What we know
The BOP is a large group of people, we know they have low income. They can only spend a limited amount on communication. Their income is also irregular. So they can’t spend at a constant rate.
We know they have phones. Almost all of them have used phones at some point and about 45% own one already while a lot of others want to own one. We know that they are getting phones because companies have begun providing services to them and the market is expanding fast.
Making Money at the BOP
Low Average Revenue Per User (ARPU) leads us to ask the question; how do you drive down prices to appeal to the market and still make money? South Asia has hugely prepaid markets. From a consumer point of view it reduces credit mess and credit risk is reduced to companies. Billing costs for companies are also minimized. Printing and distributing scratch cards is also fast becoming redundant as electronic transfers take over. The retailers who bring in customers get rewarded for it only several months later. Companies have figured out a lot of ways to lower operational cost.
Network sharing and infrastructure sharing, outsourcing the management of their networks etc are methods of reducing infrastructure cost. With smaller countries, regional players aggregate volume and discover economies of scale. Employing skilled local management is also a method of reducing cost efficiently.
In terms of broadband the same model is observably taking place. Again, a pre paid and sim based model is coming in fast. Limited consumption packages are increasingly becoming popular. We call it the budget airline model.
The challenge ahead
But heres the challenge. Even while based on this budget telco model two to three years ago Asian companies were doing well. 50-60 percent EBITDA levels were very common. They were way more profitable than a lot of companies operating in the West. But gradually they started making less and less money and now the region is in a situation where a lot of operators are now in the red.
Is this just a temporary blip caused by the global economic crisis? if that is the case a consolidation and the re-emergence of fresh economies of scale will probably be an eventual result of the where the market is heading.