devices fell by as much as $10. This impact has made all handsets in the market more affordable and has even encouraged higher-end handset customers to change their phone, making them available in turn to be refurbished.
Continued reductions in handset cost will allow operators like Idea Cellular to address successively lower socio-economic market segments in an approach Shrivastava compares to "waves with over 20 operators participating in EMHP2 and the GSMA revealing that Ultra-Low Cost Handsets are now available in over 50 emerging markets, Shrivastava explains that Indian? operators are looking at how to address the rural market. Indeed there is a potential for explosive' growth in India's rural areas where 70 per cent of the country's population lives but which today only has about three per cent mobile penetration.
This approach is encouraged by the Indian government that has identified telephony as one of the six areas of focus for rural growth and further boosted by the supportive regulatory environment and other governmental initiatives such as basic infrastructure sharing.?
Although there have not yet been any large scale deployments of ultra-Low cost Handsets in India, feedback from consumer trials has been very favourable. The Motorola C113 and C113a, which are expected to retail at between $38 and $41,below the psychological Rs 2000 prices point, will encourage more Indians to become mobile subscribers and help achieve the 100 million mobile subscriber mark in that country by Q107.
The EMHP has helped deliver lower cost handsets into the hands of emerging market subscribers, but its key achievment to date has been to focus handset vendors on the previously untapped market towards the "bottom of the pyramid." The redirection of vendor strategy towards the growing low and ultra-low cost segments is increasing competition in these segments, obliging further handset cost reductions. Efforts to reduce Ultra-Low Cost Handset cost are being made right across the handset value chain. However, this pursuit of lower cost must not be at the expense of lower quality or reliability as emerging market subscribers will invest a substantial portion of their income in a handset and will requires it to function well for many years. In addition, given the underdeveloped nature of the distribution chain in many emerging markets, the cost of repairing or recovering a faulty handset once it is in service is far higher than it is in more developed countries.
Key to lowering device cost is to reduce the handset's Bill of materials (BoM). The engineering approaches to work towards this have required innovations from handset component suppliers, particularly in the areas of the RF, baseband and component intergration. Part of Informa Telecom Telecoms & Media's Ultra-Low Cost? Handsets report gives an overview of how the ex-words? cost of these devices is likely to evolve over the rest of the decade. Looking at the forecast cost evolution of a very basic feature set (voice, SMS and a small B&W display) and assuming that the devices will be produced by an organisation with minimal IPR charges, in quantities of over one million units at an average margin of 10 per cent, the total ex-works cost is expected to decline by a compounded annual rate of just over 14 per cent over the five years, from almost $42 in 2005 to almost $18 in 2010.
Over that time, the greatest cost reductions are forecast to be achieved in the BoM. Indeed from 2006 it is likely that single chip and system on chip Ultra-Low Cost Handsets will be produced and sold at signigicantly lower costs than the $39 ex-works cost at which the Motorola C115 and C117 had ben shipping during 2005.
The other costs, including software, packaging, assembly, testing and warranty are forecast to fall at a slower but nonethless impressive rate of almost 10 per cent when compounded annually. When BoM cost reduction slows after 2008, Informa Telecoms & Media believes that there will be increased cost cutting pressure on these other costs. Reductions in component count and optimisation is permitting PCB and handset redsign yielding significant savings in terms of assembly cost. Improvements in vendor supply chain management and company organisation will bear dividends? but it is warranty costs and the largesly outsourced area of testing and approvals that may prove the most difficult to reduce in the short term.
Reducing costs and maintaining device quality while still yielding sufficient margins is the challenge now faced by the handset industry.
Although it is clear that the Ultra-Low Cost Handsets segment has been given the impetus required to focus its attention on engineering out cost, network costs and handset and service taxation are the other principle challenges to the continued development of this segment.