Spectrum is a scarce resource and hence the operators scramble to garner as much as they can. In the coming few years, unprecedented amount of spectrum will be freed up in the switchover from analogue to digital terrestrial TV which is better known as the Digital Dividend. The spectrum is getting freed as digital TV is much more spectrum efficient than analogue TV.

The Digital Dividend spectrum is located between 200 MHz and 1GHz. This spectrum band offers an excellent balance between transmission capacity and distance coverage. GSMA claims that if just 25%, or around 100MHz, of the spectrum currently used by analogue TV (470 – 862 MHz) was re-allocated to mobile communications, the mobile industry could dramatically speed up the rollout of broadband communications and increase coverage. However, Analsys Mason, in its report to European Commission identified 5 potential areas for usage of digital spectrum

1. Digital Terrestrial TV
2. Broadcast Mobile TV
3. Commercial Wireless Broadband services, both to fixed location and mobile devices
4. Wireless Broadband services for public protection and disaster relief (PPDR)
5. Services ancillary to broadcasting and programme making (SAB/SAP)

In my opinion, the most appropriate use of freed spectrum would be to take the mobile broadband to the masses especially in the rural areas and far flung areas. There is a digital divide amongst developed and developing countries and w;ithin each country between the urban and rural areas. The excellent propagation capacity at low frequencies means fewer base stations are required leading to a cost effective network roll-out with wide and in-building coverage. It is estimated that mobile broadband in 2100 MHz band is 3 times more expensive than that in 700 MHz band (Refer the Capex chart below from GSMA).

Benefits of Mobile Broadband

There are several benefits of mobile broadband:

• Economic Development – there are reports that suggest that with every 10% increase in household broadband penetration, the GDP growth can go up by up to  1.4% (source: McKinsey). Bringing broadband penetration levels in emerging markets to today’s Western European levels could potentially add USD 300-420 billion in GDP and generate 10-14 million jobs.  Mobile broadband would help increase the broadband penetration faster as the mobile penetration is much higher than PC penetration.
• Mobile Broadband can be used for tele-medicine, education and general information to farmers, fishermen, etc. which would lead to prosperity in rural areas and among lower income groups. This is a direct result of productivity increase due to broadband usage.
• Development of human capital as internet can bridge the knowledge gap
• Mobile broadband is cheaper than fixed broadband as the last mile connectivity does not require laying of copper wires for mobile broadband. This means that not only the cost is less but also the deployment is faster.

There are many impediments to allocation of spectrum to mobile operators. Most of the countries are yet to make up their mind on the spectrum allocation, also the timelines vary across countries for switch over from analogue TV to digital TV. In Oct’07, the World Radiocommunications Conference (WRC) discussed the issue of allocation of digital dividend spectrum and agreed to identify a chunk of UHF spectrum for mobile broadband services, and a chunk of spectrum in the higher frequency bands to create the capacity required for the next generation of advanced mobile services. The following UHF band identifications were made at WRC 07:

Despite the WRC recommendation, there are a few countries that are planning to adopt their own distinctive band plans for the UHF spectrum rather than coordinating their spectrum allocations with other countries. Given the multiplicity of spectrum bands across regions, there is a need for harmonization of spectrum bands to keep the cost low. The key reason for success of GSM has been the standardization of spectrum bands which kept the terminal costs down. However, in case of mobile broadband, there are multiple frequency bands and to enable roaming, the handset would need to work on all or most of the frequency bands. Frequency harmonization can drive down terminal costs by as much as 50% (Refer the GSMA white paper on ‘The advantages of common frequency bands for mobile handset production’ )

In my opinion, the regulators across the world should allocate the digital dividend spectrum to mobile broadband for bridging the digital divide without any further delay. There is a need to keep the service and terminals affordable that can only be achieved if consensus is attained on allocating the 650-862 MHz for LTE. Given the scarcity of spectrum, it is important for Governments to taken the decision of switchover from analogue to digital TV and the mobile broadband can be used as one of the channels for TV.

Here are the top stories for the week ending 7th Mar:

• MeeGo repository going public later this month, coming to Nokia N900 http://www.telecomcircle.com/54q #
• China handset design houses ship over 200 million handsets in 2009, say sources. Surprising but true !!! http://www.telecomcircle.com/30v #
• Report: Sony cooking up new smartphone to challenge Apple. Will SE be able to revive its fortunes? http://www.telecomcircle.com/4×7 #
• MEDIATEK raises 1Q sales forecast to growth of 5 to 10% compared with an earlier forecast of zero to 5% http://www.telecomcircle.com/5zz #
• First LG Windows Phone 7 handset unveiled http://www.telecomcircle.com/49h #

On 15th Feb, 2010 Bharti announced the acceptance of its bid for Zain’s Africa business by Zain’s board. The deal value is $ 10.7 billion which Bharti plans to fund by loans arranged by Standard Chartered Bank and a couple of other Banks. This is the third attempt by Bharti to enter Africa after two failed attempts with MTN of South Africa. The share price of Bharti took a serious beating after this announcement as most of the analyst felt that Bharti is overpaying for Zain’s assets by around $ 2 billion. My analysis shows that it is a good deal for Bharti and its stock price would rise in the long run. In fact, just after the announcement of the deal, I brought Bharti shares and my optimism is based on the following facts:

1. Low Financial Leverage

Bharti has a very low “Net Debt to Equity Ratio” of 0.05 at the end of Dec., 2009 which means that it is virtually a debt free company. It is good to have low debt but zero debt is not a desirable situation as debt can increase the shareholders’ return on their investment due to tax advantages associated with borrowing. The figure along side illustrates how financial leverage can help companies optimize their cost of capital. As it can be seen from the figure, the total cost of capital is high if there is no or low debt and there is a level of financial leverage where the total cost of capital is the lowest. Most of the companies try to maintain leverage at the level where the total cost of capital is lowest.

Bharti is a profitable company with over 40% EBIDTA margins which is higher than the cost of debt. This means that it is better for the company to pay interest than paying dividends to a large number of shareholders and hence it should either reduce the shareholding (through share buyback) or increase debt and deploy debt in a profitable way. Bharti has selected the second option and is taking debt to buy Zain that would return higher profits in the long term. It is like investing for the future. Even if Bharti were to pickup $ 7 billion for the Zain acquisition as debt, then also the leverage is unlikely to exceed 1 which would still be lower than many listed companies. To put the case in perspective, Verizon has a debt to equity ratio of 1:45 while the similar ratio for Sprint Nextel is at 1.19 and for Telefonica, it is as high as 2.78 (source: Forbes financial application).

2. Free Cash

Bharti is one of the few carriers across the world that has free cash flow and it does not make sense for the company to keep sitting on the pile of cash when it can deploy it in productive assets. The capex in the Indian operations have started to decline and hence the free cash flow is likely to increase even further in future. If Bharti decides to fund the Zain acquisition through debt, it would not find much problem in servicing this debt due to generation of free cash flow in the years to come.

3. Attractiveness of African Market

Africa is the next frontier as far as mobility is concerned. As markets saturate, the carriers start to look at opportunities outside of their domestic markets. Vodafone invested in India around three years back to increase the growth potential of its revenues. Now that the tariffs have declined significantly in India and that the penetration levels have crossed 45% in India, there is little opportunity left in the domestic market for Bharti. The penetration levels in Africa are around 33% and the ARPU levels are high varying from $8 – 12 (apart from Kenya and Ghana where it is closer to India ARPU levels of $4). Bharti can replicate its low cost model in the African market which would not only bring the cost down but would also result in significantly higher subscriber addition. The level of competition in Africa is not as intense as India as most of the countries have no more than 4-5 operators. The countries where Zain has operations in Africa have a population of close to 500 million which is an indicator of the opportunity that lies in Africa.

Summary

I believe that with this deal, Bharti would be able to increase the valuation of the company in the longer term. The Zain deal would turn out to be better than MTN as it would be an outright purchase rather than co-ownership as in case of MTN deal. Most of the joint ventures or mergers fail due to cultural issues and ego issues between partners and the ego issues are more likely in co-ownership model. Moreover, in case of Zain, the regulators are unlikely to hold the deal on account of nation pride as Zain does not belong to any of African country and hence there would not be any insistence on dual listing or any similar binding as it was in the case of MTN.

Ten years back, Napster took the world by storm when it launched its peer-to-peer file sharing service that allowed music fans to share MP3 songs with each other. This service was accused of massive copyright violations as the network was mostly used for song transfer. In 2000, A&M records along with several other companies sued Napster. Napster lost the court cases and had to pay $26 million as settlement and eventually declared bankruptcy in 2002. The outcome of Napster’s case is not important but what is important is that this case highlighted the consumer attitude towards music piracy. It made it evident that if there are enablers, consumers are bound to opt for free music irrespective of their paying capacity. Digital music is the enabler that has killed music.

Over the years, the total revenues from music sales (physical + digital) has declined which indicates the growing menace  of piracy in the music industry (Refer to the chart alongside). Mobile phones have accelerated the decline in music revenues.  According to the International Federation of the Phonographic Industry (IFPI), 95% of downloads are illegal. Synovate survey on music reveals that globally 29% respondents admitted to downloading illegal music.

The decline in music revenues in the last few years does not reflect the lost opportunity due to piracy and I firmly believe that current monetization is just the tip of the iceberg. Though the regulatory authorities and law enforcement agencies have a big role in controlling the level of piracy, it is imperative on the companies (music labels and service providers) to come up with innovative business models that can help control piracy. In the last one year we have seen a lot of action on this front and the new initiatives are backed by improving enabling infrastructure (mobile broadband). I am listing a few interesting business models below which can be broadly be classified into two categories – Subscription and Streaming both of which could be Advertisement supported:

Download/Subscription:

Full Track download is still the most prevalent form of digital music as most of the people like to keep their music on their devices. In emerging markets, the internet infrastructure, esp. mobile internet is slow and unpredictable which makes streaming services less popular. The memory slots are now available in most of the handsets over $30. I have seen many outlets in India that fills the memory card with songs and video for anything ranging from 20 cents to a dollar. In fact it is a good revenue model for the retailers as most of the people do not have access to internet. In the rural markets or in small towns in India, the retailer sells a Chinese handset and makes $4 as margin and then makes around 40 cents every second month on songs download to the memory card. This makes a total of $8.8 margin on a handset which is far more than the margin offered by branded phones (branded phones do not have a memory slot in the cheaper phones). Internet infrastructure issues are only a part of the problem which would get resolved as the infrastructure starts to get better and cheaper. Even in the developed markets where internet access is good, most of the consumers are not willing to pay for music downloads. Certainly, there is a need to make music more affordable. There have been a few attempts to reduce the cost of music to the consumers, e.g. making the songs DRM free which means that the user can transfer songs across multiple devices. A bigger and more subtle business model that is making its way is the subscription model for downloads. The model is mostly being followed by carriers, device vendors or ISPs who want to retain customers and for them the music revenues are secondary. A few examples of this kind of model are:

• Vodafone Music Subscription service in Europe:  nearly 450,000 subscribers have signed up to Vodafone’s music service since it went DRM-free at the end of last year, with over 2 million tracks available so far. The services are available in all of Vodafone’s Western European operations with two options for the customer. One is through a bundled service where customer can download 10 music tracks for €5 (US$7.05) a month while the other is through an ‘all you can eat’ (AYCE) service for €3 a month if bundled with other data services.
• Nokia Comes with Music: Comes With Music gives users all the music they want and comes bundled with the device. During the subscription period (usually 12,18 or 24 months) the users can download unlimited free music from the Nokia Music Store to their PC or over the air to their compatible Nokia device. Everything the users download can be kept even after the subscription ends.
• Google’s Music Link service in China: Google offers links to free music downloads in China, a service it does not offer anywhere else in the world. Google’s service offers some 350,000 songs from Chinese and foreign artists that can be freely downloaded. Google is splitting the advertising revenue share with Sony Music, Warner Music, EMI and Universal Music. In a country where 99% of music download is pirated, this kind of service can go a long way in shifting people to a legal service.
• TDC’s PLAY service was the first ISP music service to launch. Today it offers TDC’s broadband, mobile and cable customers in Denmark unlimited music streaming from a catalogue of 6.1 million tracks at no additional cost. TDC’s online customer churn was reduced by 50 per cent, for those who used TDC Play.

Streaming Services

One of the key developments of 2009 was the rise of streaming music services. Many companies are sprucing up their streaming services as part of their cloud strategy. Today many of the music lovers may prefer to download music but in a couple of years when the data becomes real cheap, people would not mind streaming services. Even though users of streaming services are not necessarily buying more music, the industry benefits by learning more about fans’ tastes. Steve Purdham, CEO and founder of We7, a music streaming service and download store, said: “They may not buy an album, though they have that opportunity, but you can sell them tour tickets and a T-shirt of their favourite band.” A research in UK, conducted by music research companies Music Ally and The Leading Question last summer, found that illegal music sharing is declining and that teens are now increasingly streaming music online instead. The younger generation just wants to click – not on the download button, but on the play button. Of the 1,000 14 to 18 year olds polled, only 26% admitted to illegally sharing music files, down from 42% in December 2007. Instead, 65% of respondents said they stream music online at least once a month. Spotify and Lala are two leading examples of this kind of business model but there are many other such services like Myspace, Pandora, Groove Shark, etc.

• Myspace Music: MySpace Music is a joint music venture, with equity stakes from major labels, that allows users to stream music on demand, create playlists, and add widget music players to their profiles. This is an ad supported service.
• Spotify: Spotify has created a lightweight software application that allows instant listening to specific tracks or albums, with virtually no buffering delay. It has 7 million users in six countries (Sweden, Spain, Norway, UK and France) where it has been launched. The revenue model is based on advertisements and revenues from paid services to users who do not want advertisements. The mobile versions of Spotify was released onto the iTunes App Store and Google’s Android Marketplace in September, 2009, while a Symbian version was made available in November, 2009. The application allows Premium subscribers to access the full music catalogue, stream music and even listen to music when disconnected using the Offline Mode.
• Lala: Lala is a hub for online music discovery and purchasing. Users can listen for free music, adding tracks to their playlist as they surf.  Members who download a plugin can turn Lala into an online music locker that syncs their desktop music libraries to their Lala account. Long uploads aren’t necessary. If Lala already has the song in their library, they simply unlock the file to you online. Apple recently acquired Lala to strengthen its Cloud strategy and take advantage of Lala’s upload functionality. An upgraded iTunes application will push in the background the entire media library of users to their personal mobile iTunes area. Once loaded, users will be able to navigate and play their music, videos and playlists from their personal URL using a browser based iTunes experience. This would free the users from device and regional limitations.

What would make the users shift to original music?

I believe that it is not possible to completely stop piracy but then there could be innovative ways of keeping it under control. Any business model has to be combination of the following:

1. Convenience: The music should be easy to acquire over the air, internet or through physical channels. In emerging markets it is important to look at retail outlets as an alternative to internet for music downloads. Across markets, self help kiosks dispensing music (with blue tooth support) would not only help increase the consumption of music but it would also limit the piracy.
2. Discovery: It is difficult to discover specific song on an illegal site as these site do not invest money on discovery mechanisms. It is heartening to see new emerging services like Shazam help discover the music and then make the buying process so simple. Music purchase is an impulse purchase and if you hear a song that you like, you may want to purchase it right there and sometimes you do not even know the details of artists or understand the lyrics. With Shazam’s mobile application, the user can be directed to the song on the music store if the user holds the mobile phone for a few seconds when the song is playing. Mobile music discovery service Shazam has been used by more than 50 million people across 150 markets who identify 2 million tracks a day and buy 250,000 tracks a day.
3. Superior Service: I firmly believe that consumers would pay for a service only if it is fantastic and not easily available. Look at TuneWiki, it has an engaging music social networking site with Music Maps. There is a trend of artists getting their own applications on application stores. The artists use the applications to promote themselves by keeping the content more fresh and thereby creating a loyal fan base. Artists such as Lady Gaga, Trent Reznor and 50 Cent among those who have been particularly active in engaging with their fan bases through mobile applications with great success. Another service is Tap Tap Revenge 3 in which users pay along with music tracks by tapping in time to the beat on their phone. This game has been downloaded 2.5 million times since its launch six months back and is generating US$1 million a month in revenues, with royalty fees paid to artists for the songs featured in the game. All these are examples of services where music is being used in innovative ways and is unlikely to be matched by piracy.
4. Realistic Pricing: Piracy starts only when there are super-normal profits are there in the value chain or when there are multiple entities in the chain leading to high pricing. The music industry needs to look at the value that each entity adds to the product. The internet is supposed to cut out the middle men and reduce the cost of music to the ultimate consumers but sadly the record companies and their agents still are trying to make most of the money.The digital music and its distribution should lead to reduction in cost and hence the pricing. Realistic pricing would dissuade many from selling and buying pirated music. Advertising is certainly an alternate revenue stream. Recently, a survey from Synovate revealed that over 50% of Americans are okay with listening/viewing advertisements in return of free music downloads.

I have tried to list a few business models to fight piracy. It would be great if the readers can add to the list, so would request you to leave your comments on the business models I have talked about in the article and add any other model that I have missed out.

Mobile World Congress – Day 2 & 3

Continuation from Highlights from Day 1

1. Steve Jobs named “Mobile Personality of the year”

Steve Jobs deserves to win this award for what he has done to the mobile industry. He has made “Touch screen” the mainstream and is again trying to change the rules with the iPad launch. To my mind the other top contender for this award could have been Mark Zuckerberg of Facebook. It is time that GSMA recognizes the contribution of players apart from operators and handset vendors

2. RIM launches BlackBerry Enterprise Server Express

BES Express will be offered as a free software download, and there will be no need to purchase CALs (client access licenses). BlackBerry users too may now connect to Exchange free of charge.

This move is to attract the SMEs as cost is a major inhibitor for this segment. RIM has enjoyed strong growth in the consumer market in recent years, and so there is a significant base of BlackBerry devices among consumers that are not leveraged in the workplace. In my opinion, enabling individuals to connect their BlackBerry devices to corporate email will create greater brand loyalty for RIM as well as lure users of other mobile platforms, paying dividends in future device shipments – RIM’s key source of revenue. This would help RIM increase the activation rate of its services which is currently less than 50%.

3. BBC pushes mobile application strategy

UK broadcaster BBC is set to launch two applications for news and sport that will make it easier for smartphone users in the UK to access the broadcaster’s content on their handsets. A user who has downloaded the news app will click on an icon on their smartphone to reach the BBC’s content. The news site will be repurposed to provide short and snappy coverage via carousels for different types of story (“politics”, “technology” and “health”, for instance). Content can also be personalised. The sports service will initially be focused on the BBC’s popular football coverage and offer real-time coverage of results and news.

The content would be available for free which in my opinion would put pressure on other media companies that rely on paid content revenues.

4. Google Geared Toward Mobiles over Desktops: CEO

The chief of Google said Tuesday that the Web search engine giant saw its resources deployed more toward the mobile sector, which has become the “high-volume endpoint” to reach consumers. “There are 26 devices with 59 operators, in 48 countries, in 19 languages so far and it is just the beginning,” he said, adding that 60,000 Android devices are shipped every day.

Mobile phones outnumber the PCs by a factor of 3  so it is not surprising that Google is focusing on mobile phones. It wants to replicate its web strategy on mobile phones as well as is looking at Android to provide the entry onto mobile phones.

Continuation from Highlights from Day 1

The 2010 Mobile World Congress is being held 15-18 February, in Barcelona Spain. For next four days, this beautiful Mediterranean city will become the place for mobile leaders to gather, collaborate and conduct business. The event also includes an exhibition where over 1300 companies are displaying their cutting edge products.

Almost all telecom companies save up their best for the yearly mega event of GSMA at Barcelona. Day 1 at Barcelona today was full of announcements by leading companies. Many of these announcements will shape the future of the mobile industry in the years to come. A few new partnerships were announced while others decided to showcase their capabilities. Some of the key announcements with my 2 cents on them are as follows:

1. Wholesale Applications Community

24 of the world’s largest mobile carriers with a combines subscriber base of over 3 billion across the globe have come together to launch an open international applications platform, marking the largest unified move to date by the operator community into the mobile apps space.

My view on this initiative is that this is an attempt by operators to gain back the initiative on application store from the likes of Apple, Nokia and Microsoft. We have seen many initiatives from operators in the past like JIL (Vodafone, China Mobile, Softbank and Verizon) and it would be interesting to see if this initiative gets successful or meets the same fate as past attempts. This initiative includes JIL operators and the handset vendors that do not have application store so if successful, it can make the applications available over a wider range of devices could make the application market less fragmented for developers

2. Nokia & Intel merge their Linux Platforms -- MeeGo

Nokia and Intel are to merge their respective Linux initiatives to form a new platform designed for high-end mobile computers. Known as ‘MeeGo,’ the platform will combine Nokia’s Maemo and Intel’s Moblin. Meego will target multiple devices -- mobiles, netbooks, TVs, etc.

I think this is a logical conclusion to the partnership announced between the two last year. It would be interesting to see how Nokia balances its portfolio between Symbian and MeeGo and if it would gain any traction amongst other handset vendors (MeeGo would be offered to other OEMs as well). This partnership should result in significant upside to sales of Intel. Will MeeGo replace Windows in Nokia’s Booklet?

3. Samsung Beam (Halo) Android projector phone launched

Samsung today launched pico projector phone which runs on Android 2.1 with a TouchWiz 3.0 skin. Beam features a nice pass through trick that allows it to project the image seen by the 5 megapixel camera through the TI pico.

I am not sure about the quality of projection or the use cases for the users for this phone

4. Microsoft launches Windows Phone 7 Series

Microsoft today announced its new operating system that it has built from scratch. Microsoft has already secured commitments from 11 operators and 8 phone makers including Samsung, LG and Sony Ericsson. Phones would have a dedicated Bing key.

Microsoft mobile OS has almost been written off but this new OS interface is unlike any other interface. I think it is a class effort from Microsoft and it would be interesting see how it shapes up.

5. Acer announced 4 new phones based on Android 2.1

The new phones announced today were E110 which is an affordable touch phone, E400 which is a touch screen with “Cloud” sync, Liquid e and Ferrari Smartphone.

Acer is getting active in the mobile space and I wonder if it would be able to replicate its success in the PC industry in mobile phones industry

I have listed only a few announcements which I believe have the potential to change the industry in the coming years. There are still 3 more days to go so keep following Telecom Circle to get the latest update. In the meantime it would be great to get your views on the key announcements made today in the GSMA event. Leaving you with a video on first look of Windows Phone 7 series and Symbian^3.

Windows Phone 7 series -- Video Demo

Symbian^3 -- Video Demo

Today when I logged on to my Gmail, I was surprised to see a new service called “Google Buzz”. Google Buzz allows the users to indulge in conversations in the form of status, photo, or a link right from the Gmail inbox. This is yet another attempt by Google to be relevant in social web.

My first impression is that it looks like a poor copy of Twitter. Yes, it does add a few more features to the service but then the beauty of Twitter lies in its 140 character limit which forces the tweets to be creative. Google Buzz has no limit to the number of characters. Twitter gained as the celebrities embraced it and now Twitter has created a new lingo.  Google has over 175 million unique users of its Gmail service which is huge in comparison to Twitter and since this service is integrated into Gmail, it would certainly give it an advantage but I do not think it would be easy for Google to shift users from Twitter to its platform. It is not just Twitter but the whole ecosystem around it needs to be replicated if Google wants to take advantage of its platform. There are a huge number of applications that take advantage of Twitter’s open APIs which would be difficult for Google to replicate.

Some news reports have also pitched Google Buzz against Facebook which I fail to understand. Facebook is much more than the conversations and has over 350 million users which is double that of  Gmail. I guess it is too late in the day to launch a new social networking service without much innovation. Google should have attempted for closer partnership with Twitter and should have integrated its services like Picassa, Google Reader, etc. with Twitter.

The mobile version of Google Buzz is available on Nexus One, Droid and iPhone. In the mobile version, the application adds the location to the buzz which provides context. The buzz around you can be seen on a map on the phone. Since there is no SMS integration, the reach is likely to be limited specially in emerging markets where the GPRS connectivity is patchy at best. This mobile version baffles me as Google seems to have forgotten “Latitude” otherwise why did they create a Buzz layer. It seems that Latitude is soon be added to the list of failed products like Froogle, Google Lively, etc. I would have liked Google to use Latitude layer (instead of Buzz Layer) for enabling conversations with SMS integration.

Unlike Google Wave, Google has done well to integrate the Gmail contacts with Buzz. I am not a regular user of Google Wave as I find it hard to get my contacts ported on to Google Wave. However, since this service is integrated with Gmail, I see this as a broadcast service. I can use email and chat for one to one or one to few conversations but Buzz allows me to communicate with all my friends at one shot. It is for this reason, I would not call Google Buzz a social networking site otherwise email and chat would all fall under that category.

See the official video of Google Buzz:

For the last fortnight, there has been a lot of talk about Apple launching its tablet computer. Apple finally unveiled its much touted device, iPad on 27th January, 2010. Such was the hype of this product that as many as 177,000 tweets happened on Apple within an hour of the launch event. iPad is a sleek looking, multi-touch device that has been positioned as a device between a smartphone and laptop. Due to its design a lot of parallels are being drawn between iPad and Amazon’s Kindle. Some of the analysts and blogs have sounded death knell for Kindle.

Amazon launched its Kindle device and created the e-reader segment. Barnes and Noble later launched Nook to take on Kindle but failed to take off due to product and software issues. However, e-readers caught consumer frenzy and around 1 million e-Readers were shipped in 2008 which are expected to go up to 28.6 million units bu 2013 (source: In-Stat). Nearly half of the e-Reader users spend $9 to $20 per month on the content which means over the life time of the consumer, the content revenues far outstrip the device revenues.

Kindle is a smart device which offers convenience as the value proposition. It is the hardware plus the book store plus the download experience of Kindle that has attracted many users to the e-book category. With Amazon Kindle, the users can download the books anywhere in the world without paying anything extra for the bandwidth. The most important aspect is that the Amazon is the data MVNO in this case and hence the users do not have to worry about buying bandwidth separately. Being the first mover and having a virtual book store is another advantage for Amazon as it has existing relationships with the publishers. Availability of a large collection of books and newspaper which can be downloaded in a hassle free way is a big plus of Kindle. In case of iPad, Apple has struck deal with five publishers (Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster). Unless Apple is able to broaden its base, it is unlikely to challenge the big e-book market.

We should analyze the market of Kindle separately from its DX version. Kindle is for $259 vs. iPad’s price tag of $499 which means that there would be a large segment that may not be willing to spend double the amount to buy iPad. However, the price differential between Kindle DX and iPad is just $10 and iPad offers so much more that Kindle DX. So, unless Amazon reduces the price of Kindle DX significantly, I do not see Kindle DX being able to compete with iPad.

Apple iPad is targeting a larger segment than the e-book readers. All iPhone applications are available on iPad which means that even the Kindle store on iPhone is now available to iPad users. Another functionality that works in Apple’s favor is the fact that it has WiFi which means it can connect to hotspots and download the content fast and/or free of cost. iPad has a color screen as opposed to grey screen of Kindle and can be used for a variety of other purposes apart from book reading. In fact, I am more inclined to say that the threat is higher to the net-book market than the e-reader. There would be buyers for e-readers like Kindle if the devices are priced in the range of $200-300. Kindle @ $259 offers great value. Amazon has already making aggressive efforts to fend of competition by launching KDK (Kindle Development Kit) for developers to develop applications for its device in an effort to make the device more valuable and functional to the users.

So, is game over for Kindle? Probably not yet.

Last week, I wrote on the reasons for the success of M-PESA in Kenya. A number of comments and responses mentioned that perhaps it was the environment of Kenya that was the major reason for its success. Kenya has an underdeveloped banking infrastructure, high poverty and large migrant population. The value proposition of M-PESA was tailor made for Kenya and hence is extremely successful. I do not deny these contributing factors but at the same time there are several other developing countries which are similar to Kenya and I not sure if it would be easy to emulate M-Pesa’s success in those developing countries.

Continuing with the case study on M-PESA, I would be evaluating the socio-economic benefits of M-PESA in this final part of the case study. There is a little know fact that the M-PESA service was originally conceived as a service to support the Micro Finance Institutions (MFIs). The idea was to develop a platform that would allow a customer to receive and repay small loans using his or her handset. The use of mobile technology in MFIs lowers the cost of business (read collections) leading to lower interest rates. However, the money transfer service turned out to be the bigger draw and together with MFI support, it brought many benefits. The key benefits of mobile money transfer are:

Financial Inclusion

Developing countries are severely constraint by the physical infrastructure of the financial institutions which means that a large part of its population is excluded from the formal banking system. Kenya has just 840 bank branches and 1,510 ATMs that are certainly not sufficient for the its 38  million people. M-PESA with its 15k agents is much more accessible to an ordinary Kenyan. M-PESA  helped the Micro Finance Institutions (MFIs) to go deeper into remote areas  very quickly without substantial increase in the costs.

Financial inclusion has a multiplier impact on the lives of people drawn into the formal financial system which leads to social inclusion. When the poor people get access to financial services, their cash flow management gets better, their financial planning is enhanced and their savings are increased with increased options for providing for themselves for their old age.  M-PESA has brought many unbanked customers under the formal financial system.

Enhanced Economic Activity

Getting cash into the hands of people who can use it is limited on the supply-side rather than demand-side; more than the shortage of funds, it’s the ability to move money from the sender to the receiver that is the stumbling block. Since the creation of money, the ability to move it from A to B—the so-called “velocity of money”—has been a fundamental cornerstone of economic activity. But the issue is exactly how money transfer is made to happen in an emerging market where the infrastructure is poorly developed and where very few people have or even want bank accounts. Mobile Money Transfer platform is instrumental in substituting the banking infrastructure as in most of the emerging markets, the mobile phone penetration far out numbers the bank account penetration (by a ratio of 3:1, i.e. for every one bank account holder, there are three mobile phone owners).

M-PESA has been instrumental in driving growth and development in Kenya. The World Bank estimates that reducing remittance commission charges by 2-5% could increase the flow of formal remittances by 50-70%, boosting local economies. Reducing the cost of each individual remittance would enable the delivery of lower value remittances than today’s average transfer value of US$200. M-PESA has resulted in higher remittance and hence higher economic activity leading to faster growth. CGAP in its survey has found that the incomes of rural recipients increased by 5- 30% since they started using M-PESA.

Reduced Cash in the Economy

In the absence of formal banking system, most of the transactions are cash based giving no audit trail to the regulators. M-PESA brought in the transparency in the money transactions by reducing the cash economy and digitizing the transactions. M-PESA is equivalent of credit card or debit card which allows the regulators to monitor the trail. There is more visibility on the money flows as the remittances move from informal channels to formal channels.

Security

M-PESA provides unbanked mobile phone users with a secure platform which uses simple, tailored menus on their phone to send fully encrypted and PIN locked messages to a thoroughly audited financial accounting system.

It was observed by CGAP that M-PESA not only increased the MFI activity but is also used as a medium of storage of money. Informal saving channels are much less secure than formal saving facilities. Those who can afford it least suffer the highest risk. Both the banked as well as unbanked customers of M-PESA are using it as storage medium as it is easily accessible. There are many more agents of M-Pesa than bank which means that the customers need not travel long distances to withdraw cash.

With M-PESA, there is no need to carry cash and hence the risk of the cash getting lost or stolen is not there.

Convenience

Many people in emerging economies have to travel far from home to find work and need to be able to send money back to their families so they can pay bills. The cost of money remittance is very high in most of the parts of the world ranging from 3 to as high as 10%. This is the reason why more people depend on informal channels (through friends and family) to remit money or physically deliver the money. Traditionally, this has meant high fees, risky unregulated services, or long expensive trips carrying cash in an unsafe and unpredictable environment. It has been observed that M-PESA users needed to make fewer trips back home to deliver money and the transaction size also came down with frequent transfers. Unlike bank, the M-PESA service is accessible 24X7 and money can be sent anytime, anywhere.

Lower Costs

Mobile technology can lower the cost of remittances as it removes the need for physical points of presence and ensures a timely and secure method of transaction.

Way Forward

M-PESA has been a great success with a lot of benefits to the individuals, society and the Government. However, there are a few aspects of Mobile Banking/ Mobile Money Transfer that the regulators need to ponder on

1. Can the regulator allow a non-banking institution to get into the banking domain by accepting deposits and doing most of the functions of a bank without applying the same level of regulations on it as the banks have it?
2. How does the regulators and financial institutions plan to bring interoperability in mobile banking?
3. How do the unbanked customers of mobile banking build their credit history?

Reference

The economic impact of mobile phones is a well talked about fact but the role of mobile phones in remittances and money circulation can be far  greater. Despite the great potential, there are very few examples of successful mobile money transfer due to regulatory hurdles and evolving business models. By far the most successful example of mobile money is M-Pesa. M-Pesa is a joint venture between Vodafone and Safaricom (the local mobile operator ) with the backing of Citibank and Commercial Bank of Africa. This two part case study would attempt to explain the reasons behind M-Pesa’s success (part I) and how it is transforming the lives of Kenyans (part II).

The name M-Pesa is derived from the Swahili word pesa, meaning cash. M-PESA allows users to make four basic types of transaction:

• transfers from person to person
• transfers from individuals to businesses
• cash withdrawals at designated outlets
• loan receipt or repayment

How does the service work?

The M-Pesa service platform, developed in-house by Vodafone and the consulting company Sagentia, integrates a mobile wallet with Safaricom’s rating, billing and provisioning systems.

Subscribers of Safaricom can register for the M-Pesa service by filling up a simple form and providing any identification proof. Once registered, Safaricom replaces their SIM with the M-Pesa enabled SIM (if required, all new mobile subscribers now get the M-Pesa enabled SIM). To load the money on the the wallet, the user needs to visit the nearest agent and deposit cash there in exchange for “e-Float”. This e-Float is like currency that can be used to make payments or transfer to any other person. The e-Float is can be transferred to any person or merchant via encrypted SMS. The receiver of the virtual currency can either use it for further transactions or can cash-out from M-Pesa designated outlets. The figure along side depicts the M-Pesa transaction flow.

How has the service performed so far?

Safaricom has regularly been releasing the financials of M-Pesa service which have been impressive by any standard:

1. As on November, 2009, M-Pesa had 8.6 million users which is ~25% of Kenya’s population
2. Close to 15K agents (more than doubled in last one year). Kenya has 1500 ATMs and 840 bank branches which pale in comparison
3. Monthly person to person transactions worth over $320 million with average of $37 per user per month

The service is not only scoring high on financials but also on the consumer confidence. Kenya’s independent Financial Sector Deepening Trust (FSD), which aims to support the development of inclusive financial markets in Kenya, carried out a survey of M-PESA use in 2008. The survey of 3,000 randomly selected households across Kenya, 300 randomly selected M-PESA agents and 50 M-PESA head offices found almost 40% of households use M-PESA, with 63% sending regular financial support. Of those surveyed:

• 90% believe their money is safe with M-PESA
• 81% find M-PESA very easy to use and a further 15% say it is quite easy to use
• 84% say losing M-PESA would have a large negative effect.

Factors behind M-Pesa’s succes

• Large Market Share -- Market share of Safaricom in Kenya was in excess of 80% at the time of launch of the service. This large base could ring in the network effect which is reflected in the high consumer adoption.
• Trust - Safaricom selected the agents with a lot of care to ensure agents with high integrity are there on its network. Since the service involves money, it is important gain user trust. Safaricom communicated a lot with the users; if the server is slow, it would communicate that to the users so that there is no anxiety amongst the users. The survey conducted by FSD confirms the faith reposed by users in the M-Pesa service.
• Relationship with the Regulator and other Banks -- Safaricom never had any confrontation with the regulators. It involved the central bank right from the very beginning. It always tries to accommodate concerns of the regulator and the banking industry. The Kenyan Government had voiced concerns over the possibility of criminals using the service to launder money, and on May 4th 2009 had ordered the Central Bank to audit Safaricom’s M-Pesa service. Safaricom welcomed the Government’s decision and passed the audit due to complete transparent operations and proactive sharing of data with the regulator. The Central Bank declared the service safe and in line with Government’s objectives of financial inclusion
• Quick response to consumer needs- Safaricom quickly changed its focus from repayment of microloans to helping people make person-to-person (P2P) remittance payments to their friends and family after it found the consumer preference for P2P transfers in a survey at the beginning of the service. Safaricom has been able to keep a tab on the pulse of the consumers and has been nimble enough to adjust its value proposition to the needs of the consumers.
• Simple Communication -- At the start of the service, the communication was simple, “Send Money Home” targeting the migrant workers. The communication’s focus on what the single largest service (rather than all that M-Pesa) could do was a well articulated value proposition. The video below is the commercial on “Send Money Home”

• Pricing- Safaricom kept the pricing of the product very transparent and lower than other alternatives. Free registration and no monthly fee helped the agents in persuading the potential user to subscribe to the service. This helped in building up the customer base initially that was important for agent and merchant recruitment.
• Store Management -- Safaricom ensured consistent branding, training and constant supervision of the stores to deliver the right user experience. It worked tirelessly for proper liquidity management at the stores.
• Limited KYC -- M-Pesa was not positioned as a bank alternative and hence the “Know Your Customer” requirements were quite relaxed. The users were required to submit only the identity proof to get the service started. This limited KYC helped many Kenyans especially in the rural areas where the address proofs and other documents required by the banks are not available with most of the Kenyans. People who were not able to fulfill the documentation requirements of the bank saw M-Pesa a good alternative.
• Dedicated Customer Care Line - In Kenya, not everyone can read, so sometimes people make mistakes and send money to the wrong person, so Safaricom established back office support to assist people get the money back where possible. M-PESA has its own dedicated call centre with its own number. Safaricom ensures that a very high quality of customer care is maintained. The strong back office support has helped the company in not only building trust but also attracted the users who are afraid of technology.

Criticism of the service

Despite being touted as a financial inclusion service, M-Pesa user households  are twice more likely to have a bank account than non-user households. It is young, male, urban migrants who are driving the uptake of services – customer adoption. Hence, the adoption is not uniform across social strata.

Both agents and customers complain of  cash float problems, especially in the rural areas. Because the majority of transactions in the village are withdrawals, agents must maintain their cash float. They do this by making frequent trips to the bank. This can be problematic if the agent is not close to an urban centre, where most banks in Kenya are located. This situation is frequent despite great efforts by Safaricom on the store liquidity management.

The service availability is not uniform across the country. The service availability is defendant on the network availability which is strong in the south-west corner of the country (as seen in the picture alongside). There are only 2000 towers of Safaricom which are not sufficient to cover the entire country.

All in all, M-Pesa is a great service which is brining in big benefits to the company and the users. In my next post, I am going to talk about the economic benefits that this services has brought to the people of Kenya.

In the meantime, please leave a comment on your take on M-Pesa service and what you think are the reasons for its success?

References:

1. Three keys to M-PESA’s success: Branding, channel management and pricing (by Ignacio Mas and Amolo Ng’weno, Bill & Melinda Gates Foundation)

2. Safaricom website (http://www.safaricom.co.ke)

On 5th January, 2010, Google formally announced its entry into the competitive mobile handset space. The phone is a HTC-manufactured Nexus-One which Google calls as “Super phone”. Nexus One runs on Android 2.1 and boosts a 1 GHz Qualcomm Snapdragon processor. The key differentiator is its 3.7 inches AMOLED touch screen apart from a 5 MP camera and 512 MB RAM. Google plans to sell phones through the online Google store.

Mobile handsets is a highly competitive industry and requires special skills of supply chain management and distribution. Google is not known for hardware selling or distribution and its competence lies in software. Google does not even sell a computer despite being so strong in the fixed internet then why does it need to sell a mobile phone?

Google is a proponent of open environment as it believes that its revenues can be maximized only in a scenario where no other entity is dominant. The mobile space is very different from the computer world. Unlike the computer and internet space, in mobile industry, the carriers control much of value chain and especially the access to the web. Google’s decision to launch Android a couple of years back was an attempt to control the mobile operating system which is key to web access. Other attempts to open up the mobile ecosystem include Google’s participation in 700 MHz spectrum auction in the US. Google did not win the auction but it was a victory in disguise as it convinced FCC to adopt open-access rules that require the network operator to allow any device or application to connect to it

Search and advertising are the two key assets of Google. Google has managed to monetize the fixed internet using the combination of the two. Mobile phones are likely to emerge as key access devices for internet in the future and hence it is important for Google to invest in the mobile internet to keep the growth engine running. Google aims to replicate its web dominance in the mobile internet world as well. To this end, Google has been concentrating on various entities of the value chain – it launched Android mobile operating system, launched application store, launched Google Voice, bought Admob (the largest mobile advertising company) and now entry into the mobile handset business. It is clear that Google wants to make web the center of the mobile phone where its mobile search is used to enter the web, applications are downloaded from its store and then they are monetized from the advertising revenues from Admob. It wants to suck the value out of hardware vendors and carriers just the way Microsoft and Intel did to the computer world. Google envisages an open mobile industry where the value lies in the software and services and it wants to play a key role there. Nexus One would help it expand its search and applications footprint which can then be monetized via advertisements. Google has supervised the hardware design of the phone to ensure that the web assets of Google are perfectly integrated with the phone. Google is not interested in the hardware margins but its real aim is to increase the adoption of search and applications.

The figure alongside depicts how Google intends to make money by monetizing search and applications. The business model is simple – point the user to the required web page or application and then serve advertisement in the page/application to generate advertisement revenues. This is the successful Google model on fixed internet that Google now wants to replicate in the mobile space. Bulk of Google’s revenues are from advertisements, majority of which is search based.

Google positioned Android as an open platform providing it free to the vendors was Google’s strategy of controlling the device to deliver a seamless, integrated experience of its services (navigation, application store, etc.) to the consumers. In the process, it intends to learn about the consumer behavior and preferences to have targeted advertising. The biggest advantage for Google is high adoption of its web based PC services and the demand for similar services on mobile internet. People who use a particular service from a particular company would like to use the same service from the same company on other access media. Google recognized this and decided to control the mobile ecosystem through Android. However, since Android is an open source, there is a possibility of high fragmentation of Android leading to its development in a way that may not be entirely beneficial to Google. To overcome this drawback, Google thought that it is best to launch its own handset and control the experience on Android. Through Nexus One, Google is attempting to showcase the true capabilities of Android platform.

Google’s long term goal seems to be completely commoditize the hardware and web access. If it is able to generate sufficient advertising revenues, it would attempt to offer ad-subsidized phones directly to the consumers from its online store. This explains why it has decided to sell Nexus One from online Google store. Moreover, Google wants to dismantle the control of carriers in handset distribution and hence it has decided to sell the phone exclusively from the online channel. However, the biggest challenge for Google to sell a phone from its online channel would be the ability of phone to work on all the networks (carriers in the US may not allow Google phone to work on their networks). Carriers would fight to keep the distribution of handsets within their control. By moving towards open distribution, Google is trying to ensure that the mobile phones are sold the way personal computers are sold. I think, one of the main reasons for Google to launch Nexus One was the Online store and its attempt to end carrier’s control over distribution. Any other objective  could have easily been met by promoting Android through its partners like Motorola, Samsung and HTC.  Google’s offer to sell non-Google phones (based on Android) to be sold through the online store indicates that it is not entirely interested in the hardware margins and in the process it has ensured a wider participation and may not be required to launch follow-up models soon which is a norm in the handset industry.

Google’s intention to disrupt the mobile value chain should make its partner handset vendors and carriers worry. The key question in front of partners is whether to partner or to compete. In my opinion, the partners need to take a long term view and think about the areas of conflict five years from now.

Impact of Google’s decision on other handset vendors

Many vendors including Motorola, Sony Ericsson and HTC are betting big on Android platform and have announced product road-maps for Android based phones. With the announcement of Nexus One, there would be a lot of apprehensions amongst the handset vendors. Will the latest version of Android be available to the partner vendors or will they get an old version? Should the vendors plan to launch their own services, then they would need to compete with Google services (application store, navigation, etc.) and this is likely to impact Samsung the most which is taking baby steps in the services direction. Google wanted to comfort its partners and hence had invited the CEOs of HTC and Motorola at the time of launch of Nexus One though both the CEOs looked a little uncomfortable on the dais. Google plans to sell Android devices of other vendors in an effort to mitigate the apprehensions of its other handset vendors who use Android.

Impact of Nexus One and Android on Carriers

Using the Online channel and Application store, Google is trying to disintermediate the carriers and make them nothing more than dumb pipes. That’s what happened in the landline world of the Internet. It is a significant risk for carriers as no exclusivity and no use of carrier channel is a game changer at least in the western markets.

Google has been attempting to embed Google Voice application in its Android platform apart from seamless integration of its other services like navigation and application store. This is likely to be in direct conflict with the carrier’s voice and data services. Smaller carriers have no choice but to partner with Google but the larger operators like Vodafone should be careful in its partnerships with Google and should carefully analyze the impact of alliance on their own services. Vodafone has already placed big bets by buying out Wayfinder and launching Vodafone 360.

Summary

Google seems to be making intelligent moves to get a foothold in the mobile industry with an aim to disrupt the current value chain. It would be need to do a fine balancing act between its goals and the goals of its partners. Google would need to convince its licensees that it is not in competition with them. I do not doubt Google’s ability to deliver on software and hardware (or HTC’s ability) but it seems to be making more enemies then friends by pursuing its current strategy. If successful, Google can change the way phones are sold and the way the value is created in this industry.

I had a great holiday in Thailand but I lost my mobile phone there .  I lost my mobile phone on the second day of the holiday so I was desperate to get a replacement SIM but could not get another SIM till I came back home and went to an outlet of the service provider. I believe that in the process, I had a painful time but the service provider and its roaming partners also suffered revenue loss.

Mobile companies are in many ways operationally similar to credit/debit card companies. Like credit card companies, mobile companies provide credit in the form of talk time to be used anywhere in the world but at the same time monitor fraud and bad debts. A large number of employees in a mobile service provider are from the credit card industry and the industry looks up to the credit card industry for best practices. However, unlike the credit card companies, the mobile companies are not customer friendly. A Platinum card member of American Express gets a very different treatment from the silver member of CitiBank. However, there is very little differentiation amongst the operators and the service they provide. The players compete on tariffs rather than on customer service. The churn in the countries that allow Mobile Number Portability (MNP) is not very different from non-MNP environment as consumers realize that there is very little to choose from amongst the operators apart from the tariffs.

Most of the credit card companies promise a replacement card on loss of the card anywhere in the world. I expect the mobile operators to provide similar service. I know the operators do not have presence across all the countries and hence it is difficult for them to offer a replacement guarantee but there is a simple solution to this problem. The mobile operators can give a spare SIM to all its customers who have roaming activated on their phones. This SIM could be a blank deactivated SIM which can only be activated in the event of loss of primary SIM. The user can report the loss of SIM by email or phone and then the spare SIM can be activated. I tried to google for the best practices in case of lost SIM but to my surprise I did not get any relevant results.

Just like there are a lot of takers for business class seats in the airline industry, I am sure there would be enough people who would be ready to pay a premium for the differentiated service. I have a value proposition for carriers in a crowded competition landscape like in the US or in India: Let the carrier charge a flat fee which is four times that of the average APRU in the country and provide the following benefits in return:

1. Exclusive Number Series - The service provider can provide the numbers in a way that it gives a feeling of exclusivity to the consumer. The number on the business card should indicate that the user is using the exclusive high end service provider. If this is not possible due to regulatory issues, then the ringback tone could be a different one so that the callers come to know that the person being called belongs to the exclusive club.
2. Unlimited Usage – Since the user is already paying the monthly fee which is four times the average ARPU, there is service provider can allow unlimited local and national calls & unlimited data usage. There is a high probability that the high end users have a higher proportion of business travel which would result in a disproportionate share in roaming revenues
3. Exclusive Relationship Manager – There should be a designated relationship manager who should provide resolution to all issues and problems. In the event of needs during off-office hours, the access to call center should be easy. The call centers should not have irritating IVRs (Interactive Voice Recognition) and the call should be answered within 10 seconds.
4. Seamless congestion free network – There should be perfect indoor coverage at most of the business districts and homes of the users. In case of network complaint, it should be resolved on priority
5. No Spam – The user would not get unnecessary calls or sms and the carrier should ensure that it has effective means of controlling SPAM
6. On-site support – In many cases when a handset is replaced, the user is unable to configure all the services on the new handset especially in an open market environment. The carrier should provide the support at the user’s premises in such cases
7. Unlimited Credit – Most of the carriers assign a credit limit to the users when a new connection is given out and it has been observed that the credit limit is so low that many users exhaust the limit within a few days of usage. For the users of this exclusive plan, there should be no credit limit
8. Global SIM Replacement
9. Invitations to exclusive events/ Club memberships/Access to airport lounges

Will you not pick up the above plan? Is service not a differentiator? I am confident that with this kind of approach to customer service, any operator can churn-in the high value users of other networks especially in the MNP (Mobile Number Portability) environment.

Recently, I attended the India Telecom Meet in New Delhi where Mr Nandan Nilekani talked about how mobile phones can be used for authentication. Mr Nilekani is the head of India’s ambitious unique identification number (UID) and is planning to issue biometric based identity numbers to a billion citizens of India. The authentication would be online and since the mobile phones out number the computers, he is hoping that most of the authentication would happen on mobile networks using a mobile device. I normally do not write on any country specific issue but this opportunity is too big to be missed by any telecom player across the world.

There are two parts of the UID project – Issue of unique identification number and authentication services for verification of records. This means that after a number is issued, the record would be maintained in a database which can be fetched online anytime. This is a huge task and the huge opportunity has caught the interest of many companies including Microsoft, Yahoo and Cisco.

There are many use-cases of authentication services that UID is likely to provide. If anybody wants to confirm the identity of a person, all he has to do is to take the fingerprint of the person on a cellphone and send it across to the central database and receive authentication within seconds.The services can be used by a wide spectrum industries like the financial sector, health sector, mobile operators, etc. Many villages do not have a bank branch but banks have appointed their business correspondents (BCs) to help people transact. These BCs can use a mobile device to authenticate the account holder. Mobile operators and banks can use the authentication service to conduct KYC (know Your Customer) . The Government itself can use the authentication to distribute the money of schemes to the right person only after the claimant has been authenticated using his biometrics. This would help in reduction of corruption and the money would indeed reach the right person.  Such projects would go a long way in alleviating poverty in poor nations.

The benefits are likely to accrue to all the mobile ecosystem players. Device vendors would benefit from the demand of authentication enabled devices, the mobile operators would carry the authentication data between the server and the device and the developers would benefit from developing applications that use the authentication APIs. The APIs would be easily available to any developer for embedding them into a mobile application or an internet application. The opening up of APIs is the most interesting part of the UID project. This would enable the developers to create innovative applications which in turn would put the UID database to maximum use. Utility applications utilizing the power of identity of the user would give a big boost to the application economy. The overall opportunity for the various players is said to be around $4-5 billion.

I can think of a few applications (apart from the ideas mentioned earlier) that the developers can work on

• mGovernance – There is a huge potential for developers in the area of Governance. Applications can be developed to enable users to fetch land records, court case records, health records, etc. after proper authentication of the user. Open APIs from UID project can be embedded in the application for this purpose. Recently, addressing the community of developers, D Shivakumar, MD, Nokia Mobile phones and VP, Nokia said, “Government will be a major player in buying applications from the developer community” and urged developer community to think and build innovative applications, which will help government to implement in different sector.
• Micro-Finance Institutions provide loan to poor people to help them overcome poverty but themselves lack the basic productivity tools. This results in high administration costs and ultimately high interest rate for the borrower. Simple applications can be build with authentication mechanism to enable the money collectors to directly upload the data on collections.
• mEducation – Education is the biggest need of the country and I foresee a big role for mobile phones in imparting education and right skill-sets. Developers can work with the content providers to develop applications that enables authentic users to learn and appear in the examination.
• Mobile Banking and Commerce – This is yet another upcoming area that has huge potential but is most susceptible to fraud. Biometric authentication would go a long way in convincing the users and giving them the peace of mind. Again developers have a great potential here.

The consultation paper on UID project can be downloaded here

Global Scenario on Authentication

To put the entire opportunity in context, it is important to look at the Global Market Size for authentication products and services. A report by Goode Intelligence forecasted that mobile phone-based authentication products and services will generate $153 million in 2010 and that the market will grow to almost $760 million in revenue by 2014; an increase of $607 million. My view is that Goode has grossly understated the market and the market is likely to be much larger. As per another report, the market for fingerprint sensor chip alone is expected to grow from $40 million in 2008 to $428 million by 2013.The mobile phone with biometric authentication would be increasingly demanded by enterprise users so that data is safe. Biometric sensors on mobile phones not only protect private data stored on the device, but also can block unauthorized use of mobile phone services,  create personalized user interface shortcuts, and eliminate the need for remembering and typing passwords.It would not be wrong to say that the drivers for biometric sensor on mobile phone are stronger than that on laptops.

In the opportunity captured by various analysts, I am not sure how many have been able to size the authentication requirements of the Government and hence there could be huge upsides there.

Devices Readiness

The biometric includes fingerprints, iris and voice but currently the fingerprint sensors are the most popular form on mobile phones.  The cost of adding finger print module to a mobile handset is less than $10 and with economies of scale, it would come down even further. The biometric authentication phones are not available from the big handset vendors like Nokia and Samsung and if the big brands can come on board, the cost of biometric sensor would come down significantly.

25 phone models with authentication are shipping today, mostly in Asia Pacific regions. In Japan, phones truly lock down the FeliCa NFC payment function with biometric authentication. The Osaifu Keitai operators, DoCoMo, KDDI and SoftBank insist on having eWallet phones secured by “ facial detection”, “finger swipe”, handwriting, or voice recognition for authentication.

Atrua Technologies is the largest provider of fingerprint chips for mobile phones with other providers being Fujitsu, Authen, Atmel and UPEK.

Recently European Union officially ratified the updated GSM Directive which allows 900MHz frequency to be used for 3G and eventually 4G. This means governments across the region will now be obliged to allow operators to use 900 MHz spectrum band to roll out 3G and other high-speed technologies. The usual spectrum band for 3G services is 2.1 GHz but many operators are planning to use the existing 2G spectrum (850 MHz and 900 MHz) for 3G services.

Spectrum refarming is one of the most significant regulatory but those with 900MHz assets see refarming as a threat to their competitive advantage as well as to the quality of their networks. Although operators may feel threatened by the prospect of losing their existing spectrum assets, the opportunity to expand coverage and reduce costs outweighs any hesitation they may have about service deterioration or loss of market share from reduced spectrum holdings.

Generally speaking, refarming may be seen as process constituting any basic change in conditions of frequency usage in a given part of radio spectrum. Such basic changes might be:

• Change of technical conditions for frequency assignments
• Change of application (particular radio communication system using the band)
• Change of allocation to a different radio communication service.

Before we move further, it would be useful to understand the generic spectrum usage plan. The diagram below shows the how the different frequency bands are being used for different purposes.

Key Benefits of UMTS 900

1. Coverage – Ovum’s analysis indicates that UMTS900 provides between 44% (in urban areas) and 119% (rural areas) increased coverage per Node-B compared with UMTS2100. This is primarily due to the propagation characteristics of the lower frequency band.  All 3G applications can be provided and used cost efficiently over much larger area as the coverage radius in 900 MHz is almost double than that of 2100 MHz spectrum
2. Cost Effective –Radio wave propagation loss is less in 900 MHz, so fewer base stations are required leading to cost savings of around 50–70% compared with networks deployed in 2100MHz core-band 3G spectrum. These coverage and cost-saving benefits mean that operators can bring 3G services to less-densely populated areas that were previously uneconomical to cover
3. Better Quality of Service (QoS) - Since fewer base stations are required for UMTS 900 roll-out than UMTS 2100, the customer experience is better due to fewer hand-overs. Lower frequency band have a higher in-building penetration. Over 70% of phone calls are now made indoors and UMTS 900 can help improve the Quality of Service (QoS)

Regulatory status of spectrum refarming worldwide

As mentioned earlier, the European Union has already ratified the GSM directive on spectrum refarming and it is obligatory on part of its 27 member countries to change their laws in line with this directive. However, in most of the countries, it is up to the individual Governments to allow UMTS 900. It is necessary in some countries to re-arrange the band allocations by agreement with network operators in order to enable GSM & UMTS900 in 900 MHz spectrum.

Operators who have launched commercial 900 MHz 3G services

13 operators have UMTS 900 networks across the world till date but the reasons for the roll-out on 900 MHz vary from operator to operator.

Optus Australia launched UMTS 900 to increase its coverage. With a combination of 900 and 2100 MHz, it managed to increase its coverage to 96% of population. AIS in Thailand launched UMTS 900 as the 3G spectrum (2100 MHz) auction was getting delayed. Elisa launched UMTS 900 to save costs.

UMTS 900 Device Market

As per GSA HSPA devices survey conducted in October, 2009, 190 UMTS-900 HSPA devices have been launched in market by 34 suppliers (this includes 39 USB dongles). Most of the HSPA handsets now have 900 MHz support as well.

Will the operators completely switch off 2G in favour of UMTS900

The operator business is getting complex with many operators having to manage 2G, 3G and LTE networks. It is expected that with the stabilization of LTE by 2016/17, the operators would switch off their 2G networks (so far Japan is the only country to switch off 2G networks). However, due to the migration to UMTS 900, it is possible that the operators switch off the 2G networks much before the expected timelines. This would help the operators save on opex for running multiple networks and would also make the operations less complex requiring fewer people. The 2G network can be sold off to new operators coming up in emerging countries. However, there are a few challenges that would hold the operators back from switching off 2G networks:

• Migration from 2G to 3G handsets: Though the spectrum band would remain the same at 900 MHz, the 2G users would need to replace their handsets to be able to use the 3G network. The carrier would need to provide handset subsidy to encourage the users to replace their handsets but then the benefits have to be substantially higher than the costs involved
• Inroaming Revenues: With the voice tariffs dipping, the roaming revenues are a significant portion of the revenues. In case an operator decides to switch off the 2G networks, the users from other 2G networks will not be able to log on to the operator’s network. This loss of revenues may not be sufficiently covered by any opex savings or ARPU upside
• 1800 MHz: Many 2G networks are on 1800 MHz. UMTS 1800 is still not a viable option given the low ecosystem support. Apart from this, many operators may be holding both 900 and 1800 MHz spectrum and optimizing between the two. In this situation, the operator may not want to switch off 2G network

Another interesting option is that the operators carve out a portion of their 900 MHz spectrum for 3G roll out while retaining the rest for 2G. This would allow them not to participate in the 3G spectrum auctions and have substantial savings. Are the Indian operators listening?