Relatively cheap, portable, and today incorporating e-mail, Internet access, cameras and MP3 players, mobile phones are replacing computers as the technology device of choice among countries with the fastest-growing populations in the world. The rapid adoption of mobile phones in developing markets is aided by favorable demographics. These markets teem with teenagers and no age group has taken to mobile phones more than those who are under 25. Adults like mobile phones, too. Inhabitants of one grateful Algerian Village recently feted a representative of a local mobile phone operator by slaughtering and roasting a lamb in his honor.
The Mobile Phone Megatrend: Explosive Growth... and Profits
A handful of global mobile players are profiting from expansion in mobile phone markets where others fear to tread. Among them is Luxembourg-based Millicom International (MICC) -- the "Indiana Jones" of the mobile phone industry. Millicom focuses on offering prepaid cell phone services across 15 countries including El Salvador in Central America; Paraguay in South America; Chad, Ghana, and Tanzania in Africa; Sri Lanka in south Asia; and Cambodia and Laos in Southeast Asia.
Anyone doubting a company's ability to make money in these fringe markets need only look at Millicom's blow out numbers this week. Millicom doubled the number of its subscribers last year to almost 15 million, while its profits skyrocketed 16-fold to US$169 million for 2006. Its revenues almost doubled in fourth quarter 2006, compared with the same period of 2005.
MICC 1-yr chart
With 70% penetration in the U.S. and over 100% in some Scandinavian countries, only mobile phone companies that focused on fast-growth, emerging markets can boast this kind of growth. When the Internet bubble popped in 2000, emerging markets accounted for just about 10% of mobile phone users worldwide. Today, that same number is a whopping 60%, with emerging markets such as Africa, China and India accounting for 1.6 billion subscribers at the end of 2006. Just last month, India -- the world's fastest-growing market -- added almost as many cell phone users as the population of Manhattan. China Mobile (NYSE:CHL) overtook Vodafone (NASDAQ:VOD) as the world's largest mobile phone operator by number of subscribers sometime last year.
As impressive as these numbers are, only about three out of 10 people in developing markets have mobile phones. In India, that proportion drops to less than 15%. Only when you consider that the number of wireless subscribers doubled to 150 million subscribers -- that's close to the size of the entire U.S market -- in a single year, does the market's potential become apparent. And if the Indian government has its way, that number will triple again by 2010.
That's why Vodafone announced this week that it is buying 67% of India's Hutchison Essar -- India's fourth largest mobile operator -- from Hutchison Telecommunications International in a deal that is worth just under $19 billion. Not since the go-go days of the Internet boom has Vodafone paid so much for an asset. Frankly, Vodafone has little choice. Vodafone has already spent well over $10 billion to get into fast-growth markets in Eastern Europe, South Africa, and Turkey just over the past two years. With growth slowing in developed markets, the British mobile phone giant will continue to look at further acquisition targets in Africa, Europe, and Asia.
The Mobile Phone Megatrend: The Challenges
The rapid growth of mobile phones in developing markets has its special challenges. How to produce phones and services that customers can afford? The cost of mobile phones is high; revenues are scant; and providing service to remote areas can be tricky.
Handset cost is the biggest barrier to entry. Vodafone is working on a mobile phone that would launch for $25 in India. Just yesterday, I met a Harvard-educated entrepreneur in London looking for funding for a venture that would produce a sub-$10 cell phone, focused on low income, emerging markets. He showed me a sample. It was essentially a circuit board -- three credit cards thick -- with 60 minutes of pre-paid, talk time.
That's bad news for established handset makers. Motorola (MOT), the second-largest handset maker in the world, recently reported a drop in margins that the company blamed on fierce competition in emerging markets. Other phone makers are tweaking their features to appeal to millions of new users with special needs. Nokia (NYSE:NOK) phones now have interfaces in 80 languages, including nine languages in India, a country where Nokia boasts a 75% market share. Nokia is also adding several features to make its products more appealing to illiterate customers. Sony Ericsson -- long known more for its upscale phones -- recently unveiled four low cost phones aimed primarily at emerging markets.
Providing services at low cost is no less of a challenge. Deep cuts in tariffs have stimulated growth, but average revenue per user [ARPU] has plummeted. Across Africa, the average revenue per user was $17.50 per month. In India, that figure drops to $10 a month. In Western Europe and the United States, the comparable number is closer to $40.
These pressures force emerging markets players to think more nimbly. India's Bharti Airtel has fully outsourced its network management to equipment makers Nokia and Ericsson to reduce costs. Low income users can add minutes to their pre-paid phones for as little as 20 cents per pop. The falling cost of telecom equipment also helps, as do revenues from additional services. Mobile banking may be the next killer app. Banking over the phone allows customers to transfer money without bank accounts. This is already being tested in markets like the Philippines, South Africa and Kenya. This is how laggards can turn into leaders in the global mobile Megatrends.
Disclosure: Author has no position in any of the above-mentioned securities.