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Asia Pacific Mobile Observatory

The Parallel Development Paths of the Mobile Industry in Asia Pacific

Contents
1. Executive Summary 2. 3. 4. 5. The worlds largest and most diverse mobile market 2.1 Asia Pacific: The Growth Driver for the Global Mobile Industry 2.2 There is no One Asia Pacific 2.3 Market Dynamics in AP17 2.4 Competitive Intensity in the Mobile Industry 2.5 Resilience of the Asia Pacific Mobile Industry amidst a Global Recession The Parallel Paths of Development 3.1 Distinctive Characteristics of the Asia Pacific Market 3.2 Driving Access for the Worlds Next 1 Billion Subscribers 3.3 Taking Mobile to the Next Frontier The Economic Contribution of the Mobile Industry 4.1 The Direct Contribution of Mobile Operators to GDP 4.2 The Value-Add of the Mobile Ecosystem 4.3 The Mobile Ecosystems Contribution to Employment 4.4 Contribution to Public Funding The Forefront of Innovation: Delivering on Unique Customer Needs 5.1 Innovation Along Two Paths 5.2 Developed market innovations 5.3 Emerging Market Innovations 5 10 10 12 14 16 20 22 23 25 28 32 33 34 36 37 38 39 39 44 50 51 54 56 57 59 60 62 66 68

6. Corporate Sustainability: The Environmental and Social Impact 6.1 The Environmental Impact of the Mobile Industry 6.2 The Social Impact of the Mobile Industry 7. Regulatory Enablers to Spur Further Growth 7.1 The Need for Transparent, Predictable and Consultative Regulatory Regimes 7.2 Reducing Ineffective Taxation to Drive Penetration 7.3 Incentives to Drive Universal Access, Not USFs 7.4 Driving Improvements in Spectrum Allocation

8. Appendix: Country-Level Economic Contribution Estimates in AP17 9. About the Authors

Table of figures
Figure 1: Global Mobile Connections Figure 2: Asia Pacific Connections and Penetration Rate Figure 3: AP47 and AP17 Connections Breakdown Figure 4: AP 17 Market Size and Growth Rates by Subscribers Figure 5: Penetration Rate in AP17 Figure 6: Pre-paid and Post-paid Connections in AP17 Figure 7: Number of Wireless Operators in the Market Figure 8: Average Revenue per Minute for Selected Markets Figure 9: CAPEX/Sales Ratios for Selected Countries Figure 10: EBITDA Margins in AP17 Figure 11: Resilience from the Economic Crisis Figure 12: Growth Effects of the ICT Industry Figure 13: Market Characteristics Developed and Emerging Markets in AP17 Figure 14: Mobile vs. Fixed Lines Penetration Figure 15: Fixed and Mobile Broadband Penetration in AP17 Figure 16: AP17 Unconnected Population Breakdown Figure 17: Challenges and Drivers for Growth at the BOP Figure 18: Decreasing Average Sales Prices of handsets Figure 19: Data Revenues as a Percentage of Total Service Revenues Figure 20: Telecom Patents Filed in Major National Patent Offices Figure 21: NTT DOCOMOs Brain for Society Figure 22: AP17: The Direct Contribution of Mobile Operators to GDP Figure 23: Description and Size of Mobile Ecosystem Value Chain in AP17 Figure 24: Framework for Calculating the Mobile Ecosystems Economic Contribution Figure 25: Mobile Ecosystem Value Add (V A) in AP17 Figure 26: Mobile Ecosystem Contribution to Employment in AP17 Figure 27: Mobile Ecosystem Contribution to Public Funding in AP17 Figure 28: Market Share in the Global Handset Market Figure 29: Innovative Advanced Handsets Figure 30: Examples of Service Innovation in Emerging Markets Figure 31: Examples of Cost of Information Faced Figure 32: Savings Survey in the Philippines Figure 33: Perceptions of Mobile Money in the Philippines Figure 34: Low Cost Handset Innovations Figure 35: China Mobiles Alternative Energy BTS Deployment Figure 36: WEF Ranking of the Political and Regulatory Environment Related to the ICT Industry Figure 37: Examples of Telecom-specific Taxes in Asia Pacific Figure 38: USF Operator Levies in Asia Pacific Figure 39: Performance of Universal Service Funds Figure 40: Mobile Ecosystem Value Add in AP17 (by Country) Figure 41: Mobile Ecosystem Contribution to Employment (by Country) Figure 42: Mobile Ecosystem Contribution to Public Funding in AP17 (by Country) 11 12 13 14 15 16 17 17 19 19 20 21 23 24 25 26 26 27 29 29 30 33 34 35 36 37 37 41 42 44 45 46 46 49 52 58 59 60 61 66 66 67

Geographic Scope of this Study

With 47 countries, 3.7 billion people, hundreds of cultures as well as thousands of languages and dialects, Asia Pacific is the most diverse region in the world. Referring to Asia Pacific in singular form without considering the intricacies and complexities among and within its countries ignores the wholeness and richness of this diversity. However, it would be impossible to profile each of the 47 countries in this report in the thoroughness they deserve. Therefore, the focus of this report is on the 99% of subscribers in Asia Pacific who live in 17 countries as shown here. These 17 markets (hereafter referred to as AP17) are extremely diverse economically, culturally, geographically and politically and therefore are a good representation of Asia Pacific as a whole.

2008 Connections AP17 Countries Countries outside AP17

China CHN 618,525,000 Mongolia 1,351,156 Nepal 4,346,670 Bhutan 259,474 Myanmar 295,630 Laos 1,224,562 Macau 848,817 Hong Kong HKG 11,354,000 Taiwan TPE 23,510,925 Philippines PHI 68,696,610 Japan JPN 105,825,300 Korea, South KOR 45,606,984

Pacific Islands American Samoa 37,194 Cocos (Keeling) Islands 180 Cook Islands 10,449 Fiji 764,319 French Polynesia 192,604 Kiribati 850 Marshall Islands 1,878 Micronesia 36,400 Nauru 1,507 New Caledonia 123,894 Niue 919 Northern Mariana Islands 31,828 Samoa 53,864 Tonga 37,557 Vanuatu 40,007

Bangladesh BAN 47,136,721 Pakistan PAK 89,907,188 Sri Lanka SRI India 11,082,071 IND 346,893,808 Thailand Maldives THA 394,679 62,029,276 Indonesia INA 139,878,727 Runion 957,286

Cambodia 3,509,911 Vietnam VIE 58,508,863 Malaysia MAS 25,702,826

Palau 7,524 Guam 146,364 Brunei Darussalam 407,607

Papua New Guinea 1,030,404 Solomon Islands 30,300 Timor-Leste 125,000

Singapore SIN 6,338,000

Australia AUS 23,290,000

New Zealand NZL 4,727,000

Asia Pacific Mobile Observatory

1.

Executive Summary

Asia Pacific is the worlds largest mobile market. Since 2003, the Asia Pacific market has more than tripled in size; adding over a billion connections and growing at 26% CAGR1 to reach 1.7 billion connections in 2008 (see below). As the global mobile market grows beyond 4 billion connections, 2009 is expected to be a landmark year for Asia Pacific as it crosses the 2 billion connections mark for the first time. Over the next five years, an additional 1 billion connections are expected to be added with the Asia Pacific market projected to exceed 3 billion connections in 2013. Global Mobile Connections
CAGR 03-08 CAGR 08-13

Africa Americas Europe: Eastern Europe: Western Middle East USA/Canada Asia Pacific +24% 3,345
279

+10% 5,625 5,151 4,604 4,006


376 454 448 504 227 293 462 506 481 519 263 309 543 552 512 533 298 328 614

6,336 6,020
676 643 622 591 553 536 551 543 326 344 364 348 357 367 556 567 730

48% 29% 32% 8% 32% 11%

14% 7% 5% 2% 10% 5%

2,721 2,189 1,390


82 174 179 370 72 198 669 (38%) 200 307 333 437 133 253 1,058 (39%)

379 393 475 178 274

1,744

135 240 261 405 103 225 819 (37%)

52 127 113 339 56 173 530 (38%)

1,367 (41%)

1,705 (43%)

2,063 (45%)

2,385 (46%)

2,672 (47%)

2,913 (48%)

3,108 (49%)

26%

13%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Wireless Intelligence

This impressive growth achieved in Asia Pacific has been driven by several key factors:

Rapid economic development in the region, increasing citizen prosperity and hence affordability of communications services The opening of markets to the forces of globalisation and foreign direct investment The ambitious rollout of network infrastructure, driving population coverage to nearly 80%

The success of cost-effective pre-paid services (74% of Asia Pacific connections versus 68% in Europe and 16% in USA) enabling consumers to manage their spending and access flexible, low-cost services The introduction of low-cost handsets and the reduction in mobile usage prices driving down the minimum cost of mobile ownership Innovative business models including infrastructure sharing and unique distribution channels making network expansion to rural areas economically viable to operators and consumers

Compounded Annual Growth Rate

Asia Pacific Mobile Observatory

Figure 27
The mobile ecosystem is a major contributor to the Asia Pacific economy. In total, the direct and indirect economic contributions from the mobile ecosystem in AP172 amounted to approximately US$368 billion MobileThe ripple effect from the direct contribution of mobile operators (US$66 billion) is significant, in 2008. Ecosystem Value Add (VA) in AP17 (US$bn, 2008) resulting in a US$144billion supply-side impact when the contribution of the entire ecosystem is considered. The full impact of the mobile industry investment is, however, nearly six times greater than the direct contribution of operators when the demand-side productivity improvement is accounted for. In total, the mobile ecosystem contributed 2.82% of the aggregate GDP (see below). Mobile Ecosystem Value Add (VA) in AP17
(US$bn, 2008) 223.8 368.3

60.8% 48.2 30.3 66.1 17.9% Mobile Operators Related Industries Multiplier Effect Supply-Side Impact Productivity/ Demand-side Impact 1.71% Total Value Add 8.2% 13.1% 39.2% 144.5 100%

% of GDP

0.51%

0.23%

0.37%

1.11%

2.82%

Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

The mobile ecosystem is also a major contributor to employment in the markets it operates in. In 2008, over 10 million people were employed directly and indirectly in the mobile ecosystem. Furthermore, the mobile ecosystem also makes a major contribution to public funding through contributions to VAT/indirect tax, corporate tax, social security taxes of direct and indirect employees, income taxes, and regulatory fees. The mobile ecosystems total contribution to public funding amounted to approximately US$100 billion in the region. The answer for bridging the digital divide lies in mobile technologies. Mobile voice communication is currently the only form of voice communication for many people in Asia Pacific and this likely to continue to be the case in the future. With the continued investment in mobile broadband networks, it is likely that mobile will also be the primary form of data communications and rich internet access for the majority of people in Asia Pacific. The Asia Pacific mobile market is developing along two parallel paths. One development path is bringing mobile access to the next billion consumers at the bottom of the pyramid; while the other development path, in developed markets, is taking mobile services to the next frontier.
2 Though Asia Pacific consists of 47 countries, the focus of this report is on the 17 largest countries (in terms of connections) in Asia Pacific, which contribute over 99% of total connections in Asia Pacific. These countries (listed in the Geographic Scope section) will be referred to herein as AP17. 3 The World Resources Institute and the International Finance Corporation define the base of the economic pyramid as the population segment in which individuals had annual incomes of up to and including $3000 per capita measured in 2002 international dollars (purchasing power parity or PPP).

Today, roughly 2 billion consumers in Asia Pacific still do not have a mobile connection. Of these, 96% can be attributed to five emerging countries: China, India, Indonesia, Pakistan and Bangladesh. China and India alone account for nearly 81% of these unconnected individuals. This presents an opportunity for mobile operators to serve a significant untapped market. However, providing services to these consumers is not without challenges. The main constraint is that the majority of un-served individuals living in the AP17 emerging markets are considered to be at the base of the economic pyramid3. To address the unconnected market, industry and policy makers need to focus on a number of areas: (1) The cost of mobile ownership and usage still needs to be reduced further; lower cost handsets and further innovation on mobile services can help but policy makers also need to carefully consider the impact they have on the total cost of ownership. (2) Network coverage needs to be extended into ever more marginal areas. The mobile industry will continue to find ways of achieving coverage in remote areas, often lacking in basic infrastructure. Policy makers again have a significant influence through spectrum policy, infrastructure sharing policy, universal service funds and through the provision of basic infrastructure, on

the ability of and the cost- effectiveness for industry to bring services to these remote areas. (3) Relevant and practical mobile services and applications that meet the unique needs of individuals at the bottom of the pyramid need to continue to be developed and proliferated to drive uptake among this segment. There remains significant opportunity to create social and economic value through mobile; however, new approaches will be needed for this value to be realised. In parallel, a society of highly-advanced mobile users in developed markets is continuously finding new ways to use mobile phones, fuelled by innovations from by mobile operators and the greater ecosystem. In doing so, they are truly propelling the mobile industry to the next frontier. In developed markets across Asia Pacific, mobile phones are more than just a basic communication tool: they are an indispensable part of individuals lives. People in developed markets in Asia view mobile devices as: A device from which to organise their busy lives, making them more productive and efficient; A central platform for entertainment (gaming, pictures, video, music); A more convenient means for accessing products and services; A personal extension that embodies and documents their lifestyle and allows for intense personalisation and self-expression. As a result, developed markets in Asia Pacific are experiencing rapid adoption of services that extend beyond basic voice communication with data revenues contributing over one third of total revenues. It is predicted that by 2013, data revenues in developed markets will constitute nearly 50% of revenues, with Asia Pacific developed markets leading the way for North America and Western Europe to follow. To manage the different development paths, the mobile ecosystem in Asia Pacific is pioneering innovation. Players in the mobile ecosystem in Asia Pacific have made great progress in challenging their business models and developing innovative products and services that meet the unique demands of customers in both these developed and emerging markets. The mobile industry is increasingly making a positive impact on environmental sustainability and social development in the region. Operators in Asia Pacific are taking an increasing role in mitigating the effects of climate change. To reduce emissions, mobile operators and vendors in Asia Pacific are finding new ways to improve energy efficiency, by: designing low energy base station sites; deploying base-stations powered by renewable energy; implementing infrastructure optimisation and sharing, and reducing mobile device life cycle emissions through design and recycling. The industry is also acting as a catalyst for other sectors, enabling further reductions through the use of Machine-to-Machine (M2M) mobile technologies to deliver smart solutions. Mobile operators are also having a profound impact on social development, employing innovative corporate social responsibility (CSR) programmes largely focused on education, health and community development. Regulators have a critical role to play to ensure that Asia Pacific continues to grow and deliver value for customers, employees and society. Governments and regulators must create an environment that allows the mobile industry to further innovate and create value for consumers. Four key regulatory issues are likely to be important in the Asia Pacific region: 1) the need for transparent, predictable and consultative regulatory regimes; 2) reducing mobile-specific taxation and fees to drive penetration; 3) embedding incentives to drive universal access, and 4) reviewing spectrum management policies and accelerating harmonised spectrum allocation. The first Asian Mobile Observatory has touched upon many issues across a diverse footprint of countries and market situations. The industry outlook is positive and the massive contribution the industry continues to make on the economic, environmental and social agenda of the 47 countries in Asia Pacific will in many ways surprise even many industry insiders. A relentless focus on bridging the digital divide and driving innovation for the mobile industry is the expectation in the years to come, and regulators and governments will need to develop and implement sustainable policies to aid this ambitious growth agenda.

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Asia Pacific Mobile Observatory

2.

The worlds largest and most diverse mobile market

11

Key Messages:

Sheer population size and rapid economic development have led to explosive growth in the mobile sector. With almost 2 billion connections in 2008 or nearly half of the worlds total connections, Asia Pacific (AP) is the largest mobile market globally. Future growth in the industry is dependent on AP, 13% CAGR is expected from 2008 to 2013. There is no one Asia. Tremendous cultural, economic and consumer diversity exists and the mobile markets in AP each have their own unique development paths. Over 99% of the AP market is driven by 17 countries. The AP market is highly competitive with 3-15 players in each market, creating a competitive environment for consumers and resulting in price declines of up to 80% over the past 4 years.

Operators in Asia Pacific are resilient; they are well positioned to rebound from the recession because of their relatively better liquidity and debt positions.

2.1 Asia Pacific: The Growth Driver for the Global Mobile Industry
In 2002, the Asia Pacific (AP) region cemented its place as the worlds largest mobile market, surpassing Europe in total connections for the first time. Since then, the market in Asia Pacific has more than tripled in size, adding over a billion connections since 2003, growing at 26% CAGR4 to reach 1.7 billion connections in 2008 (see Figure 1). As the global mobile market grows beyond 4 billion connections, 2009 is expected to be another landmark year for Asia Pacific as it crosses the 2 billion connections mark for the first time. Figure 1: Global Mobile Connections

CAGR 03-08

CAGR 08-13

Africa Americas Europe: Eastern Europe: Western Middle East USA/Canada Asia Pacific +24% 3,345
279

+10% 5,625 5,151 4,604 4,006


376 454 448 504 227 293 462 506 481 519 263 309 543 552 512 533 298 328 614

6,336 6,020
676 643 622 591 553 536 551 543 326 344 364 348 357 367 556 567 730

48% 29% 32% 8% 32% 11%

14% 7% 5% 2% 10% 5%

2,721 2,189 1,390


82 174 179 370 72 198 669 (38%) 200 307 333 437 133 253 1,058 (39%)

379 393 475 178 274

1,744

135 240 261 405 103 225 819 (37%)

52 127 113 339 56 173 530 (38%)

1,367 (41%)

1,705 (43%)

2,063 (45%)

2,385 (46%)

2,672 (47%)

2,913 (48%)

3,108 (49%)

26%

13%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Wireless Intelligence

4 Compounded Annual Growth Rate

12

Asia Pacific Mobile Observatory

Even with the global economic slowdown, the Asia Pacific market is expected to continue its double digit growth (13%) over the next five years, crossing 3 billion subscribers or approximately half of the worlds mobile connections by 2013. Though the growth rate in Asia Pacific will be slower over the next five years, it is expected to add the same number of connections over the next five years (over 1 billion) as it has over the past five years, reflecting the massive scale of the industry in the region. This impressive growth achieved in Asia Pacific has been driven by several key factors:

Rapid economic development in the region, increasing citizen prosperity and hence affordability for communications services The opening of markets to the forces of globalisation and foreign direct investment

The ambitious rollout of mobile network infrastructure by operators, driving mobile coverage to over 75% of the population in 2006 compared to 50% just five years earlier

The success of cost-effective pre-paid services (74% of AP connections versus 68% in Europe and 16% in USA) allowing consumers to take control of their spending and gain access to flexible, low-cost voice and SMS services The introduction of low-cost handsets and the reduction in mobile usage prices driving down the minimum cost of mobile ownership

Figure 2

Innovative business models including infrastructure-sharing and unique distribution strategies making the expansion of network coverage to rural areas economically viable to operators and consumers

Asia Pacific Connections and Penetration Rate


Figure 2: Asia Pacific Connections and Penetration Rate
Connections (Millions) Penetration Rate

These factors have contributed to the growth in penetration of mobile services in Asia Pacific from less than 10% in 2000 to 46% eight years later (see Figure 2). As impressive as this is, it also highlights the potential and need for substantial growth to connect the other half of the population in Asia Pacific. By 2013, mobile penetration is projected to extend to 80% of the population.

3,108 2,913 2,672 80% 2,385 70% 2,063 +22% 1,705 1,367 1,058 819 669 530 19% 15% 23% 29% 37% 46% 55% 63% 75%

227 7% 2000

329 10% 2001

428 12%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Wireless Intelligence, Euromonitor

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2.2 There is no One Asia Pacific


With 47 countries, 3.7 billion people, hundreds of cultures as well as thousands of languages and dialects, Asia Pacific is the most diverse region in the world. In fact, Asia Pacific is home to some of the largest and smallest countries in the world by various measures5:

Population: China: 1.34 billion [#1/223 countries], Niue: 2,100 [#220/223] Area: China: 9.6 million km2 [#3/233], Nauru: 21 km2 [#227/233]

Population Density: Macau: 18,700/km2 [#1/238], Mongolia: 1.7/km2 [#235/238] GDP Per Capita: Singapore: $52,000 [#7/194], Nepal: $1,100 [#175/194] Literacy Rates: Japan: 99%, Bangladesh: 47.5%

Languages: China alone has seven known variations of the Chinese language, the Tibeto-Burman language family has 12 variations

Referring to Asia Pacific in singular form without considering the intricacies and complexities among and within its countries ignores the wholeness and richness of this diversity. Asia Pacific is equally diverse from a telecoms perspective with vast differences in the characteristics of the mobile markets in its 47 countries. Some examples include:

Penetration: Singapore: 173%, Myanmar: <1%

Number of Countries with 3G Network Availability: 22 out of 47

Data Revenues as a Percentage of Total Revenues: Philippines: 45% , Pakistan: 8%

Pre-paid Connections as a Percentage of Total Connections: Pakistan (98.4%), South Korea (0.7%)

Figure 3to profile each of the 47 countries in this report with the richness and thoroughness they be impossible
deserve. Additionally, the availability and reliability of data varies perhaps as much as the diversity of

Given this vast diversity in mobile characteristics as well as the macro-economic environment, it would

these countries. Therefore, the focus of this report will be AP47 and AP17 Connections Breakdown on the 99% of subscribers in Asia Pacific who live in the 17 countries as shown in Figure 3. These 17 markets (hereafter referred to as AP17) are extremely diverse economically, culturally, geographically and politically and therefore are a good representation of Asia Pacific as a whole. Figure 3: AP47 and AP17 Connections Breakdown
2008 Connections (Millions) AP17 countries represent >99% of total Asia Pacific connections in 2008 46 26 24 23 11 11 6 5 16 1,705

90 106 140 347

69

62

59

47

Remaining 30 countries make up <1% of Total AP Connections

619

CHN

IND

INA

JPN

PAK

PHI

THA

VIE

BAN

KOR

MAS

TPE

AUS

HKG

SRI

SIN

NZL

5 The total number of countries for each metric varies depending on the various sources quoted.

Source: Wireless Intelligence

Rest of Asia

Asia Pacific Total

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Asia Pacific Mobile Observatory

For the purposes of this report, countries outside AP17 will be covered through case studies and anecdotes to highlight their unique characteristics, noteworthy market moves and cutting-edge innovations.

2.3 Market Dynamics in AP17


Within AP17, the majority of countries have experienced annual double digit growth from 2000 to 2008. The countries in South Asia -- Pakistan, Bangladesh, India and Sri Lanka have grown at astounding compound annual rates of 97%, 90%, 81% and 54% respectively (see Figure 4). Four countries (China, India, Indonesia, and Japan) have grown to a scale of above 100 million subscribers, together contributing to over 70% of AP17 connections. Chinas current subscriber base of 619 million is 100 million connections larger than all of Western Europe combined! In contrast, the developed markets in AP have grown at high single-digit growth rates comparable to markets in Western Europe, reflecting the maturity and high penetration rates of these markets. Figure 4: AP 17 Market Size and Growth Rates by Subscribers
Rest of Population Penetration

Population
1,344 1,143 233 173 161 128
17% 40% 54% 70% 48% 71%

64 89 87
3% 23% 33%

48
5%

Penetration Rate (1)

97% 83% 60% 46% 30% 52% 29% 77% 95% 67%

CHN

IND

INA

PAK

BAN

JPN

PHI VIE THA KOR

CAGR 2000 2008:

28% Other AP17 Population (m) % Connected CAGR 2000 - 2008 MAS 27.82 92% 23% TPE 23.20 101% 4% AUS 20.85 112% 11%

81% SRI 19.78 56% 54% HKG 7.33 155% 11%

58% NZL 4.17 113% 12%

97%

90% 8% 85% 72% 42% 9% SIN 3.66 173% 13%

(1) Penetration rates are calculated using connections over population. This overestimates the penetration rates due to multiple SIM ownerships per citizen. Unconnected citizens are actually higher then projected. Source: Wireless Intelligence, Euromonitor, A.T. Kearney

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The penetration rates of countries across AP17 vary considerably reflecting the differences in maturity, development and subscriber usage characteristics among the regions markets (see Figure 5). Penetration rates in Singapore and Hong Kong exceed 150% (173% and 155% respectively). In fact, five countries among AP17 have penetration rates greater than 100%, showcasing the pervasive use of multiple SIMs by mobile users in Asia Pacific. While five of the countries in Asia Pacific have penetrations over 100%, there are other markets which are still in the infancy stage. For example, the Republic of Nauru, located in the Pacific, is the worlds smallest independent nation of 21 km2 and a population of 10,000 people. September 1st 2009 was declared a national holiday, as Nauruans enjoyed mobile communications for the first time with the launch of Digicels new network. In addition to voice communications, Digicel will be launching a GPRS/EDGEPenetration Rateto enable internet access through mobile devices for the first time. enabled network in AP17 Figure 5: Penetration Rate in AP17
173% 155%

113%

112% 101% 97% 95% 92% 83% 77% 67% 60% 56%

52%

46% 30% 29%

47% WA

SIN

HKG

NZL

AUS

TPE

THA

KOR

MAS

JPN

PHI

VIE

INA

SRI

PAK

CHN

IND

BAN

Source: Wireless Intelligence, Euromonitor

Interestingly, countries with lower penetration (Bangladesh, India and China with 29%, 30% and 46% penetration respectively) have at least 1.6 billion people who do not have a mobile connection yet. This shows the tremendous growth potential in Asia Pacific. In many countries in Asia Pacific, the tendency to use multiple SIM cards overstates the actual number of individuals with an active connection. For example, according to a survey conducted by Nielsen Media6, 87% of Australians reported owning a mobile phone compared to the total mobile connections penetration of 112%. Mobile customers use multiple connections for varying reasons including to take advantage of attractive promotions (long-distance rates, own-network rates, product bundles), and to split voice and data services to different handsets. In countries such as Indonesia and India, the multiple SIM phenomenon had been driven inadvertently by regulatory action, when spectrum was licensed at considerably cheaper rates for limited mobility CDMA offerings in order to drive adoption in place of traditional fixed lines. However, this also cannibalized the full mobility offerings and individuals took advantage of the benefits of each type of technology. Nowadays, as the tariffs between CDMA and GSM have converged, this is no longer a driver for multiple SIMs. The expectation is that over time, multiple SIM card ownership will decrease though it will likely not disappear as some people may still prefer holding multiple handsets (data vs. voice or personal vs. work).
6 Nielsen Media, 2006: AsiaPacific is worlds most prolific mobile phone market; Nielsen survey finds HK, Korea nearing saturation.

The introduction of pre-paid mobile services has been a vital enabler for the proliferation of mobile connections in Asia Pacific. Pre-paid pricing options offer mass-market consumers access to mobile services at a far lower entry cost than post-paid contracts. Perhaps more importantly, pre-paid services offer

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Asia Pacific Mobile Observatory

consumers that have less financial stability or cannot rely on a regular pay cheque the flexibility to purchase mobile credits only when they can afford to, as opposed to committing to an often-required 1 to 3-year contract. Additionally, with poor credit checking facilities in some developing countries in Asia, offering post-paid services could prove disastrous for operators to determine the individuals capable of paying for mobile services, as well as to collect payments in such environments. It is not surprising therefore to note that, on average, 74% of total AP17 connections are pre-paid versus 68% in Europe and 16% in the US (see Figure 6). In fact, in seven countries among AP17, prepaid connections make up almost the entirety (>90%) of their total connections. These seven countries are also amongst the less wealthy nations of the AP17. In contrast, Japan and South Korea have amongst the highest percentage of post-paid connections in the world (98% and 99% respectively). It would be too simplistic, however, to explain this dichotomy in AP17 as an developed market versus developing market or a rich versus poor phenomenon. Doing so would disregard the fact that some of the more affluent and most developed markets (Italy: 85%, Greece: 73%, Ireland 65%) in the world also have a substantial portion of pre-paid connections. Other factors that also contribute to the considerable differences in pre-paid versus post-paid connections include varying consumer needs, business models, historical market developments, education and awareness, and trust in the industry and/or businesses generally.

Figure 6

Figure 6: of Pre-Paid and Post-Paid AP17 PercentagePre-paid and Post-paid Connections inConnections in AP17
Post-Paid Pre-Paid 2% 2% 2% 2% 3% 7% 10% 16% 19% 28% 33% 50% 51% 56% WA: 74% Prepaid 98% 99%

81%

98%

98%

98%

98%

97%

93%

90%

84%

81% 72% 67% 50% 49% 44%

19% 2%
PAK PHI VIE INA BAN SRI THA IND MAS CHN NZL HKG SIN AUS TPE JPN

1%
KOR

Source: Wireless Intelligence

2.4 Competitive Intensity in the Mobile Industry


Competition in wireless markets in Asia Pacific is among the most dynamic in the world. Twelve countries in the AP17 have at least 5 wireless networks, excluding the multiple service providers and MVNOs (see Figure 7). India, as an extreme example, has 15 mobile operators present in the market in 2008, with more set to enter the market in coming years. Indonesia has 11 mobile operators, with the top 3 GSM operators holding over 80% of the market; while the remaining 20% is shared amongst the remaining operators.

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Figure 7
(2004-08)

Number of wireless operators in the Market Figure 7: Number of Wireless Operators in the market
Operators with CDMA Networks1 Operators with GSM Networks 15

12 11 9 7 6 5 4 4 9 8 6 2 6 3 6 1 5 1 5 3 2 KOR 5 1 4 4 1 3 JPN 4 1 3 NZL 7

3 1 2 CHN

3 3 SIN

9 IND

5 BAN

5 INA

4 SRI

5 PAK

4 PHI

4 THA

3 VIE

4 HKG

4 TPE

4 MAS

4 AUS

(1) Double counts operators who offer both CDMA and GSM products (2) Includes fixed-line wireless operators Source: Wireless Intelligence, A.T. Kearney analysis

Average Revenue Per Minute (US$) for Selected Emerging Markets


Figure 8: Average Revenue per Minute for Selected Markets
2004 2008 % Change in effective price per minute 0.41

Figure 8

Evidence of intensifying competition can be seen in cellular prices dropping sharply in recent years. Average revenue per minute (ARPM) in Asia Pacific has fallen significantly from 2004 to 2008 (see Figure 8). Not unexpectedly, the steepest ARPM declines have been seen in emerging markets where penetration growth has been the strongest. India, for instance, has seen ARPM plummet by 55% from US$0.04 per minute to US$0.02 per minute, making it among the worlds cheapest mobile markets today. Likewise, Bangladesh has seen its ARPM fall by 80% to just US$0.01 per minute. These declines, while partly driven by reduced per-minute pricing as a result of increased competition, are also the result of increasing take-up of attractive bundled value plans such as free minutes. However, the belief is that prices will stabilise in the near term, as further drastic cuts could threaten to bring prices below economically sustainable thresholds.

0.40

0.32

0.21 0.18 0.17

0.19 0.15 0.12 0.08 0.05 0.04 0.04 0.02 0.07 0.02 0.04 0.02 0.06 0.01 BAN -80%

JPN -4%

PHI -33%

KOR -4%

AUS -21%

MAS -29%

HKG -15%

CHN -34%

PAK -71%

IND -55%

Source: Wireless Intelligence, Merrill Lynch Wireless Matrix

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Asia Pacific Mobile Observatory

There is also intense competition in markets that have strong representation across both full mobility and limited mobility services, such as Indonesia and India. These markets have seen severe price pressure due to market forces, especially in recent years. As a large number of limited mobility subscribers do not travel much, they tend to use limited mobility services just as they would a full mobility GSM service. As a result, many of these markets do not enjoy a premium price over limited mobility (as many mature markets do vis-a-vis fixed line access). This has led to a further downward impact on full mobility GSM pricing. In mature markets however, ARPM declines have mostly bottomed out. Japan and Korea are examples of Asian countries that have actually seen ARPMs remain reasonably flat from 2004 2008, falling by no more than 4% annually. With already among the worlds highest market penetrations, sophisticated subscribers in Japan or Korea are less price-sensitive. Competitive differentiation occurs in terms of innovative products (such as new wireless data products), quality, as well as customer service. Within various markets in Asia Pacific, there are a tremendous number of brands all competing against each other. In Indonesia for instance, there are over 20 brands across both post paid and prepaid segments, as well as the GSM and CDMA segments. As of 2008, there were 12 GSM and 11 CDMA brands; and 13 pre-paid and post-paid brands. Each of these brands has attempted a different value proposition targeted at individual customer segments, ranging from professionals to factory workers to trendy college students. Across many markets, operators have begun to adopt a more sophisticated customer segmentation approach in an attempt to capture or retain targeted customer segments. However, despite lower revenues per minute, operators in many countries have maintained tremendous commitments to capital expenditure. Across AP17, 2008 CAPEX/Sales ratio has averaged just over 30% (see Figure 9) though this ratio can vary significantly depending on the stage of development of the mobile market. Leading the pack are operators from India: Reliance Communications CAPEX/Sales ratio of 102.3% is driven by aggressive expansion of its GSM network; Idea and Airtel likewise are driving high costs of rollout in various circles. With prices already among the lowest in the world, investing in network and service quality could be an important differentiator in the near future. Operators in Asia Pacific are investing in networks in many concurrent ways: they are rolling out new sites, increasing capacity on existing sites and also deploying 3G/HSPA+ sites to drive increased access to data services. CAPEX is expected to remain high for the next few years, as operators aspire to complete their work on rolling out affordable access to the masses.

19

Figure 10
CAPEX/Sales Ratios for Selected Operators in AP17 Figure 9: CAPEX/Sales Ratios for Selected Countries
(2008, %)
102.3%

69.3% 43.9% 33.1% 12.6% 18.4% 13.0% 32.4% 14.5% 16.4% 10.7% Taiwan Mobile 14.3% 31.7%

AIS

AirTel

China Mobile

DiGi

FarEasTone

Globe

Idea

LG Telecom

RCVL

SK Telecom

Total Access

Source: ML Global Wireless Matrix (2009), A.T. Kearney analysis

EBITDA Margins and Developments for AP17


(2008) 10: EBITDA Margins in AP17 Figure
Average EBITDA EBITDA YoY Change (bps) 62.4%

The joint impact of falling ARPMs and increasing costs has seen operator margins being negatively impacted across most markets. Currently, the EBITDA margin across the AP17 is just above 40%: this is expected to decline Figure 11 even further, in line with falling margins seen in other parts of the world (see Figure 10). From 2004 2008, Indonesia and India have seen EBITDA falling by ~700 basis points.

56.5% 46.7% 46.5% 44.3% 43.9% 43.5% 43.4% 41.3% 38.8% 36.2%

33.0%

32.3%

32.0%

40.8% 28.6% 23.1%

PHI

INA

CHN

TPE

MAS

JPN 314.0

THA

NZL

PAK

SIN

BAN

AUS

IND

KOR 490.0

HKG

SRI

110.0

91.0 -18.0 -178.0

64.0

169.0

18.0 -220.0

23.1 -127.3

-334.0 -756.0

-478.0 -652.0 -680.0

Source: ML Global Wireless Matrix (2009), A.T. Kearney analysis

20

Asia Pacific Mobile Observatory

2.5 Resilience of the Asia Pacific Mobile Industry amidst a Global Recession
There was much debate at the end of 2008 and in early 2009 about the global economic crisis and the resultant slowdown in the economy. Many economists and governments in Asia were apprehensive about the financial crisis and its impact on the telecommunications industry, specifically for Asia Pacific operators. A recent study conducted by A.T. Kearney illustrated that operators in Asia Pacific were likely to emerge more strongly from the crisis than their competitors in Europe and North America. The study assessed over 90 operators worldwide against several common measures of asset intensive industries such as telecommunications: 1) Growth is fuelled by constant investment; 2) Margins are linked directly to utilisation levels; 3) Success of operators is dependent on the breadth and depth of the product offering; and 4) Telecoms industries enjoy heavy economies of scale. Given that the crisis was sparked by a credit crunch and that the resulting impact was the inability of many companies to raise financing when the credit markets froze, the study focused on the degree of leverage the operator had, the scale of the business, the valuation impact due to the decrease in investor confidence and the liquidity levels on the balance sheet of the operator. When plotting the 6-month market capitalisation erosion against the Net Debt/EBITDA of the various operators, three zones emerged. This analysis showed that significantly more Asia Pacific operators were in the Attack Zone than the operators in the other regions of the world (see Figure 11). Operators in Zone 1, the Attack Zone, are in a strong position as they have high liquidity and low debt. These operators can pursue M&A and also fund aggressive organic growth in attractive segments to enhance their competitive position. Figure 12 European operators appear to be finding the current environment most challenging, Comparatively, according to this analysis. Figure 11: Resilience to the Economic Crisis
86% Comparison Between Regions

Resilience from the Economic Crisis

Key Observations Of the sample of 90 operators considered, APAC has the highest % of operators in the Attack zone, followed by Americas, Middle East and Africa, and Europe
50%

75% 71%

% of Operators in Attack

Operators in mature markets (Europe, North America) appear to be more adversely impacted by the crisis 25% of operators from Americas fall into Defend 27% of European operators are in Reinforce and 19% in Defend Asia Pacific telecom operators are well positioned to capitalise on the growth prospects

Asia Pacific (28)

Americas (28)

MEA (7)

Europe (26)

Number of Operators Considered in this Study


Source: A.T. Kearney Analysis

21

Figure 13

In fact, studies even point out that emerging economies like Asia Pacific have a steeper benefits case than developed economies. For example, a new study by the World Bank that analysed 120 countries found a strong correlation between mobile, broadband and economic development in both developing and developed countries. In developed countries, a 10% increase in broadband penetration contributes 1.21% in per capita GDP growth; yet in developing countries the same growth in penetration contributed 1.38% per capita GDP growth (see Figure 12).

dial-up. Clearly there is a 10% case to be made of the benefits of Increase in GDP growth per strongincrease in telecom penetration driving penetration in mobile broadband from these figures as both mobile and broadband independently raise GDP significantly. Figure 12: Growth Effects of the ICT Industry
Percentage Points 1.5 Developed Economies Emerging Economies 1.38 1.21 1.12 1.0 0.81 0.73 0.60 0.5 0.43 0.77

Growth in mobile of ICT Growth Effects penetration was also strongly correlated to GDP however, less so than broadband or

0.0 Fixed- Line Phone


Source: World Bank, Qiang 2009

Mobile Phone

Dial-Up Internet

Broadband Internet

22

Asia Pacific Mobile Observatory

3.

The Parallel Paths of Development

23

Key Messages:

Mobile voice communications is likely to be the only form of voice communication for the majority of people in AP; and mobile broadband will likely be the only form of data communications for the majority of people in AP

While the industry is a complex mix of 47 different markets, broadly speaking it is developing along two fundamentally different paths: In emerging markets in AP17, operators are driving access to basic services for the worlds next 1 billion subscribers, the majority of which are low-income individuals at the bottom of the economic pyramid. Operators are attempting to break down the barriers for adoption: affordability, availability and relevant applications and services In parallel, consumers and operators in developed AP17 countries are finding novel applications and services that are redefining the boundaries of the industry globally

3.1 Distinctive Characteristics of the Asia Pacific Market


The characteristics of Asia Pacific markets are vastly different as can be seen in Figure 13. In many countries in Asia Pacific, the mobile phone was the first form of communication available for the mass market, since access to a fixed line was problematic. This was in stark contrast to developed markets where fixed lines were largely ubiquitous when the first mobile phones came along and many people had already experienced the power of communicating with each other over a telephone line. In these developed countries, mobile usage became complementary to fixed line usage. in Asia Figure 15 Pacific. Firstly, it can be argued that mobile voice communications is likely to be the only form of This distinctive phenomenon has a couple of interesting implications for emerging and developed markets voice communication for the majority of people in Asia Pacific. Secondly, as a result, it can be argued that mobile broadband will likely be the only form of data communications for the majority of people in Asia Pacific. Figure 13: Market Characteristics Developed and Emerging Markets in AP17
Developed Markets Emerging Markets

Market Characteristics Developed vs. Emerging Markets in AP17

Countries Included: Mobile Penetration

Australia, Hong Kong, Japan, New Zealand, South Korea, Singapore, Taiwan Average penetration rate at 119%, implying >1 connection per person Average 3G+ penetration rate is 51%

Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand, Vietnam Average penetration is 61%, almost half

3G+(1) Penetration Broadband Penetration

Average 3G+ penetration rate is 5%

Average fixed broadband penetration is 70% Additions to connections are at 8% of total 2008 connections Average ARPU at US$34, but declining at 4%

Average fixed broadband penetration is 7% Additions are still growing strong at 23% of total connections in 2008 Average ARPU at US$7, (almost 1/5 of developed nations) but declining at 13%

Net Additions

ARPU Trends

(1) Network speeds at 3G levels and above, including CDMA2000 1xEVDO, CDMA2000 1xEVDO Rev. A, WCDMA, WCDMAHSPA, TD-SCDMA Source: Wireless Intelligence A.T. Kearney analysis

As can be seen in Figure 14, mobile voice communications will be the primary form of communication for the majority of people in Asia Pacific. The larger markets, with lower fixed line density, are on the left hand side of the graph. This is most apparent in Thailand and the Philippines, where mobile penetration rates are 97% and 77% respectively compared to fixed line density which is 24% and 10%. In contrast, developed markets such as Australia, South Korea and Singapore are near or above 100% penetration for both fixed and mobile, showing they are complementary by nature. Fixed line penetration in most countries is unlikely to grow further, which means that in countries like Thailand and the Philippines the only way the vast majority of people will communicate with each other will be via the mobile phone.

24

Asia Pacific Mobile Observatory

Figure 16
Mobile vs. Fixed Lines Penetration
Mobile Penetration 200% Emerging Markets Averages Fixed Line: 29% Mobile: 61% 150% HKG Developed Markets Averages Fixed Line: 99% Mobile: 119%

(2008, %) Figure 14: Mobile vs. Fixed Lines Penetration

SIN

NZL 100% THA PHI VIE INA 50% IND BAN 0% 0% 10% Population size
(1) Total consumer fixed lines over total households Source: Wireless Intelligence, Euromonitor, Ovum, A.T. Kearney Analysis

AUS KOR TPE

MAS SRI JPN

PAK

CHN

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

Fixed Lines Household Penetration (1)

The penetration of broadband follows the same logic as above: countries that have high fixed line penetration typically have high levels of broadband adoption due to the rollout of xDSL services. In fact, developed markets in Asia Pacific have an average household broadband penetration rate of 80%, even greater than the penetration rates in Western Europe (55%) and North America (66%). Furthermore, South Korea and Singapore rank first and second in the world with penetration rates of 83% and 82% respectively. However, since a large proportion of customers in Asia Pacific do not have access to fixed line services, their gateway to broadband access is likely mobile broadband. At present, emerging countries in Asia Pacific have an average household fixed broadband penetration rate which is ten times less (7%) than the developed markets in Asia Pacific (though total population is nine times greater than the developed markets). For example, in India, only 5 million households -- or 2% of total households -- have broadband internet access. Hence, 217 million households do not have adequate internet access. The continents weighted average penetration is only 19% due to the sheer population size in the emerging markets. Nearly 700 million households do not have broadband access in Asia Pacific today and thus sit on the wrong side of the digital divide. The answer for narrowing the digital divide in Asia Pacific will lie in mobile broadband technologies7. Mobile broadband connections (114 million) are currently fewer than fixed broadband subscribers (182 million) but are expected to surpass fixed broadband connections by 2011. By 2013, mobile broadband connections will reach 753 million, far exceeding fixed broadband connections (311 million). The additional 636 million connections will connect a sizeable portion of the unconnected Asia Pacific population to the internet. Australia has been a driving force in mobile broadband deployment. Telstra, Australias largest operator, has launched the worlds first HSPA+ (or HSPA Evolved) network which promotes the fastest broadband speeds at 21 Mbps (and upgrade to 42Mbps currently being rolled out) and mobile broadband coverage of 99% of the population in Australia.

25

Figure 17
Fixed and Mobile Broadband Penetration in AP17
Figure 15: Fixed and Mobile Broadband Penetration in AP17
AP17 Mobile(1) vs. Fixed Broadband Subscribers (Millions) CAGR 2007-13 19% 55% 753

Fixed Broadband Penetration in AP17 (2008, % of Households) Developed Markets Avg.: 70% 84% Emerging Markets Avg. : 7%

83%

82%

Fixed Broadband Mobile Broadband 67% 61% USA / W. Europe Average 55% 69%

48%

311 AP17 WA: 19% 10%

23%

18%

5%

3%

2%

2%

1%

1%

0%

HKG KOR SIN TPE JPN AUS NZL MAS CHN THA PHI VIE IND SRI INA PAK BAN
(1) Mobile Broadband Connections include CDMA 2000 1x EVDO, Rev A and WCDMA-HSPA family Source: Ovum, ITU, Wireless Intelligence, Frost & Sullivan, A.T. Kearney analysis

2006

2007

2008

2009

2010

2011

2012

2013

The mobile industry in Asia Pacific can, therefore, be characterised as developing along two fundamentally different paths: 1) A path of Driving access for the Worlds next 1 billion Subscribers where there still remains a massive opportunity for many industry players to provide very basic voice services to the low-income segments and underpenetrated consumer and business segments at the Bottom of the Pyramid. 2) A path of Taking Mobile to the Next Frontier where a relatively small base of advanced users in developed markets (primarily in North Asia) is pushing the industrys boundaries; finding novel applications and services that are challenging our perceptions and preconceptions of what owning and using a mobile phone means to us today.

3.2 Driving Access for the Worlds Next 1 Billion Subscribers


Today, roughly 2 billion consumers in Asia Pacific still do not have a mobile connection (see Figure 17). Of these, 96% can be attributed to five emerging countries: China, India, Indonesia, Pakistan and Bangladesh. China and India alone account for nearly 81% of these unconnected individuals. This presents a significant growth opportunity for mobile operators to serve a massive untapped market. However, converting these individuals into customers will not be easy. The large majority of individuals living in the AP17 emerging markets are considered to be at the base of the economic pyramid8. The people in this population segment are the lowest-income earners in society and thus have little disposable income to spend on even the basic necessities, let alone telecommunications. Furthermore, since some of this population already has a mobile connection, it can be assumed that those remaining are likely to be the poorest among this already marginalised segment of society.

7 Mobile Broadband is defined in this paper as mobile technologies that enable data download speeds greater than 1Mbps, such as W-CDMA / HSPA (HSDPA, HSUPA, HSPA+), CDMA2000 1x-EVDO (and Rev. A) and TDSCDMA. 8 The World Resources Institute and the International Finance Corporation define the base of the economic pyramid as the population segment in which individuals had annual incomes of up to and including $3000 per capita measured in 2002 international dollars (purchasing power parity or PPP).

26

Asia Pacific Mobile Observatory

AP17 Unconnected Population Breakdown (Millions)


Figure 16: AP17 Unconnected Population Breakdown
(Millions) 83 114 77 3,579 93 797

Figure 18

726

These 5 countries make up 96% of the total unconnected population 1,689

AP17 Subscribers

CHN

IND

INA

PAK

BAN

Rest of AP17

Total Population

Source: Wireless Intelligence, Euromonitor, A.T. Kearney Analysis

Much has been discussed about the aggregate economic opportunity as well as the development potential from serving the bottom of the pyramid (BOP) since Prahalad and Hart first introduced the concept in 20029. Conventional wisdom holds that, in order to succeed at the BOP, companies must fundamentally adapt their business models as well as their products and services. The same holds true for the mobile industry. The massive untapped market at the BOP presents three broad challenges for growth based on the unique needs of individuals at the BOPs that must be catered for with a new approach. The three challenges and drivers for growth are: Affordability, availability and practical applications (see Figure 17).

Figure 19

Figure 17: Challenges and Drivers for Growth at the BOP1

Affordability: Biggest barrier for take up at the BOP2


% of respondents at the BOP who rated affordability as the reason for no connection.

Low disposable income and unreliable cash-flow make affordability the biggest barrier for take-up 1. Affordability Decreasing handset and usage prices along with new business models aimed at affordability (pre-paid services, alling-party pays, connections sharing, IT outsourcing) will drive growth

India

82%

2. Availability

With population coverage below 70% in BOP countries, a significant portion of people (particularly in rural areas) could not get access even if they wanted to and could afford it Innovative solutions for network expansion and distribution models that expand coverage economically to rural areas (tower sharing, indirect distribution models) will boost take-up

Thailand

77%

Philippines

77%

Pakistan 3. Relevant Applications & Services Subscribers at the BOP need practical applications that are essential for improving their lives such as agriculture, health, and education Practical applications that show tangible benefits to potential consumers will drive take-up and usage Sri Lanka

75%

72%

Source: (1) A.T. Kearney Analysis (2) Teleuse at the Bottom of the Pyramid : Beyond Universal Access. Harsha De Silva and Ayesha Zainudeen Telektronnik 2. 2008

The Fortune at the Bottom of the Pyramid. C.K. Prahalad and Stuart L. Hart. Strategy+Business Magazine 2002.

27

First, affordability is perhaps the greatest barrier to owning a mobile connection. A study by LIRNEasia researchers found that, although 90% of sampled individuals in Pakistan, India, Sri Lanka, Philippines, and Thailand claimed to have used a phone at least once in the past three months, the majority do not own a phone because they cannot afford it10. Operators have already made significant strides in making mobile services more affordable. They have reduced the effective price per minute of use considerably (in some cases over 80%) to as little as one cent in Bangladesh (see Figure 8). Additionally, the average selling prices of handsets have been steadily decreasing (see Figure 18) lowering the total cost of mobile ownership and usage in the region. Furthermore, the introduction of pre-paid services has made mobile services more accessible at the BOP, where many cannot count on a steady stream of income. Policy makers have enabled greater affordability at the BOP with policies such as the introduction of calling-party pays policies (otherwise resulting in the missed call phenomenon) and, in some cases, are beginning to reduce telecom-specific taxes (e.g. Pakistan) to operators and subscribers. Furthermore, operators in some emerging countries are adopting lean operating models with sizeable outsourcing to reduce their cost base and thus be able to reduce prices to subscribers. However, governments and operators will need to continue to find new ways to make mobile connections more affordable.

Figure 20

AverageDecreasingPrice of GlobalofHandset Manufacturers Sales Average Sales Prices Handsets Figure 18:
US$/unit 220 210 200 190 180 170 160 150 140 130 120 110 2004
Source: Mirae Asset Research

CAGR 04-08

Sony Ericsson

-5%

LG Nokia Motorola Samsung 2005 2006 2007 2008

-9.4% -6.7% -7.1% -6.9%

10 Source: Teleuse at the Bottom of the Pyramid: Beyond Universal Access. Harsha De Silva and Ayesha Zainudeen. Telektronnik 2. 2008.

A second challenge for serving the BOP is availability of mobile services. The fact that a large portion of the BOP resides in rural areas makes delivering and distributing services to them considerably more challenging. Though mobile networks cover approximately 70% of the population for some of the BOP countries, a significant portion of individuals at the BOP are still unable to access a mobile connection, even if they want to and are able to afford it. Operators and regulators must continue to work together to find new ways to make the further deployment of mobile networks economically viable. In addition, since vastly rural areas will not make traditional retail models viable, operators will need alternative distribution models to reach consumers. A further complication lies in unreliable power sources: operators and handset vendors must find ways to make mobile usage viable (both for powering networks and charging handsets). Finally, an additional innovation that is increasing availability while maintaining economic viability is infrastructure tower sharing, where operators share ownership and/or access to BTS towers with one another. This can significantly reduce network deployment costs, as well as ongoing operating costs.

28

Asia Pacific Mobile Observatory

A third challenge for serving the BOP is the need to offer relevant and practical content and applications that deliver tangible benefits to customers. Content and applications created for the developed world (such as music downloads, gaming, and social networking) are far less relevant for consumers at the BOP. Instead, applications that help improve their daily lives be they related to agriculture, health, education or personal finances will likely deliver the most value and hence drive take-up and usage. A perfect example of this is Farmers Friend, an application developed by AppLab (a Grameen Foundation initiative) and powered by Google SMS, that sends farmers agriculture tips in response to SMS-based requests. The growth of the mobile industry is expected to be driven by countries with a large population segment at the base of the economic pyramid. This untapped market will drive subscriber and revenue growth for operators and will enable individuals at the BOP to connect to the global economy for the first time. As the World Resources Institute rightly stated, It may seem obvious, but those in the BOP cannot join the global economy, and benefit from it, until they are connected to it.11 However, for this forecast to become reality, the mobile industry, along with policy makers, needs to adopt a different approach to serving this market and meeting its unique needs, instead of the traditional approach taken in developed markets.

3.3 Taking Mobile to the Next Frontier


In developed markets across Asia Pacific, mobile phones are beyond just a basic communication tool: they are an indispensible part of individuals lives. Whereas for people in most of the world a mobile phone is primarily utilised as a device for voice and text-based communication, people in developed markets in Asia view mobile devices as:

A device from which to organise their busy lives, making them more productive and efficient; A central platform for entertainment (gaming, pictures, video, music); A more convenient means for accessing products and services;

A personal extension that embodies and documents their lifestyle and allows for intense personalisation and self-expression.

In fact, it has been said that, for people in this region the mobile phone is not only a symbolic repository for the users social capital but also signals to others certain unspoken clues about the users identity and social status.12 Simply put, advanced users in some Asian markets place far greater value on, and have an intimate relationship with their mobile phone and services compared to the rest of the world. Therefore, a society with highly advanced mobile users is constantly searching for new ways to use their mobile phones and, in doing so is propelling the mobile industry to the next frontier. New handset and service innovations are achieving rapid take-up and are driving further innovation in a powerful consumer-driven innovation cycle. The rapid adoption of services that extend beyond basic voice communication can be seen in Figure 19 as data revenues make up an increasing portion (over one third in 2008) of total revenues and the rest of the world is following. It is predicted that by 2013, data revenues in developed markets will constitute nearly 50% of revenues, with AP developed markets paving the way for North America and Western Europe.

11 The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. World Resources Institute and the International Finance Corporation. 2007. 12 Hjroth, Larissa. Mobile Media in the Asia-Pacific: Gender and the Art of Being Mobile. Routledge 2009.

29

Figure 21
Data Revenues as a PercentageTotal Total Revenues Revenues Figure 19: Data Revenues as a Percentage of of Service Service
50% Asia Pacific AP Developed Markets 40% Western Europe North America 30%

20%

10%

0%

Figure 22

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Gartner, A.T. Kearney Analysis

Telecom Patents Filed in Major National Patent Offices


Figure 20: Telecom Patents Filed in Major National Patent Offices
Listed by Patent Origin Country (2002-06) 100% = 549,147 patents Sweden Netherlands UK Finland France Germany China 6% Japan 36% Others

The advanced use of mobile communications in South Korea and Japan has placed them at the forefront of the global industry, being viewed by many as the benchmark for the evolution of the mobile industry in other countries. New inventions stemming from this part of the world have been plentiful: 50% of all telecommunications patents applications (filed to National Patent Offices between 2002 and 2006) were filed by individuals and/or organisations from Japan and South Korea (see Figure 20).

United States 23% South Korea 14%

Source: World Intellectual Property Organization

30

Asia Pacific Mobile Observatory

In Japan, NTT DOCOMO has introduced the concept of using its mobile assets to create infrastructure that can act as the brain of society (see Figure 21). Such infrastructure is able to leverage the tremendous amount of data that the mobile network can collect (location, demographics, buying and browsing characteristics, traffic data, weather, etc.) to contribute to the development of society and its economy by memorising, assessing and predicting individual behaviour, events or other phenomena13. Practically speaking, an intelligent system such as this could, hypothetically, use the mobile network as social sensors to predict demand and control oversupply of products and services and thus make the economy considerably more efficient. Will such a concept succeed? Will it transcend to other countries around the world? This cutting-edge thinking radically challenges the perceptions of how a mobile phone and a mobile network can be used. Figure 21: NTT DOCOMOs Brain for Society

13 Docomos Change and Challenge to Achieve New Growth. NTT Docomo, Inc. October 31, 2008. http://www.nttdocomo. co.jp/english/corporate/ ir/binary/pdf/library/ presentation/081031-2/all_e.pdf.

31

Besides finding new uses for mobile communications, operators are also exploring what the next trend in their consumers usage patterns will be, so as to pre-empt these needs and respond to demands as they arise. For example, one clear frustration that users have is the transfer of all their valuable mobile material assets from one handset to the other, especially as handset replacement cycles become shorter. To manage their mobile assets, South Korean operators have been leaders in the GSMA SmartSIM initiative, to drive development and adoption of the large capacity USIM (Universal Subscriber Identity Module) that allows users to store personal mobile content, contacts, multimedia files and run various mobile applications such as personalised portals or multimedia messaging across handsets. SK Telecom was the first to propose this initiative and successfully launched this project in February 2009 in cooperation with KT Telecom to standardise technologies in enabling the realisation of this idea. This thumb-drive concept will likely prove popular with many users in developed markets across Asia as multiple handset ownership continues to proliferate into the future. While mobile customers in developed countries may form a relatively small portion of the overall subscriber base in Asia Pacific, these users (particularly those in North Asia) are highly advanced in their uses of mobile technologies. Their voracious hunger for new services and applications will continue to drive the development of the mobile industry globally.

32

Asia Pacific Mobile Observatory

4.

The Economic Contribution of the Mobile Industry

33

Key Messages:

Mobile operators revenues in AP17 contribute 1.9% of aggregated GDP.

The total value add of the mobile ecosystem in AP17 is nearly US$370 billion or 2.8% of GDP.

In addition, the mobile ecosystem plays a major role in national employment as over 10 million people are either directly or indirectly employed through the mobile ecosystem. The mobile ecosystem is a major contributor to public funding with over US$100 billion generated through corporate taxes, social security, income taxes, indirect taxes and regulatory fees.

The previous chapter highlighted the development paths of the mobile industry in Asia Pacific and the massive impact that the mobile industry is having on the lives of people in both emerging and developed markets. In this chapter, we focus on quantifying the direct and indirect economic contribution that the mobile industry has made to countries in Asia Pacific.

4.1 The Direct Contribution of Mobile Operators to GDP


The phenomenal take-up of mobile communication in Asia Pacific has driven revenues for mobile operators in AP17 from US$150 billion in 2004 to over US$230 billion in 2008. This represents a direct contribution from revenues of approximately 1.9% to aggregated GDP in AP17. At a country level, this direct contribution from operator revenues ranges from 3.2% in Vietnam to 1.2% in Hong Kong. Interestingly, the direct contribution from operator revenues is considerably higher among emerging countries (2.2% on average) than developed countries (1.5%). This finding is consistent with studies previously undertaken including the World Bank study mentioned earlier(see Figure 13) which showed that for every 10% increase in mobile penetration, there is an increase of 0.81% in GDP in emerging countries (compared to 0.60% in developed countries). This means that raising mobile penetration rates in AP17 emerging countries to 100% could add over US$270 billion to the aggregate GDP of these countries in the AP17, an increase of 4.6% of cumulative GDP. In India, Bangladesh and China, potential GDP growth could be over 5% (see Figure 22). Obviously, this is simply theory that, in reality, would take years to accomplish. However, it is indicative of the powerful impact that could be achieved if governments and operators work together to enable all individuals to have access to mobile communications. AP17: The Direct Contribution of Mobile Operators to GDP

Figure 24
(2008)
(2008) 3.2% 2.8% 2.6%

Figure 22: AP17: The Direct Contribution of Mobile Operators to GDP


MNO Revenues As % of GDP Vietnam Malaysia India 2.3% 2.3% 2.1% 2.1% 2.0% 1.8% 1.6% 1.6% 1.6% 1.5% 1.5% 1.3% 1.2% 1.2% Philippines Bangladesh China South Korea Thailand Pakistan Indonesia Singapore Japan Taiwan Sri Lanka New Zealand Australia Hong Kong 4.1% 3.3% 0.8% 4.1% 5.0% 2.4% 5.8% 0.8% 5.8% Potential Increase to GDP1 3.3%

(1) Potential increase in GDP (at 2008 levels) from raising mobile penetration rates in emerging countries in AP17 to 100% based on a 2008 World Bank econometric study that showed that a 10% increase in penetration has a 0.81% increase to GDP Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, World Bank, A.T. Kearney Analysis

34

Asia Pacific Mobile Observatory

4.2 The Value-Add of the Mobile Ecosystem


Mobile operators work within a larger ecosystem to deliver mobile communications to society; therefore the entire ecosystems economic contribution to society needs to be considered. Broadly speaking, the mobile ecosystem value chain consists of five components: infrastructure vendors & support services, network operators, handset devices, distributors, and content & services providers (see Figure 23). Mobile operators make up roughly 62% of the of Mobile Ecosystem Description and Size entire ecosystems revenues. Value Chain in AP17

Figure 25

Figure 23: Description and Size of Mobile Ecosystem Value Chain in AP17
Value Chain Infrastructure & Support Services Description 2008 Revenues (US$m)

Suppliers of infrastructure and support services, including public and enterprise network equipment and support services for this infrastructure Predominantly mobile network operators (MNOs), with some revenues flowing to fixed line network operators (FNOs) for interconnection1

49,182

Network Operators

241,603

Handset Devices

Wireless handset device manufacturers

69,686

Distribution

Distributors and retailers of wireless handset devices

23,586

Content & Services

Providers of mobile content and service applications

7,688

(1) Interconnection revenues flows have not been included in this analysis Source: Gartner, Informa, PWC, Telecommunications Industry Association, A.T. Kearney Analysis

To estimate the direct and indirect economic contribution of the mobile ecosystem, a structured framework was used (see Figure 24) that considered the following factors: Supply-side Effects

The direct contribution from MNOs

The direct contribution from the adjacent industries in the ecosystems value chain (see above) The indirect impact on the greater economy (the multiplier effect)

Demand-side Impact

Productivity gain from workers using mobile technologies for work (mobile workers)

35

Figure 26
Framework for Calculating the Mobile Ecosystems Economic Contribution

Figure 24: Framework for Calculating the Mobile Ecosystems Economic Contribution

Direct Value-add from MNOs Outcomes Supply-Side Effects Economic Contribution of the Mobile Ecosystem Value Add from Related Industries in the Ecosystem Contribution to GDP Contribution to Employment Multiplier Effect Contribution to Public Funding

Demand-Side Effects
Source: A.T. Kearney analysis

Productivity Gain from Workers who use Mobile Phones for Work Purposes

To determine the mobile ecosystems supply-side effects on the economy, firstly the economic value add14 of MNOs and adjacent industries in the ecosystem was estimated based on a sample of companies across the value chain in various countries in AP17. A multiplier15 was then applied to the direct contribution of the mobile ecosystem to estimate the impact of mobile ecosystem on other industries. The results showed that the supply-side impact from the mobile ecosystem on the greater economy contributed approximately US$145 billion in AP17 or 1.1% of the mobile ecosystem. However, the economic impact extends beyond the supply-side effects. It has also greatly improved the productivity of workers who use mobile technologies for work purposes. This impacts various individuals in the workforce, from the chief executive of a large business who can communicate with his/her team while travelling, to the plumber who is able to respond to customers while on the job, and to the technician who is able to receive notification from his employer of other appointments in the day while on the road and thus reduces wasteful travel back to the office. For such individuals, a mobile phone (and other mobile technologies) has enabled them to plan and coordinate their activities more easily, allocate resources more effectively and reduce wasted travel and time. To evaluate the economic impact resulting from the productivity gains enjoyed from mobile workers (or workers who use mobile technologies for work), the percentage of mobile workers in each countrys workforce16 and their average GDP contribution was estimated (total GDP divided by total workforce) and multiplied by an estimated productivity gain from mobile usage. The productivity gain factor used was approximately 4% for developed countries and 7.6% for emerging countries based on a range of percentages used in previous studies (5-10%). A lower productivity gain percentage was used for developed countries based on the fact that, in emerging countries, mobile phones are often the only form of communication, and thus, without mobile phones workers in the developing world would be significantly worse off than their counterparts in developed countries who typically have access to fixed line access in the office, at home, and on the road. The productivity gain was proven to be very significant, contributing over US$220 billion across AP17, equivalent to 1.7% of the aggregate GDP across AP17. In total, the direct and indirect economic contributions from the mobile ecosystem amounted to approximately US$368 billion or 2.82% of the aggregate GDP in AP17 (see Figure 26). The ripple effect from the direct contribution of mobile operators on to the rest of the mobile ecosystem and the economy at large has a much larger contribution than originally thought. Across AP17, the overall contribution of the mobile ecosystem is nearly six times greater than the direct contribution of mobile operators, or nearly four times greater than the direct contribution of mobile ecosystem.

14 Value add was used rather than revenues in order to avoid double counting of revenue flows within the value chain. Value add = EBIT + Wages CAPEX + Depreciation or approximately Revenues Cost of Sales. 15 We used 1.5 as a multiplier based on an average of multipliers used in previous studies ranging from 1.1 to 2. 16 To assess the percentage of mobile workers in the economy, we leveraged various studies including studies conducted for Telenor ASA and IDC .To determine the % of mobile workforce across AP17 countries, we correlated the GDP per Capita (at PPP) to the % of mobile workers for selected countries. Subsequently, we linearly interpolated the missing counry data that were not available. While it can be argued that GDP per Capita and mobile workers % may be partially interrelated, we do not believe that they are fully dependent upon each other.

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Asia Pacific Mobile Observatory

On a country level, the direct and indirect economic contribution of the mobile industry varied significantly from 3.5% 27 Indonesia (country-level in Figureof GDP in Singapore to 2.0% of GDP in be attributed to a numbercontribution can be foundnot the appendix). The variance in GDP contribution can of factors including (but limited to):

MobileGDP size, GDPValue Add (VA) in AP17 rates Total Ecosystem per capita and average wage (US$bn, 2008)

Mobile penetration rate and affordability of mobile services

The proliferation of mobile services in the workplace (mobile workers in the workforce)

What is certain, however, is that the mobile industry has a major direct impact and an even stronger ripple effect on the economic growth in countries in Asia Pacific. Figure 25: Mobile Ecosystem Value Add (VA) in AP17
(US$bn, 2008) 223.8 368.3

60.8% 48.2 30.3 66.1 17.9% Mobile Operators Related Industries Multiplier Effect Supply-Side Impact Productivity/ Demand-side Impact 1.71% Total Value Add 8.2% 13.1% 39.2% 144.5 100%

% of GDP

0.51%

0.23%

0.37%

1.11%

2.82%

Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

4.3 The Mobile Ecosystems Contribution to Employment


The mobile ecosystem is also a major contributor to employment in the markets it operates in. In 2008, over 10 million people were employed directly and indirectly in the mobile ecosystem (see Figure 26):

Approximately 2.6 million people were employed directly by the mobile ecosystem, of which 1 million were employed by mobile operators

Over 4 million people were employed indirectly through support service companies and the ecosystems contribution to public funding An additional 3.4 million induced jobs were generated through direct and indirect employee spending (derived using the multiplier effect)

The strong ripple effect from mobile operators generates 10 times more jobs directly and indirectly by the mobile ecosystem. This provides impetus for further development of the mobile industries across Asia Pacific as every job created in mobile operators generates, on average, 10 more jobs in the economy. A country-by-country breakdown for AP17 can be found in the appendix.

37

Figure 28
Employment Created by the Mobile Ecosystem in AP17

Figure 26: Mobile Ecosystem Contribution to Employment in AP17


(000 of Employees, 2008) Direct Employees: 2,580K Indirect Employees: 7,532K 3,371 33.3% 4,161 ~10X 1,560 1,020 10.1% Mobile Operator Employment Related Industries Employment Indirect Employment1 Induced Employment (Multiplier Effect)2 Total 15.4% 41.1% 10,112

Figure 29

(1) Indirect Employment from Support Services Companies and employment generated from taxes paid (2) Indirect employment generated from spend of direct / indirect employees, calculated using a multiplier of 1.5 Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

The Mobile Industry Contribution to to public Funding AP17:mobile ecosystem also makes a major contributionPublic funding through various levers including ( VAT/indirect tax, corporate tax, social security taxes of direct and indirect employees, income taxes, and ) regulatory fees. In 2008, A.T. Kearney estimated that the mobile ecosystems total contribution to public funding amounted to over US$100 billion of which mobile operators directly and indirectly generated 75%, as can be seen in Figure 27. Figure 27: Mobile Ecosystem Contribution to Public Funding in AP17
(US$bn)

4.4 Contribution to Public Funding

15.6 15.3% 37.4

102.0

36.7% 11.5 5.0 32.5 31.8% 4.9% 11.3%

Corporation tax

Social Security Tax

Income tax of employees

Indirect taxes

Regulatory fees

Total

Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

Conclusion: The mobile industry is a major contributor to the economic development of nations across Asia Pacific. Beyond its direct contribution, the mobile industry has a powerful ripple effect on other industries within and beyond the mobile ecosystem. It generates significant economic value add to the economy, it drives considerable direct and indirect employment, and it contributes greatly to public funding to enable governments to achieve their national development agendas. As governments consider levers to further develop their economies and societies, they must consider the mobile industry as an enabler of development beyond its direct means. Investing in, and creating the conditions for greater investment in the mobile industry will drive economic development far beyond its direct domain.

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Asia Pacific Mobile Observatory

5.

The Forefront of Innovation: Delivering on Unique Customer Needs

39

Key Messages:

The mobile industry in Asia Pacific is fast becoming the industrys hub for innovation, pioneering new innovations, and rolling them out globally. Innovations in service delivery, operators business models, handsets and networks have all been instrumental in pushing the boundaries of mobile services, as well as driving access to the next billion customers.

Advanced market service innovation has focused on convenience, entertainment, productivity and efficiency. The rise of the smart phone and Asian handset vendors who now have almost 40% of global market share has driven mobile data revenues.

Emerging market service innovation has focused on enriching lives through health, education, trade and commerce applications. The low-cost handset has transformed the industry by lowering entry barriers for millions of users. Operators have pioneered new business models like outsourcing, distribution and tower sharing.

5.1 Innovation Along Two Paths

To manage the dual development paths in Asia Pacific, players in the mobile ecosystem have made great progress in challenging their business models and developing products and services in order to meet the unique demands of customers in both developed and emerging markets. The mobile industry in Asia Pacific is fast becoming the industrys hub for innovation, pioneering new innovations and rolling them out globally. It is therefore not surprising that the top prize in the 2009 GSMA Global Mobile Innovation Awards was given to a company from Asia Pacific: Cootek China won recognition for its innovative soft keyboard used in touch-screen mobile phones. In this chapter, innovations in the Asia Pacific mobile industry that are enabling the industrys (and more broadly societys) development will be profiled. These innovations are profiled below and organised into four categories: a) mobile services (new products/services developed by operators); b) business models (changes made to the operators business to deliver a new innovation); c) devices (innovations in end-user devices); and d) network (innovations in the network business) areas of the mobile ecosystem.

5.2 Developed market innovations

5.2.1 Service Innovation Customers in developed markets have a deep attachment to their mobile phones and seek innovative content, services and applications that will improve their lifestyles along several dimensions:

Convenience: Services that enable customers to more easily access goods and services through their mobile devices

Entertainment: Services that offer entertainment through various means (gaming, pictures, videos, music) and allow for intense personalisation and self-expression. One sub-segment of entertainment is the use of mobile for social networking communications Productivity and efficiency: Services that increase output or reduce time taken to perform various activities (mostly work-related) with the assistance of mobile technology

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Asia Pacific Mobile Observatory

Convenience. Consumers in developed markets are able to more conveniently access goods and services with their mobile phones, thanks to innovative services from the mobile industry. A host of innovative mobile commerce applications are pushing the boundaries of mobile technology to provide consumers with seamless access to finance, shopping and trading facilities on the go. Operators are also tying up with physical businesses like shopping malls and restaurants to enable mobile browsing and purchasing, catering to the lifestyles of consumers. For example, NTT DOCOMO now has approximately 10 million users of its DCMX credit service17, where purchases can be made with a wave of their phones over a reader for handsets equipped with Sonys contactless cards. Phones with the Osaifu-Keitai e-wallet service can also serve as train tickets and member ID cards while allowing users to check account balances, purchase tickets and obtain discount vouchers. In many developed countries, consumers now have the option to locate restaurants, book transport services, and book movie tickets through their mobile phones. The introduction of location-based services (LBS), where personalised information or services can be found by subscribers based on their location, is truly delivering convenience through mobile. SK Telecom started its pilot LBS services in 2002 with NATE GPS offering users information on facilities, friends locations, and emergency notification. This was further enhanced with the Becktermap in 2004 that pinpoints a specific location on the user screen. A popular LBS service launched by SK Telecom is the child and elderly safety service, where adults can keep track of the location of their family members. Elderly citizens can also notify hospitals in case of emergency by pressing specific buttons to transmit their location. This popular service has also been exported to the Netherlands. By 2007, the total Asia Pacific LBS market stood at US$384m, with Japan and Korea leading the majority of revenues18. However, increased growth in this market is expected from Singapore, Hong Kong, Australia and New Zealand with operators, users and regulators encouraging the proliferation of services in the market, and a host of platform and content providers are emerging. Entertainment. Entertainment services are also seeing a huge jump in Asia Pacific with the increased usage of mobile social networking tools such as INQ handsets and networking providers like BuzzCity and Tencent QQ. Music, games and shopping are also other services that can be easily obtained through operators, with Asia Pacific content providers flourishing with the provision of local content. Many countries have already seen operators launching music download plans and even video streaming services to users, bundled into their voice packages. PCCWs Moov on Mobile music service makes 60,000 songs available to PCCW mobile users via streaming technology. A special US$68 plan also allows users to enjoy up to 4,000 minutes of music streaming from the full MOOV on mobile library, along with 100 minutes of airtime19. Productivity. Productivity and efficiency are being addressed by mobile services through location-based navigation and information provision for businesses. Businesses can also use mobile communications to track delivery schedules and manage physical goods through immediate real-time tracking. SK Telecom is catering to many specialised segments of this market by providing powerful solutions that make couriers, vehicle management and even vending machine companies more productive and efficient. Public services providers can also benefit from monitoring street lighting and water tanks, as well as remote energy inspection. To deliver these services, a recent trend in Asia Pacific is the emulation of the App Store concept, with operators across the region rushing to set up their own versions. Mobile widgets and applications can be downloaded by users to customise their content requests, and enable automatic updates and store preference memory. In Korea, the fee for download is highly affordable, between US$0.21 US$0.35, resulting in rapid subscriber take-up. In Singapore, SingTels IDEAS portal enables users to store MMSs, download ringtones and purchase content. Moving forward, this app-based approach will allow users to personalise their mobile interaction and enable the flourishing of content from a variety of users in collaboration with mobile operators.
17 NTT DOCOMO website, August 2009. 18 Source: Asia Pacific Location Based Services Highlights, Frost and Sullivan, 2008. 19 PCCW website.

41

5.2.2 Business Model Innovation Delivering on the service innovations will not be easy; mobile operators have begun to reinvent their business models to deliver services profitably and sustainably. One of the most recent developments seen in the market is a new focus on micro-segmentation a concept well known to consumer goods companies but rarely seen in emerging market telecom operators. To grow in saturated markets, operators have been active in challenging traditional assumptions in which customers are profitable and valuable. They have been identifying micro-segments and modifying their business models to attract and retain these customers in an efficient, sustainable manner. For example, Chunghwa in Taiwan has a reduced-price data plan targeting smart-phone users at US$5.45 a month for 1GB of data20. In Singapore, M1 and Starhub now offer unlimited mobile data plans capped at approximately US$2021.These data plans have also gone one step further to segment the market through targeting specific brands of devices. Many operators now have BlackBerry and iPhone specific plans at affordable prices: Optus Australia has launched its personal iPhone plans at a cap of approximately US$1622, while SingTel recently introduced new entry-level BlackBerry plans including 1GB of data at less than US$10 a month, targeting youths and young working adults23. The move towards unlimited flat rates was arguably pioneered by South Korean operators. All major South Korean operators offer data intensive plans for users, often bundled with free content. Hong Kong, Taiwan, Malaysia and Singapore are also countries where the popularity of unlimited plans has started to emerge. In Taiwan, mobile broadband has in fact become less expensive then fixed line ADSL services. 3s launch of the X-series internet-connected mobile phones accelerated the adoption of unlimited data plans in the market with handsets and networks supporting the ultimate mobile internet experience24. These flat rate plans have even been extended to roaming travellers with major mobile alliances Conexus and Bridge, extending data buffet flat rate plans to users roaming on member networks25. Moving beyond mobile, operators are also partnering with ICT companies to offer bundled packages to users. Users can expect to find operators bundling data plans with net-books, some with SIMs already embedded inside. These bundling initiatives have helped to increase user adoption and decrease total cost of ownership in a convenient package. Asian handset vendors make up a significant portion of the global handset market, led by LG, Samsung and 2008 (see Figure 28).

Figure 30 5.2.3 Handset Innovation

Market Share are ranked among the top 5 vendors in the world with a combined market share of 34% in Sony Ericsson who in the Global Handset Market
Figure 28: Market Share in the Global Handset Market
Units (m) 681 817 1,002 1,121 15% 1,227 18% 1,263 15% 1,344 16%

Others

29%

24%

17%

14% 18% 20 Source: Data price wars begin: many mobile operator are trying to stifle the threat posed by the launch of WiMax services by cutting prices, Telecom Asia, 2009. 21 Source: M1 cuts mobile data prices, Straits Times, 2009. 22 Optus website. 23 SingTel launches entrylevel BlackBerry plan, Digitalmediaasia.com & DME Ltd, 2009. 24 Asia Pacific Premium Content Market, Frost and Sullivan, 2008. 25 Mobile alliances go toe to toe on data roaming, Telecom Asia, 2007. Motorola 15% 22%

9%

8%

8%

39% Nokia 31% 32% 35%

40%

39%

38%

1% 1% 1% 8% 8% 9% 9%

1% 10% 10% Asia Pacific vendors: 34% market share in 2008

HTC Sony Ericsson LG Samsung

6% 7% 13% 2004

6% 7% 13% 2005

1% 8% 6% 11% 2006

9% 7% 14% 2007

17%

17%

18%

2008

2009

2010

(1) Average selling price Source: Mirae Asset Research

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Asia Pacific Mobile Observatory

In developed markets, mobile phones have gone a long way from being purely voice devices to becoming an integral and indispensable part of peoples lives. Besides providing voice and messaging on a host of platforms from touch screens to keypads to styluses, the majority of handsets now come equipped with built-in cameras, music players, video players and internet browsers. In 2006, approximately 75% of all handsets in Japan and 52% in South Korea included cameras: todays figures are likely far greater. Two megapixel (MP) cameras with autofocus and zoom functionalities are now common, and 5MP models have gained momentum. Newer displays are also revolutionising the market with bigger, brighter and more efficient screens that also consume less power26. Smart-phones are widely available in developed markets in Asia Pacific, with 7.5 million units sold in 2008 and seeing sustained growth27. Design and style are other areas where Asia Pacific manufacturers are pushing boundaries, in response to the mobile phones status as a fashion accessory. For example, Samsungs Innov8 won the GSMA Mobile Award for best mobile broadband handset. Also, LG Korea has developed the worlds first 3GSM Watch Phone that integrates wireless technology into a miniature wearable phone at 49x39mm. The Watch Phone is among the latest in a series of stylish concepts from one of the worlds leading handset vendors: other innovations include collaborations with renowned fashion brand Prada and the worlds first transparent phone, LG Crystal (see Figure 29). Figure 29: Innovative Advanced Handsets

Samsug Innov8

DoCoMo Solar Hybrid

LG Watch Phone

LG Prada

LG Cyrstal

26 Source: Japanese and South Korean Mobile Handsets Leading the World in Mobile TV, Digital Imaging, and Display Innovation, ABI Research, 2006. 27 Source: Gartner Says Worldwide Smartphone Sales Reached Its Lowest Growth Rate With 3.7 Per Cent Increase in Fourth Quarter of 2008, Gartner, 2008.

Manufacturers are also seeking ways to differentiate their offerings, including appealing to the environmentally conscious. NTT DOCOMOs latest addition is the Solar Hybrid waterproof mobile phone, where 10 minutes of solar recharging can provide 1 minute of talk time. Moreover, the handset comes equipped with an 8MP camera and DOCOMOs standard service and applications offerings, including its personalised information service (i-concierTM), music download application (Chaku-Uta Full), widget (i-WidgetTM) and application platform (i-appliTM).

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5.2.4 Network Infrastructure Innovation In an industry traditionally dominated by European and American companies, Asian network equipment vendors particularly Chinas Huawei and ZTE are making waves in the industry globally. Their innovative, cost-competitive solutions are being deployed in telecom networks globally. New wins around the world, particularly in China where mobile infrastructure spending is forecasted to be US$80bn over the next three years28, have helped these vendors carve out an increasingly larger share of the market. Huawei is ranked third in global market share in mobile network equipment and first in mobile broadband devices at 20 million shipments worldwide. Additionally, Huawei has also recently achieved major wins in Singapores National Broadband Network, deployment contracts with China Unicom, China Mobile, Telefonica in Spain, Sonaecom Portugal and a global master agreement for mobile broadband modems with Telenor Group29. ZTE, on the other hand, is the largest provider of 3G mobile equipment in China, and a global top 3 player for GSM base station suppliers30. As a result, Asia Pacific network vendors are being recognised globally for their growth and innovation. In August 2009, ZTE was named a Top 3 LTE network infrastructure vendor by Gartner31 based on its products and services, market understanding and offering strategy, among other criteria. The report cited ZTE as a strong player in the LTE industry with a quality product portfolio and a strong financial position which helps to maintain its R&D spending at 10% of revenues. In addition, these manufacturers have been highly committed to research and development, with Huawei recently partnering with Optus to establish a mobile innovation centre in Sydney to investigate the acceleration of high-speed mobile and wireless broadband adoption. Huawei is also a major contributor to LTE patents, representing almost 12% of the total patents assigned by the European Telecommunications Standards Institute (ETSI). Recently, Huawei launched the first LTE mobile broadband internet connection for TeliaSonera in Norway. Vodafone Germany is also collaborating with Huawei to conduct joint tests in investigating the performance of LTE in the Digital Dividend Band. Finally, many Asian vendors are also driving innovation in optimising base station power consumption, which has significant cost improvement and environmental impact. For example, ZTE has a range of base stations that utilise a multiple-density frequency approach to achieve power consumption reduction and smaller dimensioning, while Huawei offers a Green Sites Solution using hardware, power amplifiers and consumption management to reduce power consumption by up to 60%. Huawei was also selected by Grameenphone in August 2009 to deploy solar powered Base Transceiver Stations in Bangladesh. While global firms have been active in Asia Pacific for a long time, upcoming Asia Pacific vendors, although arguably late entrants, are challenging the incumbents through their technically-advanced yet costcompetitive network equipment innovations.

28 Source: Mobile Network Infrastructure Vendors Starting to Feel the Heat, ABI Research, 2008. 29 Huawei statistics and news obtained from corporate website. 30 ZTE statistics and news obtained from corporate website. 31 Source: Gartner rates ZTE among the top 3 LTE vendors, Gartner, 2009.

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Asia Pacific Mobile Observatory

5.3 Emerging Market Innovations


5.3.1 Service Innovation As discussed in Chapter 3, people at the bottom of the pyramid (BOP) typically use their mobile device in vastly different ways from their neighbours in developed markets. In these markets, the services demanded by BOP consumers relate to practical applications that help resolve essential needs in their lives, such as Health, Education, Trade Information and Commerce (see Figure 30). Unlike users in the developed markets, whose lives are enriched by convenient mobile services, BOP consumers often rely on wireless connections as their only means of accessing these basic facilities. Examples of Service Innovations in Emerging Markets

Figure 32

Figure 30: Examples of Service Innovation in Emerging Markets


Initiatives TeleDoctor 1911 SMS Blood 7777 Citycell(1) HEAR Text2Teach Mobile Eco School PC for Schools Mobile Library *1677 Farmer Info Frontline SMS lffco Kisan Sanchar Market Lite Nong Xin Tong CellBazaar Mobile Money Initiative Leader Telenor Pakistan Dialog Citycell DiGi Globe Softbank Excelcom AIS Happy/DTAC NAMA(2) Bharti & IFFC(3) Reuters China Mobile Grameenphone GSMA, Operators Description Ring 1911 to get medical advice at US$0.17 a minute Coordinate blood bank with SMS notification for emergency donor Offer medical help through data-powered laptops at remote outlets Help facilitates communication between ambulances and hospitals Help public schools access educational materials through mobile Promote environmental awareness and education on handsets Providing computing facilities and internet connections to schools Mobile mini libraries allow children to access reading content 24/7 news updates via on sms market trends and prices SMS field communications on maize and soybean prices Uses network to send agricultural information to >50m farmers Provides weather and price information for farmers on mobile Information provider for news, weather and government policies Provides trading platform on a pay-as-you-use service Aims to provide personal banking services for the unconnected

Health

Education

Trade Information

Commerce

(1) Hospital Emergency Ambulance Radio, (2) Northwest Agricultural Marketing Association, (3) Indian Farmers Fertilizer Cooperative Source: Operator provided data, operator websites, press search

Trade-related information (prices, volumes, suppliers) and production-related information (e.g. weather information for farmers) help to improve the capability and productivity of farmers, fisherman, and other trades-people at the BOP. It also reduces their transaction costs relating to the cost of information in searching, bargaining, screening, monitoring, co-ordination, enforcement and facilitating a transaction. Both transaction costs can be reduced when there is less information asymmetry where timely and accurate information is made available. In a study by LIRNEasia on the role of ICT in the production and sale of agricultural produce in Sri Lanka, the researchers found that transaction costs make up as much as 15% of total costs, with information costs contributing the majority. In looking at the information costs associated with each step of the production chain (see Figure 31), it appears that there are many opportunities for mobile communications to reduce these costs. In fact, the researchers found that a 50% increase in the use of mobile and ICT can reduce information costs by as much as 33%, and there is strong market demand for such services. A similar study of fishermen by Harvard economist Robert Jensen cites that before mobile phones, deciding which [market] would offer the best price was sheer guesswork.

45

Figure 33
Figure 31: Examples of Cost of Information Faced Examples of Cost of Information Faced
Decision Visits to meet farmer association officials to decide on a crop Cost of phone calls to agriculture officers to information about the crops Seed Cost of finding information about a particular type of seed Cost of traveling to purchase seeds if the seeds were not available Land and Planting Cost of finding labour Costs finding machines to prepare the land Growing Cost of finding fertilizer, pesticides weedicides etc. Costs of traveling to purchase fertilizer, pesticides weedicides if unavailable Harvesting, Packing, Storing Cost of finding market prices Costs finding labour Cost of finding storage, packing materials etc. Selling Cost of comparing prices of different traders Cost of finding transport

All of which can be reduced through the use of mobile phones In the survey, the cost of phone calls is only 0.21% of cost of information (at US$0.35 a call) Comparatively, travelling incurs a higher cost, at a spend of almost US$41

Source: LIRNEasia DDEC study

To support this growing trend, service providers have introduced innovative offerings that act as an information intermediary. In Thailand, one such information provider is the *1677 Farmer Information Superhighway hotline, which provides SMS updates on agricultural news, such as market trends and movements, crop prices and also production techniques. With the goal of assisting farmers to maximise crop yields and minimising costs, more than 180,000 DTAC customers have subscribed to the service since its launch in 200832. Other such services include the collaboration between Frontline SMS and Northwest Agricultural Marketing Association in Cambodia, Market Lite by Reuters in India and Nong Xin Tong in China, which has reportedly more than 50 million subscribers today. At the end of the production chain, commerce is another area where mobile communications have revolutionised the industry. Again, this is an area where the transaction costs of information asymmetry are high, and arbitrage and waste often occurs as a result of insufficient communication. In this aspect, trading platforms and markets have often sprung up to mitigate the buying and selling dilemma to enable better decision-making. Mobile information can take this even further by reducing the costs of transport in travelling to these markets, by allowing traders to make the decision on transport (and preventing sunk costs), as well as by enabling real-time visibility over an entire market. In Bangladesh, Grameenphones CellBazaar is one popular success story; it allows users to buy and sell goods and services through SMS, WAP or the internet using their mobile phones. This platform allows traders to find others, and post information about their businesses. This service also provides regular market information about price, quantity and suppliers on a pay-as-use basis. More than one million subscribers have accessed the service since 2006 and the site gets an average of 210 new postings and 34,000 hits a day. Another commercial aspect that has resonated with BOP subscribers is mobile money. Mobile money first began with subscribers using airtime as a currency to transfer money between one another. Riding on the success of this convenient method of personal banking, mobile money initiatives have emerged, enabling people to cash in their accounts and withdraw money where needed. These initiatives are particularly impactful for mobile operators who are able to leverage on their strong brands and wide distribution networks to roll out these services, thus creating a new revenue stream. Of course, the benefits are far greater for BOP subscribers: evidence suggests that access to financial services has a positive impact on growth, by raising income levels and improving wealth distribution to people at the bottom of the pyramid. The GSMA Development Funds Mobile Money for the Unbanked initiative seeks to financially connect the worlds population living on less than US$2 with the goal of making the service available to 20 million previously unbanked customers by 2011 . Mobile money in Asia Pacific has been led by Smart and Globe Telecom in the Philippines, a fast-developing market where text messaging is among the predominant means of communication, and where many of its 96 million people continue to live below the poverty line.

32 Lifting of advertisement ban urged to help stations survive, Bangkok Post, 2009.

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Asia Pacific Mobile Observatory

The people at the bottom of the pyramid frequently lack access to banking facilities, as these traditional financial channels are often too expensive or do not meet their non-conventional needs. In fact, the unbanked Figure 34 often have savings of their own (for example, the average unbanked person in the Philippines has about US$34 in savings), but do so almost entirely through informal mechanisms such as home savings or village savings clubs (See Figure 32).

Savings Survey in the the Philippines Figure 32: Savings Survey inPhilippines
Approach used to save 52% 2% Do not trust another to store 2% Do not know another place 3% Get satisfaction in counting 4% Get satisfaction in seeing the money 11 % Money stored in just in small amount 29% Safer 7% At home Family/ Friend/ HH member Village savings club 6% 0% Kept in the wallet Bank account 0% MM account Mobile savings offerings can be positioned as a safe way to save money, but must address the importance the unbanked place on access savings quickly in case of emergency 49% Quicker to access in emergency Rationale for saving at home

35%

Source: LIRNEasia DDEC study

Operators in the Philippines are rolling out initiatives to meet the needs of these users through driving awareness and educating users on mobile money. The rapid adoption of mobile money services rides on lower service charges, increased convenience, reduced requirements for private information, as well as faster processing speeds (see Figure 33). In particular, demand is driven by network externalities: with increasing user adoption, it becomes a mainstream mechanism where people truly believe that the system is credible, user-friendly (with minimal registration hassle), and caters to their informal banking needs. The programme Figure 35 has met huge success, with almost 7 million subscribers to the Smart Money scheme, and new initiatives rolled out to include Western Union in its list of partners that will enable cross-border remittances from the Philippines large overseas workforce. Figure 33: Perceptions of Mobile in the Philippines Perceptions of Mobile MoneyMoney in the Philippines
Mobile operator, bank and mobile money awareness 88% 67% 56% 45% 64% What customers say when they talk about mobile money Cheaper service compared to other money charge transfer services Convenient/easy-because minimal requirements/personal info Convenient/easy-because numerous case-in/cash-out established Urban Bank Urban telco Rural bank Rural telco Mobile money Faster process of sending/ receiving money Safe/more reliable process of sending/receiving money Awareness of mobile money in the Philippines is higher than bank brand awareness and on par with mobile operator awareness
Source: LIRNEasia DDEC study

48%

12%

2%

29%

8%

When asked what they would say when recommending mobile money, advocates highlighted the relative cost and speed

33 GSMA Development Fund: Mobile Money for the Unbanked Annual Report 2009.

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In other parts of Asia Pacific, similar mobile money and mobile payment schemes have been launched to enable financial transactions through mobile. True Money launched in Thailand three years ago and is available to banked and unbanked customers. Customers can either link their bank accounts to their True Money accounts, or buy scratch cards to load money onto their phones. True Money customers can pay bills and purchase airtime through their phones, or even pay for goods and services in retail outlets by using an RFID device that sits next to their SIM card. The company has 5.6 million users of its e-Wallet service with 100,000 new users added every month. By the end of 2009, True expects to reach 10 million users. 5.3.2 Business Model Innovation Pre-paid Services. The introduction of pre-paid services has been arguably the most impactful innovation in the industry. The post-paid model that is common in many developed countries works on a credit system where people utilise the services and pay after usage, their payment secured by credit facilities. Additionally, post-paid services are often tied to long-term contracts. However, in cash-driven societies, suitable credit mechanisms hardly exist and people rarely have the means or the willingness to commit to long-term contracts. Pre-paid schemes, therefore, have fundamentally changed the way individuals buy mobile services, giving them the flexibility to buy talking credits, use them until they run out, as well as to top up their phone with additional credits as needed. Doing so has opened the market to a significant portion of the population that could not have conceived of mobile ownership under the post-paid model. Operators have continued to adapt this model to serve the delicate purchasing habits and the little disposable income that people at the BOP have at any given time. Today, some operators offer per-minute denomination top-ups on customer accounts. In the Philippines, users can top up their account by as little as 30 pesos (approximately US$0.60), facilitating this low-cost segment to top up only when needed. In India, this sachet pack mentality has operators allowing top-ups from as low as US$0.14 a week, while Dialog Sri Lanka has a minimum reload of US$0.17 which enables low value but frequent purchases. The pre-paid model has also lowered the cost base of operators by lowering the cost of bill issuance and collection. Innovative Distribution Models. Second, operators in Asia Pacific have had to innovate to implement new distribution models to ensure access to vastly rural and often remote lands in South and East Asia is economically viable. Innovative new channel structures have been developed to reach consumers who had previously never been able to afford or gain access to telephone services. In countries like Indonesia and India, the de-coupling of mobile phones and prepaid SIM cards was an important aspect of the success of the distribution model. Operators and distributors in these countries have found success in building channel structures that allow them to focus on selling prepaid cards through a smaller number of powerful indirect channels who are able to distribute prepaid calling time to thousands of small (often family owned) shops. On the other hand, mobile phones are imported to large wholesale distributors who channel the devices to thousands of small electronic shops. The result is a more cost-effective and manageable distribution model that greatly increases reach to people in rural areas. Another powerful example of an innovative distribution model is Grameenphones Village Phone programme, where selected individuals take a loan from Grameen Bank to buy a handset and subscription that comes with training on its operation. These individuals, often women who are referred to as phone ladies, then offer access to the mobile phone service to fellow villagers, earning a steady income in the process. This is becoming increasingly common in other countries such as India where some villages are sharing a community mobile phone in order to extend mobile services where telecoms infrastructure is lacking.

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IT Outsourcing. As operators seek ways to make their operating model leaner in order to reduce costs and hence make services more affordable, some have found great success in outsourcing key parts of their value chain. Outsourcing has been a key theme in India, where some operators outsource much of their IT and network operations. This concept was pioneered by Bharti Airtel, who outsourced its IT operations entirely to IBM, the management of its mobile network to Nokia Siemens Networks and its customer care to IBM and a group of local firms. Bharti has also outsourced the construction of its networks under a managed capacity scheme, where Bharti only pays for the capacity it needs. As a result, Bharti has reported saving 15% in operating expenses from outsourcing its network build and operations, as well as saving 30% from outsourcing IT34. Tower Sharing. Another powerful innovation that is increasing availability while maintaining economic viability is tower sharing. Tower sharing has brought about significant benefits, including:

Financial, including switching CAPEX to OPEX, lower operating costs from site rental, security, electricity

Deployment, including gaining access to bottleneck sites in rural areas (where infrastructure is poor) and dense urban sites (where site availability can be a constraint) Regulatory, including enhanced viability of sites leading to better rural availability and better asset utilisation resulting in lower costs to the end customer

In markets such as China, Malaysia, and Indonesia tower sharing is mandated or strongly encouraged by the government. In other markets such as India, tower sharing was driven by the market, with operators leading the efforts. Tower sharing also presents other benefits: in Indonesia, the government has mandated tower sharing to help new industry entrants to expand coverage across the archipelago, without requiring significant CAPEX investments. 5.3.3 Handset Innovation At the end of 2008, reports suggested that India, Pakistan, Bangladesh and Sri Lanka successfully reduced the total cost of ownership for a mobile consumer to US$5 a month, which increased the affordability of a mobile service to consumers at the bottom of the pyramid (BOP)35. As most markets in Asia Pacific are prepaid and do not have a subsidy model in place, manufacturers have been active in driving handset innovation to make devices more affordable to the masses. For example, Chinese manufacturer ZTE has introduced a range of low-cost phones priced between US$23 US$79 (see Figure 34). However, low-cost handsets need not be featureless basic phones. Instead, they are adapted to serve the needs of customers at the BOP. To facilitate handset sharing more efficiently, some low-cost handsets are loaded with multiple contact folders. To accommodate consumers in areas where electricity supply is unstable, Samsung recently launched a low-cost handset, powered on solar energy that consumers can charge using sunlight, priced around US$58 under its low cost line Guru. Other features include an FM radio, torchlight and a Mobile Tracker that alerts phone users when the SIM card is changed, or to send out an SOS message in an emergency. Religious prayers and wallpapers are also included as a specialised feature of Mobile Prayer. Concurrently, operators have also begun to cater to niche segments of this immense market. Spice India has a low-cost handset retailing at US$14 made especially for the blind. Phone for the visually impaired is a simple voice-only phone which comes with a Braille keypad that announces the number dialled, along with 10 speed dials. This phone retails at the same price as the People Phone, which is a basic low-cost handset that comes without a display in order to reduce costs.
34 Mobile Marvels: A Special Report on Telecoms in Emerging Markets. The Economist. September 26, 2009. 35 Source: Mobiles become more affordable in many, but not all countries, Nokia Siemens Networks

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Figure 34: Low Cost Handset Innovations

ZTEs A261 low cost handset

Spice Phone for the visually impaired

Samsung Guru range

This section has highlighted the innovations carried out in the mobile industry to create better products, enable access, provide entertainment and increase productivity. This has brought better, faster and more stylish handsets to users, as well as more efficient and cheaper infrastructure to network operators. Yet in all the examples mentioned, many mobile innovations have become integral to the lives of users only because of the impact on real life needs whether in trade, finance, networking, community development, entertainment, or information transmission. Once again, this highlights the mobile industrys role as a facilitator and transmitter of information in society and how, by enabling access, users can reach out to a host of other industries and to connect to the rest of the world. Because of its role as an enabler, the mobile industry is spurring innovations in other industries as well. These industries are taking advantage of the access that mobile services have provided, to innovate and to extend their services beyond traditional boundaries.

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6.

Corporate Sustainability: The Environmental and Social Impact

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Key Messages:

The mobile industry has steadily decreased its CO2e emissions per subscriber and is undertaking an increasing role in mitigating the effects of climate change in two ways:

First, it is improving the energy-efficiency within the mobile industry directly by deploying low-energy mobile networks (increasingly powered by alternative energy), implementing infrastructure optimisation and sharing initiatives and reducing mobile device life cycle emissions through design and recycling. Second, it is acting as a catalyst to enable emissions reductions in other sectors through the development of smart solutions enabled by mobile technologies. The mobile industry has had a profound impact on social development in Asia Pacific by connecting 2 billion people in Asia (the first phone connection for many of these people). Mobile operators in Asia have deep CSR commitment to the societies in which they operate and have made major contributions through essential initiatives often focused on health, education, and community development.

In previous chapters we have shown that the mobile industry is a major contributor to economic development, job creation and government funding in Asia Pacific countries. This chapter completes the discussion of the mobile industrys performance along the triple bottom line by reviewing its contribution to environmental sustainability and further discussing its social impact.

6.1 The Environmental Impact of the Mobile Industry


Mitigating climate change is an unprecedented challenge for the world: a challenge where consumers, companies, NGOs and governments each have an important role to play. Scientists and experts forecast that global emissions need to be stabilised by 2015 to prevent reaching potentially irreversible levels but targeted declines in emissions have yet to materialise36. While the mobile industry does not belong among the smoking chimney industries that pose a major threat to the environment, it is nonetheless taking an increasing role in mitigating the effects of climate change. This is being done in two ways:

Improving the energy efficiency of the mobile industry

Acting as a catalyst to enable emissions reductions in other sectors

Improving the energy efficiency of the mobile industry Mobile operators and vendors are finding innovative ways to increase energy efficiency and reduce the greenhouse gas (GHG) emissions resulting from the operation of mobile networks as well as from the usage of mobile phones. Improving the industrys energy efficiency is broadly done in four ways: Designing low energy base station sites Deploying base-stations powered by renewable energy Implementing infrastructure optimisation and sharing Reducing mobile device life cycle emissions through design and recycling The following are examples of such operator-led initiatives currently taking place in Asia Pacific: Mobile operators in Asia Pacific have been actively deploying Green Power technologies to power their base stations, utilising solar, wind and bio-fuels as alternative energy sources. China Mobile has one of the worlds largest deployments of alternative energy-powered BTSs with 2,135 sites across 25 provincial subsidiaries in 2008. Of these, 1,615 are powered by solar energy, 515 are powered by solar and wind energy and five are powered by alternative sources such as hydrogen (see Figure 35). China Mobile reports that in Jiangsu, on Cheniushan Island in the Yellow Sea, a base station powered by solar and wind energy generates enough energy to provide additional power for some of the islands residents.
36 Vodafone 2009. Carbon Connections: Quantifying mobiles role in tackling climate change.

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Figure 38
Figure 35: China Mobiles Alternative Energy BTS Deployment
China Mobile Alternative Energy BTS Deployment (2008, Total = 2,135)

Other 5

Solar & Wind 515

Solar 1,615

Source: China Mobile 2008 Annual Report

In Sri Lanka, Dialog Telekom is piloting a green power trial in collaboration with the GSMA Development Fund with 10 hybrid renewable energy powered BTSs across the country. The multi-vendor trial is enabling Dialog and the GSMA to evaluate the effectiveness of the different technologies. In Vanuatu, an island nation located in the South Pacific Ocean east of northern Australia, Digicel is working with the GSMA Development to assess and develop commercial scale rollouts of green power technology. There are currently 24 live sites in the Digicel Vanuatu network running on green power, including eight mission-critical backbone sites carrying up to 60% of Digicels traffic. The findings of the initial assessment shows that commercial scale implementation of green power solutions is viable for replacement of diesel generators. Similarly, in Papua New Guinea, inspired by the booming local coconut oil industry, Digicel has experimented using coconut oil to power one of its cell sites. Given the volatility in global fuel prices, coconut oil is a cheaper, more environmentally-friendly alternative, and could be a major source of income for local copra producers. In a successful pilot, a tower was run on pure coconut oil for over two months. If all goes well, a similar move could be launched across other Pacific markets. Other Green initiatives by operators in AP include programmes for mobile waste reduction, handset recycling and carbon footprint reduction. For example, Globe Philippines initiated its Bantay Baterya project in 2003 to manage the proper disposal of mobile waste through an accredited treatment and recycling facility. Through this project, 100% of all the lead-acid batteries used in operations have been recycled, with an additional donation of 49,794 kg of used batteries to Bantay Kalikasan, a local conservation group. This contribution translates to 1,256 m3 of landfill space, 9,959 litres of sulphuric acid and 34,856 kg of lead that would have otherwise damaged the environment. In Malaysia, DiGi has declared an aggressive target of achieving 30% CO2 reduction by 2011, to reduce its carbon footprint from 70 million tonnes in 2007. Furthermore, DiGi aims to be a pioneer in this area for the ICT industry by setting an addition reduction target of 50% in the next 3-4 years. DiGi expects significant investment in green-driven initiatives in the next three years, including initiatives related to TRX swapping, modernisation of the network, and community engagement. As showcased, mobile operators in Asia Pacific have made significant inroads towards tackling climate change. In doing so, they have found new means for reducing power consumption, and therefore, carbon emissions. The benefits have extended beyond just a reduction in emissions to achieving cost savings and extending network coverage to areas where stable power supplies do not exist. Finally, the mobile industry is acting as an enabler for driving carbon emission reductions across numerous industries through improved communication and remote monitoring technologies that reduce the need for physical travel.

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And the Winner is At the 2009 Mobile World Congress in Barcelona, the GSMA presented the Green Mobile Award, sponsored by A.T. Kearney, to Philippines-based SMART Communications. The award recognises companies that employ new and innovative concepts and programs that promote environmental protection and sustainability. SMART won for its outstanding achievements in using alternative energy sources to power cell sites in off-grid locations. At present, 68 sites in various parts of the country are powered by renewable energy. Of these, 41 are run by wind energy and 27 by a combination of wind and solar power. By using wind and solar energy to power base stations, SMART is addressing a fundamental issue both economically and environmentally that operators in emerging countries are struggling with: how to power base stations in remote areas with diesel generators which tends to be very expensive. SMARTs program also benefits the environment as the CO2 emissions per litre of diesel are far higher than using the power grid. It also eliminates the risk of polluting waters, as diesel is normally carried by pump boats from mainland to island sites. Martin Sonnenschein, A.T. Kearney global head of the firms Communications & High-Tech Practice, commented: With its alternative power for cell sites program, SMART is improving its cost efficiency while reducing environmental impact in a very seamless way. Next to these benefits, this impressive project makes mobile communication more widely available by enabling cell sites in off-grid locations.

Acting as a catalyst to enable emissions reductions in other sectors


Beyond directly undertaking carbon reduction efforts, the mobile industry is also acting as a catalyst for other sectors, enabling further reductions through the use of Machine-to-Machine (M2M) mobile technologies to deliver smart solutions. Smart solutions enabling energy efficiency through the use of mobile technology can be categorised into five types:

Smart logistics solutions including fleet tracking systems and load optimisation

Smart transportation solutions including synchronised traffic and notification systems, onboard telematics to encourage eco-driving, congestion management, routing and journey management optimisation, and road pricing

Smart grids and smart meters solutions including electricity network monitoring, and electricity and gas metering Smart buildings which use mobile and other ICT technologies to deliver highly energy efficient, lowemissions buildings both for new and existing building stock

Dematerialisation, the substitution of high carbon products and activities with low carbon alternatives (substituting face-to-face meetings with video-conferencing)

The following are examples of such smart solutions enabled by mobile technologies which have begun to emerge across Asia Pacific: In Australia, Optus recently launched Optus TrafficView, a national road traffic information service that monitors traffic conditions across 70,000 KMs of roads by analysing location data collected anonymously from mobile phones. Optus TrafficView uses a combination of 2G and 3G mobile data to deliver real-time, historic and predictive traffic flow information to the automotive, navigation and government markets. This data is combined with other sources including GPS-equipped vehicles and journalistic or traffic incident data to produce extensive traffic information including current journey times, current traffic speed, expected trip delays, incident cause and effect, intelligent routing and congestion indexes all of which could have considerable benefits for reducing emissions and increasing energy efficiency. In China, China Southern Power Grid (CSG) has installed an automated meter reading solution from China Mobile, Huawei, and Hongdian, in order to improve efficiency in meter reading. Given its vast infrastructure, meter reading for utilities players has typically been an arduous, inaccurate and expensive process. However, with the automated system, which uses 1 million remote monitoring devices, CSG is now able to track end-users electricity usage in real-time, allowing it to accurately bill customers and optimise demand planning.

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CSG is also using M2M technology to monitor other parts of its electricity network (substations, power lines and primary nodes). By connecting the communications module to additional equipment, such as cameras or monitoring equipment, CSG can obtain real-time information to support remote troubleshooting and maintenance. The automated solution has provided to CSG significant benefits: reduced data collection, maintenance and troubleshooting costs; improved data accuracy through automation; easier deployment; a more reliable power network; and considerable carbon reduction through automated meter reading and fault detection.

6.2 The Social Impact of the Mobile Industry


The mobile industry has had a profound impact on social development in Asia Pacific. There are a number of ways to evaluate the social impact of the mobile industry. In chapter 3, we highlighted how the proliferation of mobile services has improved the lives of individuals and met the specific needs of people across the region. In chapter 4, we estimated the mobile industrys direct and indirect contribution to public funding in AP17. This contribution enables governments in the region to underwrite socio-economic and national agenda priorities, be it improving education systems, new infrastructure investments, upgraded healthcare facilities, and so forth. In this section, we will expand further on the social impact of the mobile industry by showcasing how mobile operators are positively contributing to the development of the societies they operate in through innovative corporate social responsibility (CSR) programmes. While the CSR agendas of mobile operators vary significantly from operator to operator and from country to country, several themes consistently appear:

Education programmes;

Health programmes; and,

Community development programmes.

Education Initiatives by Mobile Operators The mobile industry improves and spreads education in Asia Pacific by facilitating access to information, communication and the world. The mobile industry typically contributes in two ways; by enabling learning through mobile devices (m-learning) and by increasing mobile and internet access for schools. In the Philippines, Globe Telecom is helping public elementary schools access educational materials through the Text2Teach program. The mobile phones provided for the programme are pre-loaded with education videos on English, Math and Science subjects. Globe has also pioneered the Internet in Schools programme to connect children to the internet. Since 2000, this programme has brought the internet to more than 800 schools across the country. In Indonesia, Excelcom launched a five-year Computer for Schools programme in 2008, where it targets to provide computing facilities and internet connections to 60 educational institutions and schools throughout Indonesia, reaching 6,000 students and 300 teachers annually. Excelcom will provide training to teachers, and plans to actively measure the programmes success through periodic testing of computer literacy. Health Initiatives by Mobile Operators High-quality and reliable healthcare is among societys basic necessities that are lacking in some emerging countries in Asia Pacific, particularly in remote or rural areas. The mobile industry has an important role and high-impact opportunity to spread healthcare services across Asia Pacific through mobile health (m-health) services. In Bangladesh, Citycell is revolutionising the way healthcare is delivered to the masses with the set-up of Televideo Health Services for farmers and the general public. Doctors at hospitals can offer consultancy and prescriptions, pathological test views, case history transfer, medical file maintenance and other services online through the set-up of data device-enabled laptops at remote outlets.

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In Sri Lanka, Dialog Telekom provides an important service in collaboration with the National Blood Transfusion Service to facilitate and coordinate more donors to add to the blood supply system. Individuals register as donors for this service, called SMS Blood (7777), by sending an SMS with their blood type. Donors are then notified by SMS during emergency situations or when the national supply of their blood type is low. In Malaysia, DiGi has collaborated with the Ministry of Health since 2007 to expand existing radio communications between ambulances and hospitals to uncovered areas through the Hospital Emergency Ambulance Radio (HEAR) programme. By installing radio equipment at high-altitude locations, enabling two-way communications between ambulances and hospital in the surrounding areas, DiGi play a small but meaningful role in ensuring people in need of emergency assistance can receive help without delay. In Australia, BreastScreen Victorias Mobile Screening Services showcases the potential power of mobile broadband in providing high-quality health services beyond the clinic. BreastScreen Victoria leverages Telstras Next G mobile broadband network to send digital mammogram files of about 40MB in size directly to an assessment clinic for review. Ordering additional images, if necessary, can be done immediately rather than requiring a repeat visit. For some rural clients, this means not having to travel vast distances to attend a fixed screening site. Community Development Initiatives by Mobile Operators Finally, mobile operators are actively leveraging their services and resources in the development and protection of their communities and citizens. Such operator programmes range from disaster relief to employee volunteerism and to child protection. Disaster alleviation and relief: In collaboration with the Dialog University of Moratuwa Mobile Communications Research Laboratory and Microimage Ltd., Dialog Telekom is developing a Disaster and Emergency Warning Network (DEWN) based on R&D undertaken after the 2004 Tsunami. DEWN has national significance, with the potential to transform the mobile phone into a life-saving device. Child and senior citizen protection: In South Korea, SK Telecom provides a location-based service which provides parents with information on the whereabouts of their children in order to prevent crime and missing-child/elderly incidents. Parents are notified by SMS in cases where children are out of pre-defined safe areas. Additionally, senior citizens or the disabled can notify hospitals in case of emergencies by pressing pre-specified buttons on their mobile handsets to send an SMS to patrons or emergency services. Employee volunteering programmes: Vodafone Australias Employee Engagement Programme encourages its employees to be active in their communities but, unlike other companies, its encouragement is backed by support from the company. For example, employees can take at least one additional paid leave day each year to volunteer with their favourite community organisation. Additionally, employees can have the money they raise for charity matched by the Vodafone Australia Foundation on a dollar for dollar basis. While the initiatives and programmes showcased in this chapter are obviously not exhaustive, they are representative of the comprehensive CSR programmes around the AP region. They highlight the deep commitment that the mobile industry has towards acting sustainably and responsibly, and measuring its success along the triple bottom line. These initiatives also emphasise the pivotal role that the mobile industry plays in facilitating other industries environmental and social contributions.

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7.

Regulatory Enablers to Spur Further Growth

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Key Messages:

Regulatory policies in Asia Pacific are key to drive sustained growth in the industry. - The need for a transparent, predictable and consultative regulatory regime - Reducing ineffective taxation to drive penetration - Incentives to drive universal access, not USFs - Driving improvements to spectrum allocation

Four key regulatory themes emerged that had cross-regional relevance in Asia Pacific:

Regulatory policy in these four areas can be an influential means to benefit consumers, reduce prices and also generate industry value.

Progressive governments and regulators understand the benefit of a connected society and therefore the benefits of a thriving telecommunications industry. Former Prime Minister of Malaysia, Dr. Mahathir Mohammed, once said that It can be no accident that there is today no wealthy developed country that is information-poor, and no information-rich country that is poor and underdeveloped. Regulators are important actors in the mobile ecosystem. The role of regulators is, ultimately, to ensure that affordable access to telecommunication services is available for all. Telecommunications policy has a major impact on the development of the mobile industry and its ability to deliver affordable services. Indeed, governments and regulators in Asia Pacific have already seen some successful policy initiatives implemented in the past, however, there is always more to do. Forward-thinking regulators who view the mobile industry as a fundamental driver of the economy and society can continue to positively drive growth and draw further investment by enacting newer, progressive policies. This chapter will focus on regulatory policy issues that have relevance across the Asia Pacific region and how governments and regulators can create an environment that allows the mobile industry to further innovate and create value for consumers. For this study, a joint team of A.T. Kearney consultants and GSMA public policy specialists interviewed mobile operators from both emerging and developed markets in the region to assess the regional relevance and resulting impact of the different policy enablers. A consistent message from the interviews was that governments should focus on enabling progressive policy making in four areas. These areas are:

The need for a transparent, predictable and consultative regulatory regime Reducing ineffective taxation to drive penetration Incentives to drive universal access, not USFs Driving improvements to spectrum allocation

7.1 The Need for Transparent, Predictable and Consultative Regulatory Regimes
Perhaps the most commonly stated concern that operators identified was the need for a transparent, predictable and consultative regulatory regime. Issues cited include a lack of transparency in decisionmaking, unfair practices that favour certain companies or technologies, opaque foreign ownership rules, unclear (or lack of) industry development plans, and the inability to enforce and enact contracts. Transparency and predictability in the regulatory regime are necessary to attract investments. Decisions made by regulators or other policy-making bodies can potentially change the business case for long-term investment within short notice. Some operators have observed regulatory decisions that have altered the viability of business cases overnight. Mobile operators need to consider investing significant funds into the deployment of mobile broadband licences and infrastructure. In deciding where and how much to invest, the level of transparency and predictability in the regulatory regime are clearly important decision criteria.

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Figure 39

The World Economic Forum (WEF) together with INSEAD evaluated and ranked the political and regulatory environment of countries around the world (including 22 countries in Asia Pacific) as part of the Networked Readiness Index published in their annual Global Information Technology Report (2008-09). The ranking considered factors such as: the effectiveness of law-making bodies, ICT-related laws and the speed and process to enforce contracts. The results for Asia Pacific ranged from Singapore and Australia placing 1st and 9th in the world respectively, to Bangladesh and Timor-Leste that placed at the bottom of the ranking (130th and 134th respectively out of 134 countries) (see Figure 36). Singapore ranked atop the world in other related rankings including the Government prioritisation of the ICT industry and the importance of the ICT industry to the Governments vision for the future.

Figure 36: WEF Network Readiness Index: Political and Regulatory Ranking WEF Network Readiness Index:Political and Regulatory (Environment Sub-Index)Environment Ra
Country Singapore Australia Hong Kong SAR New Zealand Japan Korea, Rep. Malaysia Taiwan China Thailand Vietnam India Sri Lanka Brunei Darussalam Indonesia Philippines Mongolia Pakistan Nepal Cambodia Bangladesh Timor-Leste Asia Pacific Rank (22 Countries) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Global Rank (134 Countries) 1 9 11 14 18 23 24 43 45 48 53 57 71 78 83 87 102 107 115 117 130 134

Source: Global Information Technology Report 2008-2009: Mobility in a Networked World. World Economic Forum

The stability and predictability of the political and regulatory environment is important for the telecom industry for several reasons:

First, the lack of consistency, transparency and industry inclusion in regulator decisions can stifle competition in the mobile industry and reduces the level of trust among stakeholders; Second, uncertainty in the regulatory regime and lack of a clear long-term path for the industrys development increases the risk profile and worsens the overall investment climate;

Third, opaque and ineffective legal practices and processes make it difficult to enforce business contracts (e.g. the WEF found that contract enforcement/dispute resolution in Bangladesh takes an average of 1440 days compared to 150 days in Singapore) with the risk being transferred to consumers;

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Ultimately, all of these factors reduce industry investments, constrain competition and ultimately weaken affordable access for consumers. In order to ensure a thriving telecoms sector that maximises benefits for society, governments and regulators should adopt the following principles and practices:

Major regulatory decisions (such as spectrum issuance and licensing frameworks) should be made in a transparent, inclusive and consultative process drawing inputs and feedback from all industry stakeholders

Regulatory policy should have its foundations based on sound and efficient laws that enable timely contract enforcement, adequate appeal processes and effective implementation procedures Regulatory frameworks should be clear and long-term in nature as well as neutral both from a technology standpoint and a company standpoint (incumbents vs. new-entrants)

7.2 Reducing Ineffective Taxation to Drive Penetration


If mobile telecommunications is an important engine for economic growth, continuing to stimulate growth will require further liberalisation and reform to telecoms policy in many countries in Asia Pacific. A main driver for reform is that growth in teledensity will now come from growth in rural areas, where the cost of providing services is higher and the per capita income is significantly lower. Encouraging adoption of mobile services will only be possible through lowering prices and breaking down entry barriers for endcustomers taxation will be an important lever to consider in overall telecoms policy. Mobile operators already face a slew of charges like licence fees, spectrum usage charges, service taxes, USO, GST, etc. However, in addition to these taxes, many countries in Asia Pacific have telecom-specific taxes that directly hit end customers (see Figure 37). As discussed earlier, the barriers to growth in mobile (and mobile broadband) are 1) affordability, 2) availability and 3) content and services. Telecom-specific taxes raise entry barriers, drive prices higher and thus negatively impact affordability, effectively pushing mobile access beyond reach for the customers who need mobile access the most those sitting at the bottom of the pyramid. In the Philippines, there was intense debate and even public uproar when the parliament in Manila announced it was planning on implementing an excise tax of five-centavo on every SMS sent, in an attempt to raise funds to close the budget deficit. As each of the 70 million subscribers send between 10-12 text messages a day, the proposed excise tax could raise over half a billion dollars. However, the proposal met with widespread opposition from consumers, industry groups and operators as it was most likely to hurt the poor the most, as 92% of the text messaging traffic was generated through cut price, unlimited Figure 40 use plans.

Examples of Telecom-specific Taxes in Asia Pacific

Figure 37: Examples of Telecom-specific Taxes in Asia Pacific


Country Bangladesh Examples of Telecom-Specific Taxes (not exhaustive) 12% duty on handsets (decreased from 25% in 2009/10 budget) $11.63 tax on SIMs 12.24% tax on usage charges 13% tax on handset imports $1.36 tax on SIMs 10.3% tax on usage charges (reduced from 12.5% in Feb 2009) $3 tax on handset imports $3 tax for activation $0.10 tax on usage $0.002 per SMS (introduced in 2009-10 Budget) 33% tax on handset imports 10% tax for Mobile Subscriber Levy Additional taxes like Environment Conservation Levy (2%), Nation Building Tax (3%) 10% Handset import duty 3% usage levy 18% handset import duty

India

Pakistan

Sri Lanka

Cambodia

Indonesia

Source: Interviews with regulatory bodies, regulator websites, A.T. Kearney analysis

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Governments should focus on removing telecom-specific taxes completely as well as reducing consumer/ indirect taxes and corporate taxes (or offering tax breaks and subsidies) over time. Governments can be reassured that the loss in taxation revenues will be more than offset by the net positive effect of increased mobile penetration and usage on government tax receipts.

7.3 Incentives to Drive Universal Access, Not USFs


Universal Access regimes have a formidable vision: to spread access to communication to all citizens. This is a shared vision across governments, regulators and citizens as well as mobile operators and the larger mobile industry as a whole. However, the means to achieve this vision are disputable. Regulators in many emerging countries have instituted Universal Service Funds (USF) in order to subsidise increased universal access. USFs typically work on a pay or play model where levies are collected from operators (mostly as a percentage of adjusted gross revenues) and are, in theory, redistributed as one-time subsidies in auctions to interested operators in order to fill the financial gap required to make rollouts commercially viable. At least seven countries in Asia Pacific currently have USF operator levies in place, with India (5%) and Thailand (4%) amongst the highest in the world (see Figure 38). Figure 38: USF Operator Levies in Asia Pacific
India Thailand Malaysia1 Nepal Mongolia Pakistan Indonesia 0% 1% 1.50% 1.25% 2% 3% 4% Percentage of Adjusted Gross Revenues 5% 6% 2.00% 2.00% 2.00% 4.00%

Figure 42

USF Operator Levies in Asia Pacific

5.00%

Note: (1) Malaysias USPF levies 6% of operator weighted net revenues, which includes the following services: international calls; call termination service for foreign service providers, freephone service, ISDN, cellular mobile, international roaming, IP telephony, leased lines, other activities subject to an individual or class license. The levy is approximately equal to 2% of the sectors total gross turnover according to the regulator, MCMC. However it appears to be higher than this on mobile operators. Source: GSM Association Universal Access Report, Regulator websites, Operator interviews

However, the impact of these funds is limited for several reasons. First, according to a 2007 study commissioned by the GSMA that reviewed USFs in 15 developing countries, most of the monies (74%) that have been collected through USFs have not been distributed (see Figure 40). This implies that either operator levies are higher than required or an effective funds distribution strategy does not exist. A review of Indias USF reported activities in 2009 shows that only 31% of the total funds collected since 2003 (US$5.38 billion) have been distributed, meaning that over US$3.7 billion of funds collected from operators are sitting unutilised in government coffers. Second, USFs have been unfairly and unevenly distributed to fixed-line operators rather than mobile operators. Though mobile operators contributed approximated one third of USF monies, less than 5% of distributed funds have been have given to mobile operators. Moreover, in some countries such as India mobile operators are entirely barred from receiving funds.

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Figure 43 Fourth, the allocation strategy that is heavily biased towards fixed communication technologies, does not
Figure 39: Performance of Universal Service Funds Performance of Universal Service Funds
USFs in 15 Developed Countries1 (2007, US$ Billion) 6.20 Mobile Other 34% Fixed-Line USF Performance in India2 (2009, US$ Billion) 5.38

Third, USF policies have not adapted to market developments. Malaysia, for example, has a 2% levy in and yet its population coverage (92%) and mobile penetration rates (92%) have grown over the past decade to be amongst the highest in Asia Pacific (though not as a result of the USF). Even successful USFs should be short-term solutions and should be reduced and phased out as markets reach full coverage and penetration. meet the principle of universal access (spreading communication for all) since deploying fixed-line is more expensive and more time-consuming than mobile technologies.

Total India USF

Only 26% of Funds collected have been utilized 1.62 5% 3%

Only 31% of Funds collected have been utilized

66%

1.45

93%

Collected

Distributed

Collected
(2) Breakdown of mobile and fixed-line not available Source: India Department of Telecommunications

Distributed

(1) USF in Bolivia, Brazil, Chile, Colombia, Dominican Republic, Guatemala, India, Indonesia, Malaysia, Nicaragua, Pakistan, Peru, South Africa, Uganda, Vietnam Source: GSM Association Universal Access Report

Lessons Learned for USFs in Asia Pacific The failure of USFs in Asia Pacific and around the world begs the questions of how governments and regulators should reform their USFs and what should be done with funds already collected but not yet distributed. Governments and regulators are urged to consider the following recommendations:

USFs should have clear goals, targets, timelines and processes for both the collection and distribution of funds to ensure the transparency and measurement. USFs should be reviewed on a regular basis and should be removed upon the achievement of the original goals.

Funds collected by USFs should be distributed in open and consultative process involving industry stakeholders. USF allocation policy should be on a least-cost technology basis that drives the highest population connectivity at the lowest cost (often mobile communications).

USFs could be spent on infrastructure that could be shared among multiple players (such as towers and backhaul) to achieve greater efficiency of funds.

Incentives to Drive Increased Coverage and Penetration Beyond USFs, governments should aim to increase the penetration rate among citizens who are already covered by mobile services (thus reducing the gap between population coverage and penetration). As previously discussed, governments and regulators can positively influence penetration by reducing telecom-specific taxes which hamper mobile take-up, especially among those at the BOP. Second, to increase coverage, regulators could introduce innovative licensing frameworks to attach coverage requirements for underserved areas to new coveted spectrum/licenses issuing. For example, in the Philippines, regulators combined Metro Manila licences with licences for less-coveted regional territories to incentivise operators to expand coverage across the entire country.

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7.4 Driving Improvements in Spectrum Allocation


Spectrum management is among the most important issues for the telecoms industry globally. Spectrum is a valuable and limited social asset effectively a scarce natural resource that governments control and need to best utilise to maximise economic and social benefits for their citizens. As shown in previous chapters, mobile technologies are the primary sources of communication for much of the population in Asia Pacific and mobile broadband is expected to be the critical technology that will finally bridge the digital divide and connect the unconnected across the region. However, for ubiquitous and seamless mobile communication and broadband to exist, sufficient spectrum must be allocated to the industry. To provide the desired mobile services at the lowest possible cost and to allow consumers to use the widest selection and lowest possible cost handsets, the mobile industry needs allocation of internationally harmonised frequency bands and implementation of internationally harmonised band plans. The licensing and spectrum landscape across Asia Pacific to a certain extent differs along the lines of emerging and developed economies. In most developed markets, 3G spectrum licences have been available in the market for a number of years already. In such markets, the take-up of 3G and mobile broadband (HSPA and EV-DO) and the corresponding rapid increase in data usage is putting pressure on the bandwidth available for operators to meet the needs of customers. In emerging markets, where 3G licences have recently been issued (China, Indonesia) or are planned to be issued by end of 2009/early 2010 (India, Thailand), spectrum allocation ultimately impacts how many people will gain access. Broadly speaking, there are four key factors related to spectrum management and its impact on the mobile industrys ability to deliver affordable and high-quality access and services to consumers:

Access to the right type of spectrum and to a right combination of frequency bands Access to sufficient spectrum Spectrum pricing

Efficient, fair and transparent spectrum allocation processes

Access to the Right Spectrum The type of spectrum issued or the frequency band where the spectrum is allocated greatly affects mobile operators ability to achieve ubiquitous population coverage in a cost-effective manner, particularly in rural areas. The mobile industry must have access to internationally harmonised coverage bands and internationally harmonised capacity bands and each operator depends upon the right mix of coverage and capacity bands. The coverage band used in most countries currently is the 900MHz band for GSM and, in some countries, the 850MHz band is used as a coverage band for HSPA. The 1800MHz capacity bands is currently most utilised though some countries use 1900MHz band for GSM. Countries which have awarded spectrum for UMTS/HSPA predominantly use the 2100MHz band. The 2600MHz band, a relatively new capacity band often referred to as the 3G extension band, has been internationally allocated by ITU Radio Regulations and most countries have either already allocated this band for mobile or are currently in the process of assessing it. The 2600MHz band is expected to become a capacity band for LTE. Allocation of UHF spectrum to mobile should be the next step towards achieving mobile broadband for all. To enable take-up in rural areas and among citizens with lower income, governments should provide mobile operators with UHF spectrum which will reduce rollout costs, and ultimately, reduce prices to consumers. In most countries in Asia Pacific, the 700MHz band (698-806MHz) is most likely to be the harmonised solution for mobile in the UHF band. Estimates carried out by SCF Associates shows that the cost of providing mobile broadband using the 700/800MHz band is approximately 70 percent lower than providing the services based on 2100MHz band. Australia is one example of the benefit of access to coverage spectrum. Telstra has been able to achieve a staggering 99% population coverage (in one of the worlds most sparsely-populated geographies) for mobile broadband using HSPA+ technology and attributes much of the success to deploying its network in the 850MHz spectrum frequency band37. Telstra estimates that an HSPA BTS using the 850MHz band can achieve four times more coverage than the same BTS using the 2100MHz band (the 3G standard in much of Europe and Asia).

37 Telstra Case Study: Stretching the Boundaries of Mobile Broadband. GSMA Case Study Series. October 2008.

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International harmonisation of frequency bands has many benefits. It is instrumental in achieving costeffective roll-out of networks and drives service up-take. It also reduces harmful cross-border interference and helps facilitate international roaming. There are also significant economies of scale in the production of radio equipment and handsets as harmonisation of technical specifications can result in up to 50% reduction in the cost of terminal manufacturing. Harmonisation of frequency bands is especially important for emerging economies where affordability is the greatest barrier for access as it can drive the down rollout costs and consumer pricing. Access to Sufficient Spectrum The amount of spectrum issued to mobile operators determines their ability to deliver high-quality services to consumers and manage the bandwidth required to handle increasing traffic volume from the uptake of mobile internet services. In most markets, the minimum amount of spectrum licensed to operators has been 2 blocks of 10MHz (2X10) though in many markets licenses of 2X15Mhz of 2100MHz spectrum exist. China, for example, recently issued operators two blocks of 15MHz (minimum), positioning the market to deliver greater takeup and usage and therefore, greater benefits for the economy and society as a whole. However, as mobile broadband take-up increases, LTE developments emerge, and users begin to experience the true power of an always connected experience, 2x10MHz will likely prove to be insufficient and larger blocks per operator will be required to meet consumer demands. In contrast, the upcoming 3G auction in India will issue only one 5MHz spectrum block to each operator. The issue with this strategy is that operators typically will reserve an entire 5MHz block for the provision of voice services alone. In densely populated regions (like in many Asia Pacific countries) it is feasible that even one 5MHz block reserved for voice services could suffer capacity constraints due to network congestion, especially during peak times. If this happens, providing mobile internet services to the broader population is unlikely to occur. The unintended consequence of this phenomenon is that either operators will opt for offering very poor-quality services because their network load will be far over capacity; or operators will be enticed into reluctantly pricing their 3G and mobile broadband services such that only a very small portion of the population will be able to afford them. Regardless, neither outcome meets the needs of consumers. As the transition from terrestrial to digital TV looms on the horizon for developed markets (Singapore, Australia) and some emerging markets (Malaysia), an unprecedented amount of spectrum is expected to become available this phenomenon is commonly referred to as the digital dividend. At the same time some countries in Asia (e.g. India and Pakistan) which have previously used the same spectrum, the UHF band, for other purposes are looking into allocating UHF spectrum to mobile. It is absolutely essential that sufficient harmonised UHF spectrum is re-allocated to the mobile technology for the industry to continue to deliver high-quality services (mobile broadband, in particular). The mobile industry argues that the promise of LTE can only be achieved if sufficient digital dividend spectrum is allocated to the industry. The GSM Association is seeking 25% of digital dividend spectrum (at least 100 MHz of the 400 MHz expected to become available), a seemingly reasonable demand given the widespread economic and social benefits that can be generated from it. Spectrum Pricing The demand for, and limited supply of spectrum may sometimes tempt governments to drive spectrum prices high under the guise of maximising public good; however, this is a narrow and short-term view. It is flawed to assume that governments would be maximising societal welfare by reducing supply and driving up price per MHz for spectrum. In fact, governments could find themselves even eroding their net licence fees if they restrict the amount of bandwidth released, even though the price per MHz is kept high. Most importantly, the value of spectrum to society cannot be measured in terms of price per MHz because the real value comes through welfare improvements stemming from using the available spectrum to deliver mobile services. The short-term goals of maximising revenue from a public good for governments desperately seeking a means of reducing their budget deficits are actually harmful to society. These policies hamper network roll-out and the development of mobile services and thereby reduce the mobile sectors contribution to GDP growth.

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The theory states that when an operator purchases spectrum, the costs can be considered as sunk. However, in the real world mobile operators treat the price of spectrum as a true (recoverable) cost in their business cases which then leads them to reduce other costs such as CAPEX needed to roll out networks and/or to increase prices. For example in the upcoming Indian 3G licence auction, a ministerial panel nearly doubled the reserve price for national coverage spectrum to US$722 million, up from US$414 million. Indias telecom regulator had earlier recommended a reserve price of US$250 million per licence. While it is understood that Indias Department of Telecommunication hopes to raise US$5 billion in proceeds from this auction to help close the governments large fiscal deficit, the likely consequence of this action is that rural deployment of 3G services will be hampered. Public discourse related to maximising public good from spectrum should not be focused on how much money can be generated for public funds. Instead, it should be focused on how to maximise the overall economic and social returns from spectrum. As discussed in earlier chapters, there is a strong correlation between mobile and broadband penetration and economic growth. Furthermore, the industry makes considerable contributions to the social development of a country and its people. Unreasonably high and irrational spectrum prices will ultimately be passed on to consumers which will inhibit penetration growth and ultimately, reduce the impact and value derived from the spectrum. Spectrum award procedures Governments should design and implement spectrum award procedures in an efficient, technology neutral, fair and transparent manner to keep participant costs low and deliver usage benefits to citizens as quickly as possible. Lack of clarity around the spectrum award procedures can send mixed (and even negative) signals about the investment climate in a country. There have been several examples in Asia Pacific where the spectrum award procedure has been unclear and thus inefficient. For example, the Bangladeshi government has been discussing award of the 2100MHz band for several years without reaching firm conclusions or even starting the process for designing and implementing the award. Also, Thailand is now the last remaining country in the ASEAN group without 3G services (Vietnam and Laos finally received licences in 2009) as policies presented by the National Telecommunications Commission (NTC) face strong opposition from labour unions at the two state telecoms enterprises. Government policies should aim to develop a technology neutral environment (while ensuring interference is managed, and allowing the deployment of internationally harmonised spectrum plans). To facilitate innovation and a smooth technology development curve, governments should relax restrictions on the specific technology to be deployed so that, for example, a GSM operator can consider using its current spectrum for upgrading to third generation technology (UMTS/HSPA) or even fourth generation technology (LTE). One might consider this as allowing operators to follow a natural upgrade path, and ensure that they are using the most cost-effective, and spectrally-efficient solutions. Government policies should also be fair to all industry players. Implementing policies with the aim of ensuring one player (typically the state-owned incumbent) is given the advantage of going to market well before others, does not create a level playing field. For example, in India 3G licences and spectrum were awarded directly to incumbents in mid-2008 well before any competitors were allowed to compete for licences or spectrum. Though these incumbents will still be required to pay for the licence and spectrum (at the highest price resulting from pending regulation), this gives them an undue competitive first-mover advantage. It should be noted that India is not the only nation in the world to grant such advantages to their incumbent; similar cases have been seen in other countries. For example, in Thailand the state-owned operator is the only 2100MHz licensee while other players in the market have not yet been given the opportunity to compete for 2100MHz spectrum.

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Finally, preparing for spectrum awards and implementing and accomplishing award procedures should be carried out transparently, and preparations should include public consultations with market players. Investments in spectrum have long lead-times and thus require a high degree of certainty. Governments should realise that there are many ways to promote investment and attract bidders, like:

Clarifying the regulatory framework

Clarifying future spectrum availability, e.g. publishing a spectrum allocation and award roadmap of both the coverage bands (700, 800, 850 and 900 MHz bands) and the capacity bands (1800, 1900 if US band plan adopted, 2100 and 2600 MHz bands) Publicly committing to and actually implementing international harmonised band plans Clarifying the key technical and operational terms and conditions such as potential technology restrictions (e.g. GSM only) or potentially relaxing technology restrictions.

The Indonesian market has learnt a great deal from its own unclear spectrum allocation process in the past. In Indonesia, 3G licenses were awarded twice: the first time was in July 2003 and the second time in January 2006. The Chief Economics Minister went on record to say the government would repeat the tender for 3G licences, as the initial process of awarding the first two licences had been unfair. The first tender had resulted in two winners (Cyber Access Communications and Natrindo Telepon Selular) and neither player was even capable of rolling out a 3G network. Both players quickly sold the majority of their stakes to foreign investors, for a large profit. In September 2005, the regulator (DGPT) encouraged CAC and Natrindo to each hand back 5MHz of 3G spectrum frequency for reallocation in a re-tendering process that would involve the countrys leading telecom operators. In February 2006, Indonesian government awarded separate licences to Indosat, Excelcomindo and Telkomsel and subsequently halved the 3G spectrum allocated to Natrindo and Hutchinson (formerly CAC) to create a level playing field. While this is a good example of how not to run a transparent, efficient tendering process the learning has been good for the regulator, that has since run efficient auctions for spectrum allocation (the latest being the WiMax auction in July 2009). As countries across Asia Pacific begin to consider re-farming (by either relaxing GSM-only restrictions allowing deployment of UMTS, HSPA and LTE in the GSM bands, or by re-planning the use of UHF band previously used for terrestrial broadcasting and various public services) the principles of transparency and public consultations will become increasingly important. Some good examples have already begun emerging. Australia has recently embarked on a major consultation process regarding the revision of its spectrum management policies in advance of pending licence expiry (in 2013 the HSPA and 2G expiry on 850MHz/1800MHz; in 2015 the 2G expiry on 1800MHz; and in 2017 the 3G expiry on 2100MHz). Also, New Zealand recently carried out a major public consultation on the future use of the UHF band when analogue shut-off of broadcasting is accomplished in a few years from now (deadline for responses was end September 2009 and the consultation process included both options for written responses and participation in public meetings set up by the relevant government branches). Similarly, in India, regulators have invited mobile industry players to comment on the future use of the UHF band and have given the industry the opportunity to express their preferences on which bands to allocate and which harmonisation measures are preferred (band plans). These consultation processes are taking place well in advance of spectrum issuing and are inclusive of all stakeholders. Clearly, spectrum is fundamentally important for the success of the mobile industry. In economic terms it is an essential input; no spectrum means no networks, no services and no business. Spectrum is considered a vital factor for the mobile industrys ability to truly deliver affordable services to all. The objective of providing voice connections and internet access to all citizens cannot happen without ensuring the mobile industry receives sufficient amount of spectrum and the right combinations of coverage and capacity bands. As such, regulators are strongly encouraged to adopt the recommendations made above to allocate sufficient spectrum in the right frequency bands, priced to achieve maximum benefits for the economy and society as a whole, in an open and fair award process.

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8.

Appendix: Country-Level Economic Contribution Estimates in AP17


Figure 44
Mobile Contribution Value Add Ecosystem Value Add in AP17 by Country
Figure 40: Mobile Ecosystem Value Add in AP17 (by Country)
(Value Add as % of GDP, 2008) 3.5% 3.46% 3.38% 3.22% 3.0% 3.01% 2.78% 2.5% 2.74% 2.73% 2.73% 2.70% 2.40% 2.40% 2.28% Productivity / Demand-side Impact Multiplier Effect Related Industries Mobile Operators

2.25%

2.21%

2.14%

2.0%

2.06%

2.01%

1.5%

1.0%

0.5%

SIN

JPN

MAS

VIE

KOR

BAN

IND

HKG

AUS

CHN

TPE

THA

NZL

PHI

PAK

SRI

INA

Figure 45

Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Telenor, A.T. Kearney Analysis

Contribution to Employment by the Mobile Ecosystem in AP17 Employment Created


Figure 41: Mobile Ecosystem Contribution to Employment (by Country)
(000 of Employees, 2008) 3,800 3,700 2,900 3,706 2,890 Induced Employment (Multiplier Effect)2 Indirect Employment1 Related Industries Employment Mobile Operator Employment

900 800 700 600 500 400 300 200 100 0 CHN IND JPN INA VIE THA KOR PHI PAK MAS BAN TPE AUS SRI SIN HKG NZL 347 288 277 259 244 205 730 653

156

114

106 42 40 37 19

(1) Indirect Employment from Support Services Companies and employment generated from taxes paid (2) Indirect employment generated from spend of direct / indirect employees, calculated using a multiplier of 1.5 Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

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Figure 46
(US$bn)

AP17: Mobile Industry Contribution to Public Funding by Country


Public Funding Contribution
Figure 42: Mobile Ecosystem Contribution to Public Funding in AP17 (by Country)
Regulatory fees 36 35.4 23.8 Indirect taxes Income tax of employees Social Security Tax 20 16 Corporation tax 16.2

12

8 6

7.2

4.2 4 2 0 CHN JPN IND KOR AUS INA MAS PAK THA TPE PHI VIE BAN NZL SIN HKG SRI 3.0 2.0 1.8 1.7 1.6 1.5 1.0 0.8 0.6 0.6

0.4

0.3

Source: Wireless Intelligence, Merrill Lynch, Frost & Sullivan, IDC, Ovum, TIA, PWC, Informa, Telenor, A.T. Kearney Analysis

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9.

About the Authors


The inaugural Asian Pacific Mobile Observatory was a joint research study between the GSMA, A.T. Kearney and Wireless Intelligence. Any questions on the content of this document can be directed to the authors of the study.

The GSM Association (GSMA) is the operator-led trade association representing the global mobile industry. The GSMA represents the interests of the worldwide mobile communications industry. Spanning 219 countries, the GSMA unites nearly 800 of the worlds mobile operators, as well as more than 200 companies in the broader mobile ecosystem, including handset makers, software companies, equipment providers, Internet companies, and media and entertainment organisations. The GSMA is focused on innovating, incubating and creating new opportunities for its membership, all with the end goal of driving the growth of the mobile communications industry. 7th Floor, 5 New Street Square, London EC4A 3BF www.gsmworld.com Authors: Adam Denton, Head of Regulatory Policy adenton@gsm.org Kristin Due Hauge, Director of Spectrum Policy Richard Cockle, Project Manager

A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the worlds leading corporations across all major industries. A.T. Kearneys offices are located in major business centres in 36 countries. The firms telecoms practice works with the senior management teams of fixed line, mobile, cable and satellite operators as well as vendors on their most important strategic and operational challenges. A.T. Kearney Pte. Ltd. 438 Alexandra Road #05-03 Alexandra Point Singapore 119958 www.atkearney.com Authors: Naveen Menon, Principal naveen.menon@atkearney.com Roi Ross, Consultant Janice Tan, Consultant

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GSMA Head Office 7th Floor, 5 New Street Square, London EC4A 3BF United Kingdom Tel: +44 (0)20 7759 2300

www.gsmworld.com