February 14, 2007 2:19 PM PST

Emerging markets fuel cell phone growth

BARCELONA, Spain--Once viewed as expensive and unprofitable, developing regions such as Africa, China and India are now being thought of as the cash cows of the mobile phone industry.

As penetration rates in many developed regions such as Europe approach 90 percent or more, mobile operators and handset makers are looking to new markets where people may have never even picked up a regular telephone, let alone a mobile phone, according to a panel discussion Wednesday at the 3GSM World Congress.

The topic has been widely discussed at the conference here, with mobile operators Vodafone, Orange and Telenor outlining their strategies and making announcements.

3GSM panel

"There is a massive opportunity for our business in India," Arun Sarin, CEO of Vodafone, said during a keynote address on Tuesday. "We are really excited to move into the rural areas. Whenever we get into these rural areas, we find people love to talk. They light up our base stations immediately."

There are still challenges in dealing with existing infrastructure, coming up with low-cost handsets and putting adoption-driving services into place. But the sheer numbers of potential subscribers make emerging markets a likely source of growth.

Today, there are roughly 2.2 billion cell phone subscribers worldwide. Experts predict that will jump to 3 billion by the end of this year, with much of the growth to come from new subscribers in countries like India, China, Africa and Latin America. As only about one third of people in developing markets have a cell phone, operators believe there is a huge promise for profits.

On the eve of the conference, for example, global industry leader Vodafone announced that it had gained a controlling stake in Indian operator Hutchison Essar. In India, about 13 percent of people have cell phones. Vodafone's Sarin said that he expects market penetration to reach 40 percent, or 500 million subscribers, within a few years.

Hurdles to overcome
But chasing after this untapped market is challenging. In many countries, the electrical infrastructure is so unreliable that operators are using generators to power bay stations. And dealing with local government regulations and taxation can also be tough. For example, taxes in Brazil account for roughly 44 percent of a cellular subscriber's monthly bill.

"For companies that have less than a 25 percent profit margin, it's difficult to generate enough cash to expand the business and cover more rural areas where you know the return will be much lower," Roberto Oliveira de Lima, CEO of Brazilian wireless carrier Vivo, said during the panel discussion at 3GSM Wednesday. "So we try to balance the profits as best we can."

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Going mobile at 3GSM
More news from the 3GSM World Congress in Barcelona, one of the world's largest showcases of cutting-edge wireless technology.

In general, mobile operators generate significantly less revenue from customers in emerging markets than they do from customers in more developed regions. For example, major carriers in the U.S. can expect to bring in about $50 in revenue per subscriber a month. Compare that with Brazil, where 80 million people have a family income that totals less than $400 per month. Carriers there can expect between $3.50 to $7 in revenue per user a month.

As a result, operators must select equipment carefully, to make sure that their handsets aren't priced too high for customers and that their network equipment isn't costing the company too much.

"The average ARPU (average revenue per user) isn't what we're used to," said Jon Fredrik Baksaas, CEO of Norwegian carrier Telenor, who also participated in the panel. "So the services we offer have to be tailored to reach new users. And the industry is challenged to work with vendors to bring both the handset and network costs down."

Nokia, the world's largest handset maker, has proven that money can be made from low-cost phones for the developing world. To do so means manufacturing handsets that can sell for less than $100, while still maintaining healthy profit margins.

"In the developing world, most people who can afford a phone already have one," Antonio Torres, director of business development for entry-level mobile phones at Nokia, said during an interview. "The challenge is making phones affordable for people who have an income of about $50 to $100 per month. For these people, buying a cell phone is like buying a car. It's a huge investment."

CONTINUED: Profiting from numbers…
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Telenor, emerging market, Vodafone Group Plc., fuel cell, rural area

 

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