The Battle for the Next Billion Internet Users Has Begun

Large parts of the world’s population are still unconnected, further disadvantaging the least developed regions of the planet

Today, the world is more connected than ever. Soon, 5G will herald the next era of digitalization. While we are discussing trends such as artificial intelligence, blockchain, and augmented reality, we tend to forget that there are still about four billion people on our planet who are unconnected, with the vast majority of those residing in developing and least developed countries (LDCs) in Sub-Saharan Africa, Southeast Asia, and Latin America. As high mobile network penetration already prevails in these markets, mobile (as opposed to fixed) broadband services tend to be the prevalent form of access technology. However, mobile broadband coverage is still very limited in many regions and data plans as well as smartphones are often unaffordable for the local population. In addition, available internet content is often not relevant enough to local communities. Finally, digital illiteracy as well as gender discrepancies in internet adoption pose additional barriers.

The digital divide between the developed and the developing world is at risk of widening if broadband network deployment, price decline, and subsequently consumer adoption do not keep up with the required growth levels. 3G and 4G coverage is indeed expanding while data prices are on a downward trajectory, even in developing countries. But at the same time, the bar for what is considered a decent internet experience is constantly rising. Modern applications consume more data and require faster connection speeds and lower latency for an acceptable user experience, especially with video streaming projected to make up 75% of global data traffic. The fast pace of development of these factors puts developing countries at risk of falling further behind the developed world.

The economic and societal impact of being connected is significant, especially in emerging markets. The link between internet access and economic growth is indisputable. In mature economies, the internet is responsible for about a quarter of GDP growth. Universal internet adoption in developing countries could make a tremendous difference for the state of those economies. The possibilities for education and healthcare would better lives for the poor and disadvantaged; increased literacy rates and life expectancy would uplift underprivileged communities.

There are four barriers to connectivity: availability, affordability, relevance, and readiness

Drawing on methodology and nomenclature from Internet.org, four barriers are generally attributed as causes of the status quo:

• Availability of a wired or wireless broadband internet connection;
• affordability of a data plan with sufficient data volume;
• local relevance of internet content and available applications;
• and the readiness of the population to consume and utilize available content and services for their benefit.

Availability constraints still exist in large parts of the world, especially in Sub-Saharan Africa. On average, 31% of the world’s population does not yet have 3G network coverage, according to the World Economic Forum. If connectivity is available, as is the case in most of Latin America and Southeast Asia, being actually connected is often hindered by high data prices, not to mention the cost of end-user devices, which usually need to be purchased upfront due to a lack of device financing options. In fact, developing and least developed countries see mobile broadband prices of greater than 6% and 15% of average national income (ANI), respectively, according to the World Bank. In comparison, residents of developed countries typically spend less than 1% of their income on mobile broadband services.

Furthermore, online content and services frequently lack relevance in the developing world because they are not sufficiently tailored to local needs, unavailable in users’ first language, or have not been made accessible to certain markets at all. Additionally, low levels of education, social and cultural norms, and a lack of digital skills cause unfavorable readiness conditions in some least developed countries.

The four barriers can be directly linked to the internet value chain, which is often described as a stack of different layers. While governments and telecommunications network operators as well as wholesale and tower companies set the conditions on the lower layers, internet companies like Facebook, Apple, Amazon, Netflix, and Google (the FAANG companies) dominate the ecosystem on top of the network, especially on the device and application layer. In recent years, we have seen both a push into content as well as into the lower layers of the value chain, as internet companies seek to expand their control and lower their dependency on other players.

Four connectivity barriers along the connectivity value chain

In search for growth, internet companies are taking on the challenge to close the connectivity gap

Traditionally, governments and telecommunications companies are the prime actors in the pursuit of closing the connectivity gap in their region. Unfortunately, those have often failed to do so effectively and there are good reasons to believe that non-traditional players can be and will be more effective.

Driven by profitability, telecommunication companies limit investments in broadband network infrastructure to viable areas. Although infrastructure sharing models have already led to improved unit economics, network expansions sooner or later hit a market frontier, a point at which the cost to serve incremental users intersects the willingness (or in LDCs rather: ability) of new users to pay for telecommunications services. Laying down fiber or using expensive satellite connections to serve especially rural areas with a 4G network is often nonviable, given the limited revenue opportunities in those rather low-income areas.

Governments (policymakers and regulators) play a critical role in pushing this market frontier through measures such as subsidies and other incentives for telecommunication companies to serve the unconnected. At the same time, spectrum license fees are a significant source of revenue for governments while constituting a main component in a network operator’s business case. Although regulators are meant to ensure competition in the market, incumbent telecommunications companies in developing and least developed countries are often still (partially) government owned, which leads to a conflict of interest and often results in political interference with the regulatory institutions. Further, governments in the concerned regions do frequently lack deep telecommunications competencies and policy enforcement power.

In recent years, internet companies, namely Google and Facebook, have become increasingly involved in tackling connectivity problems in the developing world. In search for the next billion users for their online platform services, internet companies invest heavily in finding ways to serve today’s unconnected and under-connected communities. They realize their dependence on the traditional players, mainly telecommunications network operators, and try to limit their inhibitory power by leveraging technology and business model innovations. While partnering with telecommunications companies to tackle network and spectrum related issues is a desired short/mid-term outcome for internet companies, a strong own position in the lower layers of the connectivity value chain broadens their options space. Internet companies such as Google and Facebook remain under pressure by shareholders to grow the active user base on their platforms, yet realize the limited user growth potential in nearly saturated markets in the developed world. Stressing the severity of the issue, Facebook’s stock price took a roughly 20% hit July 2018 not because earnings expectations were not met (in fact, they were exceeded) but because user growth targets fell short of expectations. With these highly motivated new players in the game, the battle for taking down connectivity barriers in the developing world is reaching a promising new phase.

Each market has specific problems that require attention

To exemplify a subset of the issues that persist in the developing world, we draw on the profiles of two of the world’s largest developing countries, Nigeria and India.

Nigeria faces issues across the board

Nigeria’s 4G network deployment started late, covering about 23% of the country’s population as of 2017, projected to cover about 54% in 2020. Network unavailability is mainly due to insufficient numbers of towers for capacity, a lack of fiber optic cables for backhauling, as well as a insufficient spectrum suitable for wider 4G coverage. The country has become infamous for its exorbitant costs charged to network operators for rights of way (RoW), which are the legal permissions to build fiber routes and setup physical infrastructure. Nigeria’s federal and state governments exploit the telecom sector as a source of government revenues. This was reflected in one of the largest fines ever seen in the industry, issued to MTN Nigeria for its reluctance to disconnect unregistered SIM cards in 2015. Low affordability of data plans is caused by several factors, one of which is the country’s high cost of electricity. Diesel prices have gone up 54% since 2016 and the costs for maintaining access to power, i.e. providing physical security to protect generators and batteries from theft, are adding to this. Handset prices are another issue, though at par with other sub-Saharan African countries. Without the influx of illegally imported cheap smartphones from Korea and China, barely anyone could pay for devices, which are traded in US Dollars, as the Nigerian Naira has experienced a record-high devaluation over the last few years. Further, one must remember that 54% of Nigerians earn less than $1.90 (PPP) a day, a level at which a 4G-capable device is barely affordable, even at lower price points. Readiness and relevance metrics are also trailing far behind developed world average, caused primarily by low literacy rates and language barriers.

India is on a promising path with some pressing issues

Internet coverage in India has improved significantly in the last few years, especially with the launch and expansion of Reliance Jio’s 4G network. This in turn has set of fierce price competition among the operators which has resulted in a market shake-up with few players exiting the market and consolidation among the rest. The appetite for data continues to grow, with some estimates pointing to average data consumption in excess of 4GB per month — at an astonishingly low price of 26 cents per GB. This is clearly not a sustainable price point in the long term which is reflected by the record losses and bankruptcies which has driven this consolidation. Another fallout is the fact that unit economics plays a significant role in network design and build-out; the result is that those who are connected often experience poor speeds and connection quality. Low international internet bandwidth per user and insufficient infrastructure and spectrum are the main root cause. The presence of all the major Chinese vendors (Xiaomi and others) in the market ensures that there is a significant market for affordable smartphones with aggressive competition and pricing further eroding margins for the OEMs. Nonetheless, the proportion of subscribers to India’s covered population is relatively low due to pricing and the cost of handsets — which at prices around $50 are still unaffordable to the marginalized sections of the population. Relevance for Indian consumers is impacted by more than 50 native languages spoken in India’s various regions and unavailability of top ranked apps and services for the Indian market. With a literacy rate of about 74% and 75% secondary school enrollment rate at a gender parity index of 1, India exhibits more favorable readiness conditions than the majority of countries in the Southern Asia region.

Google and Facebook too have made India a priority with initiatives such as WiFi services in partnership with railways and other operators. It simply is a reflection of the fact that with a young population of more than a billion, this is a market that one cannot afford to ignore.

GSMA indices on the state of connectivity for Nigeria and India

A number of promising initiatives and technology innovations are on the rise

Thanks to the involvement of internet companies such as Facebook and Google, we have seen an increased level of activity around technology and business model innovations with promising prospects.

Facebook’s Express Wi-Fi

As one of multiple initiatives under Facebook’s internet.org umbrella, Express Wi-Fi brings fast and affordable internet through local hotspots in underserved regions. The service is currently live in five developing countries and is being provided in cooperation with local telecommunications service providers. The Wi-Fi hotspots themselves are managed by local entrepreneurs. Google Station is a similar initiative run by Google.

Facebook’s Involvement in the Telecom Infrastructure Project

The Telecom Infrastructure Project is a collaborative telecommunications community that aims at accelerating technology innovation, new developing business approaches, and realizing cost efficiencies. The project members work on initiatives related to topics such as millimeter wave networks, end-to-end network slicing, and open source network designs like OpenCellular and Open RAN. Besides contributing to these initiatives, Facebook sponsors one of the community labs located in Menlo Park, CA.

Google’s Project Loon

Project Loon attempts to close connectivity gaps in rural areas through a network of balloons that travel in stratospheric altitudes. Equipped with solar panels and transceivers, the balloons are relaying internet signals across one another, linking up with telecommunications partners on the ground, and acting as high altitude antennas for mobile broadband services. Facebook’s Aquila project has similar ambitions but was halted in June 2018.

Google’s CSquared

CSquared lowers the cost of access connectivity for telecommunications companies through a shared infrastructure model. Currently serving regions in two developing countries, the Google-funded company is working closely with local network operators to deploy fiber-optic cables for fast and reliable internet access. Facebook is running similar initiatives on building up shared fiber backhaul networks in East Africa together with local wholesale bandwidth providers and network operators.

Google’s NBU Products and Features

Realizing the constraints many (future) users in developing countries are facing, Google has launched a series of products and features that address these challenges. For example, the Android Go edition is an operating system specifically designed for entry-level devices in emerging markets, Google’s Datally mobile app lets users control and save mobile data consumption, and Google’s next billion user design guidelines encourage developers to tailor apps and content to local needs.

Microsoft’s White Space Broadband Project

As a pioneer in TV white space innovation, Microsoft aims to increase the productive use of radio frequency spectrum by utilizing unused TV broadcast channels to provide mobile internet, especially in areas where governments are shifting TV broadcasting from analog to digital bandwidths. Projects in five emerging markets have allowed the use of previously unused license-exempt spectrum for increased and more affordable wireless internet coverage in both urban and rural areas.

SpaceX’s Starlink Low Orbit Satellites

SpaceX has FCC approved plans to launch a network of thousands of low orbit satellites that will circle the earth and broadcast broadband internet to low-cost earth-based terminals that emit mobile broadband signals to their surrounding area. Amazon and Apple are said to have similar plans.

Long-term success requires collaboration

There is no silver bullet for connecting the next billion internet users. No single solution will be able to solve all connectivity issues that persist in developing and least developed countries. The challenge lies in solving the major problems along all layers of the connectivity value chain in each market. This includes coming up with solutions that address spectrum and telecommunications infrastructure, handsets, content relevancy, and the digital readiness of the population. The needs of the next billion internet users may be somewhat different from those who have been online for decades. Internet companies need to understand these needs and invest in local solutions rather than pursuing a global scaling approach of existing applications and content.

Lowering the affordability barrier for consumers in developing and least developed countries will perhaps be the biggest challenge, with handset prices and the costs of powering handsets being a particular limitation in rural (off-grid) areas. On the network layer, operators can only increase their coverage and bring the cost per megabyte down by becoming more efficient in their network operations and planning and by utilizing shared assets to keep capital expenditures low. Innovative solutions for efficient use of spectrum are yet to be launched on a broader scale (e.g., single wholesale company that manages spectrum assets “on demand”). Regulation and government intervention also play a key role. Governments need to fully embrace the importance of the internet and its role as a key economic driver in the 21st century. Accordingly, a regulatory framework is needed to ensure competition without restricting the involved players to collaborate in areas where joint approaches are needed and tax-funded initiatives need to be considered where private-sector financing options fail or do not exist.

In conclusion, one player can maybe solve a single aspect of the connectivity challenge, but there needs to be wider collaboration between the operators, infrastructure providers, internet companies, content providers, application developers, financiers, and governments to solve the major problems and achieve the common goal of allowing the next billion users to contribute to and benefit from internet-based services.

Ingmar Haffke is a Management Consultant at Detecon Consulting, Deutsche Telekom’s management consulting division leading their practice in Emerging Technologies and Infrastructure.
Special thanks to Joseph Noronha and Sophia Frisbie for their contributions to this article.