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International Issue: August 2005
Global News Analysis
ULCHs for mobile growth
by Ouida Taaffe
It’s an ugly acronym, but an important issue: ULCHs are ultra low-cost handsets. In the struggle to make mobile communications affordable in the developing world, such devices are key — and in making handsets ultra low-cost, manufacturing scale is what counts. This could give GSM an edge.
Up to now, the mobile world has focused largely on developed markets — hardly a surprise. This is where the money is. However, saturation means that sales growth is now sputtering. To fire demand in less well-heeled regions, the GSM Association held a tender last year for the development of an ultra low-cost handset — sub US$40 out of the factory — which was won by Motorola. A new tender aims to reduce that cost to under US$30 (result to be announced in September).
Of course, though US$30 is less than many people in developed countries spend each month on take-away lattes, the average annual GDP per capita in Sub-Saharan Africa is just US$371 (World Bank figures). Many other regions are little better off. This is why, in theory, 80 per cent of the world’s population could use mobile communications but, in practice, just 25 per cent do, according to Ben Soppitt, director of strategic initiatives at the GSM Association, speaking at a recent Informa conference on ULCHs. “The democratisation of communication is a business opportunity and a social imperative,” he argues.
Miniscule incomes in many developing countries make imported handsets valuable objects. “It’s like buying a car,” several of the conference speakers said. It also means that operators cannot subsidise the handset and hope to recoup the cost over the course of a contract. ARPUs of around US$5 a month will not support that.
How can handsets be made affordable? “It’s tough even to take a dollar out of the cost of a handset,” says Mark Paxman of PA Consulting. “The bill of materials for a simple handset, once you add items such as, say, warranty costs, intellectual property licences, packaging, a manual and a charger, is around US$70. Hitting US$30 or US$40 for a handset means you have to start with a bill of materials of US$10 or US$15.” It also means that you have to sell a lot of them.
The painful truth of volume economics is the principal reason why GSM handsets look likely to come out in front. “CDMA has a much smaller market share than GSM, and chipsets are dominated by Qualcomm. The smaller volumes and lower competitive pressure is likely to make them more expensive than low-end GSM equivalents,” says Paxman.
Of course, having the actual phone is not the end of the story. Accessories, too, cost money — and just recharging is a challenge in some developing countries. For the electricity issue, solar power has been mooted as a solution. Again, volume is required. “From 250,000 units upwards, we could go as low as US$8-9,” says Govert Derks, marketing manager at Solar Mobile, a Dutch producer of solar panels for phones. (In the 50,000 unit volume range the cost would be around US$17 each.) In sunny regions, he says, one hour of charging could power a handset for a day. However, he also says that no operator in a developing region is currently able to order enough to reduce the price — even though the vendors are “interested in offering something different”. (It is also possible to make a bigger, central device for a community, rather than a single phone charger, Derks says.)
However, even if the industry can put the right device in people’s hands and make sure it is charged, there are other important parts to the puzzle. Operators, for example, need to be able to set up micro-billing — down to the 2-3 cent level. Governments, too, have a role to play in reducing costs. Sometimes local taxes can double the price of a phone, according to Fred de Vries, senior manager for device strategy at Celtel International, an African mobile operator. A further important cost is distribution. Motorola transports its handsets under armed guard in some developing countries. Still, de Vries believes that penetration could reach 10-15 per cent of the African population of the industry gets it all right.
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