Questions about the Business Case for Wireless Broadband in Latin America
IEEE standard 802.16, better known as WiMAX, is a technology platform that can provide users with broadband internet connection over licensed radio spectrum. In the developed world, WiMAX will compete with established mobile phone standards (e.g. GSM, CDMA) and terrestrial data services to deliver voice and internet connectivity to home and mobile internet users. For most consumers, the change will be one of more evolution than revolution. By contrast, WiMAX can bring revolutionary changes to the developing world. With a less substantial data infrastructure and lower internet penetration, the developing world is poised to gain a much greater marginal benefit from WiMAX technology. However, there are still significant challenges that need to be addressed before we can expect to see widespread adoption. In many ways, Latin America offers an excellent test case to evaluate the possibilities WiMAX business in the developing world. This paper will try to identify what factors need to come together for WiMAX to become a viable business opportunity in Latin America. Specifically, I will examine the technological context of WiMAX, the business context for the likely providers of WiMAX service, and the consumer context for the largest segment of WiMAX customers in Latin America.
Part I: Technology Factors
WiMAX (worldwide interoperability for microwave access) as the 802.16 standard is known, “specifies the radio-frequency technology for wireless metropolitan area networks.” (Vaughan-Nichols, "Achieving Wireless Broadband with WiMAX." 2004). Currently, the IEEE has two established standards for WiMAX, 802.16d (commonly referred to as “Fixed”) and 802.16e (also known as “Mobile”.) Both support “non-line-of-sight . . . fixed and nomadic applications”, but only the mobile standard allows for “portable and mobile solutions.” (Motorola, Inc., WiMAX: E vs. D, The Advantages of 802.16e over 802.16d. 2007). In other words, “Fixed” WiMAX could replace cable or DSL data lines into a consumer’s home or business. Inside, the consumer would then connect to the network using Customer Premise Equiptment (CPE – analogous to a cable or DSL modem) connected directly or via a WiFi to his/her computer (Motorola and Intel, 2007). By eliminating the need for terrestial, cable infrastructure, this scenario may make it financially feasible for companies to extend internet service to areas that were previously unprofitable to serve. However, because this standard does not support portible or mobile applications, this scenario would offer little benefit over existing home broadband services from a consumer perspective. “Mobile” WiMAX on the other hand, would allow users to access the network while on the go, whether in a their homes, a public park or even a moving vehicle. From a bandwidth perspective, WiMAX can provide broadband speed internet access to both consumers and enterprises at fast enough rates to support demanding broadband application like streaming video and online gaming (Motorola, Inc., 2007 Maximizing the Wireless Network Evolution with WiMAX.) Exhibit I shows a comparison of the relative mobility and bandwidth of leading IP (Internet Protocol) technologies as well as the requirements for several popular applications. Clearly, 802.16e has the greatest flexibilty in terms of both speed and mobility. As more applications and usage scenarios are developed that require both, WiMAX will become more valuable to consumers than existing technologies. In other words, because WiMAX is positioned in the uppermost, righthand corner of the matrix in Exhibit I, it is the only platform capable of handling all of the applications listed. However, the true potential of WiMAX will only be realized when more applications are developed that can only exist in the upper-right quadrant.
Clearly mobile WiMAX can offer significant value to consumers throughout the world, but its adoption does face several techological hurdles. First, experts have noted that new technologies often take off much more slowy than originally expected. One factor influencing phenomena is that new product adoption tends to follow an “S” shaped cumulative adoption curve. (Thomas "Estimationg Mark Opportunity for New Products." In New Product Development, by Robert Thomas.1993). Most people have a tendency to envision a more linear projectinon, and thus overestimate the rate of adoption in a product’s lifecyle (interestly, this also leads to underestimation of adoption later in the product’s life.) Additonally, incumbent technologies often improve significantly over time, slowing the demand for new technologies (Brody. "Great Expectations." July 1991). Lastly, Long-Term-Evolution or LTE is expected to become available in the next five to seven years. Though, LTE’s standards and capabilities have yet to be completely defined, it has the potential to leap-frog WiMAX as the preferred mobile broadband standard. This has also slowed the adoption of WiMAX (Seth, Ripan. interview by Jacob Bradbury. IT Engineer at Motorola (June 4, 2008).). Once again, these are factors that will have great effect on the viability of WiMAX as a business in Latin America. In order to best understand the opportuntity and life-cycle of WiMAX, it will be useful to buid models to estimate both the Total Addressable Market for WiMAX in a given country, as well as the market share WiMAX can expect to win given the competing technologies.
Part II – Business Factors
Aside from understanding the potential size of the Latin American market, potential WiMAX network operator will need to understand the costs associated with building WiMAX infrastructure and the amount of value that potential operators will be able to capture after building that infrastructure.
WiMAX is a relatively young technology and the costs of the equipment required to build and maintain a network are constantly evolving. WiMAX networks have been deployed in a diverse portfolio of countries, ranging from Pakistan, to Belgium (McLean, Heather. "Key news in recent months." Total Telecom Magazine: WiMAX Guide. London: Terrapinn, October 2007.) Depending on the different circumstances of the deployment, this can represent very different CAPEX and OPEX for the network operator. Payback scenarios will vary accordingly. For example, in Pakistan, Wateen telecom was able to deliver both voice and data networks with a single infrastructure, because existing mobile and broadband infrastructure was insufficient (or non-existent). By building its network from the ground up, Wateen significantly lowered the revenue required to recoup its full investment costs (Motorola, Inc. Wateen Telecom Launches WiMAX to 17 Cities in Pakistan in Nine Months. White Paper, Motorola, Inc, 2007.) – that is, all Wateen’s revenue went to paying off its WiMAX investment. On the other hand, in areas with robust existing networks, operators may only add WiMAX as a data layer to their current voice archetecture. In these cases, only the marginal revenue from addtitional data services will go towards justifying the addtitional costs. Businesses will need financial models that analyze the payback ratios under these varying cost and deployment scenarios.
In addition to the costs associated with WiMAX, network operators will need to fully understand their revenue sources with WiMAX. Technology products today often rely on large and complex networks and value chains to deliver products and services to consumers. Telecommunications are no exception. Network operators must partner with device manufacturers, content providers, application developers, and retailers in order to provide users with access to mobile networks (Phillip Olla, Nandish V. Patel. "A value chain model for mobile data service providers." Telecommunications Policy, 2002.) (Buellingen, Franz, and Martin Woerter. "Development perspectives, firm strategies and applications in mobile commerce." Journal of Business Research, 2004: 1402– 1408.). Additionally, governments license the spectrum that each operator can use and must give carriers the right of way to build base stations to broadcast the network’s signal. This complex system could be both a blessing and a curse for WiMAX’s deployment in Latin America. On the negative side, operators have become increasingly wary of giving too much control and value to partners in the value chain and becoming “dumb pipes” (Vogelstein, Fred. "The Untold Story: How the iPhone Blew Up the Wireless Industry." Wired, January 9, 2008.). Internet Service Providers had to watch as value chain partners like Cisco and Google had captured a large share of the value from internet infrastructure that the ISPs had invested to build. Mobile operators do not want to repeat that mistake. Additionally, the high cost of licensing spectrum and the government’s control of the right of way to build more base stations serve as prohibitively high barriers to entry. Therefore, if incumbent firms do not adopt WiMAX, it is unlikely that a new venture could move into the market and compete. On the other hand, by partnering with third party content and application vendors, mobile operators will be better able to create and deliver value to WiMAX customers (Olla and Patel 2002). Given that existing network operators will be the most likely owners of future WiMAX networks in Latin America, it will be critical to understand how they can manage the ecosystem surrounding WiMAX. They must find a balance to both create value for the consumer and capture a sufficient portion of that value so as to recoup investment costs.
Part III – Consumer Factors
Driving the revenue from WiMAX technology in Latin America, will be the consumers. Given that WiMAX is a new product it is important to understand who are the consumers who will use this product and what factors will drive its adoption. Through examining the introduction of similar products and the reactions of similar markets, we can begin to indentify the factors that will be important for WiMAX adoption. This section of the paper will discuss the some of the critical characteristics of the Latin American market, discuss important product factors for that market, and analyze the adoption on analogous products in similar markets.
Latin America is a region with vast disparities in the distribution of wealth. The region is home to some to some of the countries with the worst Gini coefficients (a statistical measure of the distribution of income, 0 representing perfect equality and 100 representing perfect inequality) in the world. Brazil is rated at 57, Bolivia at 60.1, Columbia at 58.6 compared to 40.8 in the US and 28.3 in Germany (Watkins, Kevin. Human Development Report 2007/2008. New York: United Nations Development Programme, 2007.) Much of the world’s population lives in nations with per capita GDP of less than $10,000 (Mahajan, Vijay, and Kamina Banga. The 86 Percent Solution. Upper Saddle River, NJ: Wharton School Publishing, 2006.) In Latin America the per capita GDP ranges from $954 in Nicaragua to $7,454 in Mexico[1] (Watkins 2007.) Given this context, WiMAX operators will need to sell services to a large portion of economically disadvantaged consumers. The poorest of this group are often referred to as the Bottom of the Pyramid (BOP) (Prahalad, C.K. The Fortune at the Bottom of the Pyramid. Upper Saddle River, NJ: Wharton School Publishing, 2005.).
Recently there has been much literature discussing successful products and business strategies for addressing this market. Of particular note are C.K. Prahalad’s The Fortune at the Bottom of the Pyramid, and The 86% Solution by Vijay Mahajan and Kamini Banga. These books list several factors critical for successful products sold to the economically disadvantaged. While not all the information is relevant to WiMAX (much of this literature is intended for consumer packaged goods) there are some important characteristics for WiMAX and its complementary products. Mahajan and Banga note that products must consider environment, culture and religion as well as being simple and easy to use – over-engineering hardware or end-user applications would be disastrous. It will be important to understand which features of an offering for the developing world are marginally more important and which are superfluous when building consumer hardware and applications. Also, products that have a cost advantage without sacrificing quality do especially well in lower income markets (Mahajan and Banga 2006). Prahalad reiterates many of those points but also explains that the interface will be critical for large scale consumer adoption. Also, the product must be scalable – because BOP consumers cannot afford to pay high prices, revenue must be generated through volume. Lastly, he notes that consumer education is extremely important in this context (Prahalad 2005). In its nascent stage, it is still unclear how these factor will impact WiMAX, but a few things are worth noting. With the high price elasticity in the Latin American market, WiMAX networks will need to have a cost advantage over 2G, 3G and terrestrial broadband for areas that already have coverage from incumbent technologies. Depending on the deployment scenario, WiMAX may have just such an advantage, (WiMAX Forum. WiMAX: The Business Case for Fixed Wireless Access in Emerging Markets. White Paper, WiMAX Forum, 2005.) Because of the complementarities between the consumer hardware and software using the network and the network itself, those consumer products will be critical to WiMAX’s success. WiMAX will need consumers to adopt new technologies that require both highspeed data transmission and mobility in order to realize its true potential value. In Latin America, these technologies must be built and marketed with the usability, educational and environmental requirements listed above. For example, WiMAX CPEs and handsets must be simple to use and durable enough to withstand the dust and extreme heat of equatorial South America. Certainly much of the technology supporting portable devices has trended towards simplicity and usability in recent years, some of it specifically designed for the developing world (Parikh, T.S. " Designing an Architecture for Delivering Mobile Information Services to the Rural Developing World." Mobile Computing Systems and Applications, 2006. WMCSA '06. Proceedings. 7th IEEE Workshop on. 2006. 31- 33.) There is no reason to expect that those advances will not translate over to WiMAX offerings. What will be more complicated, will be finding ways to offer under-informed consumers inexpensive, simple and meaningful ways to purchase access to mobile broadband networks. “I cannot over emphasize the importance of keeping the price low. You can’t sell something that costs more that costs more than $2.” (Forde, Brian, interview by Jacob Bradbury. Owner, Llamadas Heladas (June 30, 2008). Explained Brian Forde, the owner of a Nicaraguan start-up that sells access to VoIP phones to Nicaraguan consumers. Mr. Forde went on to emphasize the importance of usability in his offerings. “People like us because we have a screen that shows them exactly how much they are spending. That makes it easy for them to use and they like that even if we are not always the cheapest.”
Recent examples of technology diffusion and the success of analogous business models are also very informative when evaluating WiMAX’s potential in Latin America. Certainly there are obstacles, but it is clear that the developing world in general, and specifically Latin America are markets willing to adopt new technology and there exist viable business opportunities. Latin American spending on information and communication technology as a percent of GDP climbed from nearly half the level in the United States in 1991 to almost equivalent levels by 2003 (Pohjola, Matti. "The Adoption and Diffusion of ICT Across Countries: Patterns and Determinants." In The New Economy Handbook. Academic Press, 2003). After slow beginnings, adoption of internet and mobile phone technologies have been rapid. In 2005, Latin America boasted on average 439 mobile phone subscribers per 1000 people, compared with a negligible number of subscribers in 1990. By comparison there were 680 and 21 subscribers per 1,000 people in the US for 2005 and 1990 respectively (Watkins 2007). The key determinants for adoption across countries of information and communication technology appear to be income, relative price of technology, and education (Pohjola 2003). Exhibits II and III show the adoption and penetration of mobile phones and broadband in Brazil in during the past 13 years. These graphs show the typical “S” shaped cumulative adoption pattern. Both technologies get off to slow beginning but then the number of adopters increases at an increasing rate. As these markets mature, one would expect the rate of adoption to slow. The success of these technologies, despite the relatively low income levels in Latin America is based primarily on the decreasing costs of technology. This reinforces the importance of making WiMAX a cost effective means for providing mobile broadband.
The success of Grameen Telecom’s Village Phone program, provides a fascinating case study on how businesses can be successful selling technology products in the developing world (Richardson, Don, Ricardo Ramirez, and Moinul Haq. Grameen Telecom’s Village Phone Programme in Rural Bangladesh. Case Study, Guelph Ontario, Canada: Government of Canada, 2000.) In short, Grameen Phone Ltd. is a for-profit mobile phone network operator. The company sells mobile phones and minutes to low-income individuals who then use the phone to provide mobile phone service to other customers. The phone owners earn revenue by selling access to the phone and pay the costs of buying airtime from Grameen Telecom. The program began in 1995 and by 2004 had more than 110,000 village phones in operation and 239 million subscribers. In 2004, the company’s net earnings were over $100 million (Grameen Phone, Ltd. ANNUAL REPORT 2004. Annual Report, Grameen Phone, Ltd, 2004.). One of the biggest drivers of the success of the program was the benefits generated for consumers (Enriques, Luis, Stefan, Schmitgen and Sun, George. "The true value of mobile phones to developing markets." McKinsey Quarterly, 2007: Web Exclusive, February.). A report for the Canadian International Development Agency stated:
The consumer surplus for a single phone call from a village to Dhaka, a call that replaces a physical trip to the city, ranges from 2.64% to 9.8% of mean monthly household income. The cost of a trip to the city ranges from 2 to 8 times the cost of a single phone call, meaning real savings for poor rural people of between 132 to 490 Taka ($2.70 to $10 USD) for individual calls. (Richardson, Ramirez and Haq 2000)
One analogous business idea for a WiMAX operator would be to launch a “Village Laptop Program.” Low income individuals could purchase inexpensive WiMAX enabled laptops and network access for a WiMAX operator. The individual would then be able resell access to customers for a profit – almost like a mobile internet café. While this idea does have promise, there are several key differences between this concept and the Village Phone that would need to be addressed.
First, the Village Phone program was successful at least in part due to a cost savings for GSM over substitute technologies. Connections to the terrestrial phone network through new land lines or even via Wireless Local Loop were artificially limited by outdated government regulations and legacy contracts with other phone service providers
Conclusion
WiMAX, as a new technology faces many questions surrounding its financial return for mobile network operators in Latin America. The benefits that a WiMAX network can deliver will depend greatly on a myriad of factors. These include, the types of complementary products that are developed and the introduction of competing technologies. Just as important are the costs associated with building and operating a WiMAX network. The technology continues to develop and there is a critical need to understand the break-even points for network operators facing a diverse array of deployment options. Finally, consumer adoption is always difficult to predict with new technologies and with products in the developing world. However, we do have a cache of tools, including product development roadmaps, empirical studies and business cases to help provide guidance. Hopefully, using these tools and new information available on WiMAX, we can understand the magnitude of the opportunity this technology presents to the world.
Bibliography
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[1] Numbers are as of 2005 and before adjustment for purchasing power parity. With PPP adjustment Nicaragua’s GDP was $3,674 and Mexico’s was $10,751.
