A New Economic Model Will Be Needed To Get Everyone Online
Connecting the world’s poorest 2 billion would cost about $30 billion, but for at least the next several decades the free market economy will be focused elsewhere.
If we were asked to pick which of the many markets that make up the digital economy was the ‘most important’ then it would have to be mobile or, more exactly, mobile internet.
While other digital markets like artificial intelligence and digital media, are also very important, mobile is so visible, so pervasive and so much a part of everything else that it can legitimately claim the title as the ‘most important’ part of the digital economy.
With the smartphone market now approaching saturation in all developed internet economies attention is now turning to developing and emerging economies. The bottom line is will mobile really go all the way — that is, will everyone really have mobile, one day?
We estimate that at the end of 2015 a total of 2.6 billion individuals were active smartphone users. Given that the worldwide population at the end of 2015 was 7.3 billion then this implies a penetration level of 2.6/7.3 billion, or 35.6%.
So with 64.4% of the market still unserved and with news in February 2016 of a sub-$4.00 smartphone being marketed in India then it seems that the worldwide smartphone market is just getting going: the fact that the smartphone market is saturated in western markets is not the point — the point is the huge growth potential elsewhere.
In addition, the United Nations (UN) has been making excellent progress towards its stated goal of eradicating extreme poverty by 2030. This suggests that the underlying economics will support a smartphone penetration level approaching 100%: even the world’s poorest will be able to get online, eventually.
Such is the narrative used by those who believe that practically everyone will have a smartphone, one day.
Nakono’s position is different: based on 2015 figures our analysis is that the long-term addressable market for mobile is around 4.1 billion, not 7.3 billion:
- 1.2 billion people due are either too young or too old to be economically significant: Although the worldwide population was 7.3 billion at the end of 2015, this comes down to 6.1 billion when those below 8 years and over 80 years are omitted. Those in the 8–80 year-old age band represent practically all of the economic value that can be harvested by mobile device vendors and service providers;
- 2.0 billion people cannot be addressed using free market economics: To connect the world’s poorest, device vendors would need to achieve an unfeasibly-low unit production cost for a ‘smartphone-like’ device of between $3.74 to $0.17 (average of $1.51), and that is assuming that the targeted individuals regarded mobile internet as more important than other essentials, such as fresh water, food, sanitation and medicine — which they currently lack. Our judgement is that this segment will remain unfeasible to address using a conventional economic approach, probably for many decades to come.
These two corrections bring the practical addressable market down from 7.3 billion to 7.3–1.2–2.0 = 4.1 billion.
Therefore, the effective addressable market for mobile internet at the end of 2015 was not 7.3 billion, but 4.1 billion — and, with an installed smartphone user base of 2.6 billion at the end of 2015 the practical penetration level was 2.6 / 4.1 = 63%, which is quite different to the 35.6% which might be inferred from a superficial analysis.
Further ahead, mainly due to cost reductions in low-end smartphones we see mobile internet penetration climbing to a high of about 4.1 billion by 2023, by which time the total global population (all ages) will be about 8.0 billion.
The rest of this article looks in more detail at the 2.0 billion that cannot be addressed using free market economics.
Classic economic analysis
Situation 1: Mature Mobile Markets
Examples of mature mobile markets include the United States, Germany, Japan and Australia. These markets are all ‘fully served’ because:
- The markets are served by a range of products that cater for all budgets, from those who are completely price insensitive to those who are extremely price sensitive
- There is mass awareness and acceptance of the benefits of mobile internet
- There is mass penetration of the retail market: it is possible to buy a mobile phone and service plan are mainstream retail outlets
Consequently, practically every adult that wants mobile service already has it.
We have segmented the mature mobile market into four price bands and then added the actual retail prices for a selection of phone models and our estimate of the manufacturing costs which we have determined by scrutinising the annual reports of leading retailers and manufacturers:
Situation 2: Unserved Mobile Markets
We’ll focus on the poorest part of the unserved market, which is the 1.5 billion individuals who live on less than $3.10 per day (see above table for regional breakdown).
Let’s imagine a time in the future when this market is ‘fully addressed’ — which means that practically all of those living on less than $3.10 a day would have a personal device that they could use to access the internet — just like as is currently the case in mature mobile markets like the United States, Australia and Germany.
In the following table we have segmented the poorest 1.5 billion worldwide into four income bands:
In order to fully serve these segments then it seems reasonable to assume that a range of phone models would be needed, rather like how mature markets are currently served today: higher-price models serve the most affluent tiers of the market with very low-cost models serving the most price sensitive.
However, the dramatically lower earnings would mean that the retail pricing would need to be adjusted downwards so that the phones where proportionally ‘as affordable’ when viewed as a percentage of total earnings.
To make this price adjustment we have used OECD data for the average annual wages for 28 countries (2014 prices, PPP) and compared this with the average daily income figure of $1.57 per day ($572 per year) for world’s poorest 1.5 billion (see above table).
The OECD data shows an average annual wage of $38,424 per year or $105 per day for 2014 for the 28 OECD countries which are mostly all mature mobile markets. The lowest figure is for Mexico ($12,850 per year) while the highest is the United States ($57,139). Mexico is something of an outlier, however, as the next-lowest figures are around the $22,000 mark and include most Eastern European countries. Nevertheless, we have conservatively used an average for all 28 countries, which is $38,424 per year or $105 per day).
In order for mobile phones to be ‘as affordable’ for the 1.5 billion who live on less than $3.10 per day the retail prices for all four phone segments would need to come down by an average factor of $105.27 / $1.57 = 67.08.
The result is the following adjusted prices:
Serving the top tier, which we have called ‘Band 1’, would mean taking a basicphone like the Nokia 105 (see above) and reducing the manufacturing cost from around $ 17.00 to less than $4.00, while adding internet access. This seems reasonable when viewed as a ‘several decade’ objective.
But it is extremely hard to envisage how any sort of ‘smartphone’ device could be manufactured for $0.17. In order for this to be technically possible we would need to envision a future where the entire mobile communications device could realised as a single chip with the display effected perhaps in the form of a contact lens and where power was provided by the human body. We are not saying that this is not possible, just that it will not be possible for many, many decades: as things stand simply shipping a cardboard box with nothing inside would cost more than $0.17 at retail.
Two other factors further cloud what is a presently a rather downbeat analysis:
- Minimal near-term economic value: Even if it were technically possible to serve the poorest 1.5 billion in the world, then their near-term economic value –to merchants, service providers and advertisers — is minimal: they simply do not have enough money to spend to make the investment economically worthwhile.
- Other priorities: We should perhaps recall that mobile phones arrived in developed economies after the infrastructure and systems needed for an advanced lifestyle were already in place: in the mid-1980s markets like Germany, Canada, France and Japan already had fresh water, sanitation, ample food supply, accommodation, electricity, medicines and so on. However, most of the people we are talking about here — the poorest 1.5 billion in the world — are not yet at this stage. Therefore, even if they were able to invest a substantial amount of money in improving their life, would they really see mobile internet as the top priority? Perhaps it is arrogant of us to image they would.
Such is the gap between what is current possible and what is needed to connect the 1.5 billion who live on less then $3.10 a day and such are the economic headwinds, that our conclusion is that even those living on less than $5.00 a day — about 2 billion worldwide — will remain be unconnected using a conventional economical model for the coming several decades, at least.
A different economic model
Apart from the fundamental problem of being able to manufacture a mobile device cheaply enough, the main reason why the poorest 2 billion will remain offline for the coming decades is that the timescale for a pay-off is too large.
The capital markets cannot address very long-term developmental problems — which is really what we are talking about here.
If we assume that in the end, the world’s poorest 2 billion will eventually start contributing to the global economy to a significant extent then it then there will be a pay-off at some point, but just not in the coming few decades.
We would say that connecting the poorest 2 billion is mainly a political problem and that even initiatives like Facebook’s Free Basics cannot be expected to solve the problem entirely.
It is interesting that if we assume that a basic smartphone could be manufactured for, say, $10 — which is a ‘hard but doable’ problem then for an investment of just $20 billion the world’s poorest 2 billion could have mobile phones, and for another $ 10 billion or so even the remotest rural communities could be provided with internet access and maybe online medical services and education. The total amount of $30 billion is less than the value of annual fraud in the digital advertising market, less than Apple’s quarterly revenue and less than Mark Zuckerberg’s stake in Facebook.
Andrew Sheehy is Chief Analyst at Nakono, an industry research firm focusing on how digital technology and the Internet are transforming media, consumer devices and communications. Read more from Andrew Sheehy and Nakono at http://nakono.com