Page 2 of 9
Mobile phones2 have become the most common mode of communication in the world. In 2005, there were over 2.20 billion mobile phone users compared to only 1.26 billion fixed-line telephone users globally (ITU 2005a). Even more interesting are their rates of growth: the Compound Annual Growth Rates (CAGR) for mobile phones and fixed-line phones were 24 per cent and 5.2 per cent, respectively, from 2000 to 2005. If this trend continues, mobile phone penetration will far exceed fixed line phone penetration in the next decade. Mobile phones are not just for developed countries. With over 690 mobile phone network operators operating in 213 countries, virtually every country around the world has access to the technology. And with mobile phone penetration in many developed and developing countries reaching saturation levels, mobile phone providers are developing more cost effective solutions that are targeted at less developed countries. More than half of the world's population resides in these countries and this is where future growth of mobile phones is expected to come from.
A lot of thought has gone into the design of mobile phone systems. It can seamlessly provide voice communications to a large population spread across large geographical areas. Each user is identified with a unique subscriber identification number for authentication and billing purposes. The system is capable of supporting roaming across national boundaries. It is these features that make the mobile phone personal to the user, enabling him or her to be contacted at any time and any place where there is radio coverage. Mobile phone systems are very reliable and communication across the system is secure against eavesdropping. Spam, or unsolicited calls or messages of an advertising nature, is almost non-existent in the mobile phone system. Because of these attributes, users have made the mobile phone their trusted personal device, which has contributed to the dramatic growth in mobile phone use around the world.
While a mobile phone may seem to be very easy and convenient to use, it only works because it is supported by an extensive network of base stations and a complex layer of management software working in the background. A mobile phone system consists of a cellular arrangement of base stations spread across the entire area of coverage. Each base station can provide cover to an area several kilometres in radius. A mobile phone needs only to communicate with the base station closest to it and through it reach any other mobile or landline telephone it wants to connect to. The cellular arrangement of base stations enables the technique of frequency reuse to be exploited, thus enabling a very large increase in the traffic carrying capacity of the system. It would not have been possible for policymakers to allocate sufficient radio spectrum for the general population if the technique of frequency reuse had not been invented.
When mobile phones were first introduced, only businesses and the very rich could afford them. Today they have become much more affordable and they have penetrated all segments of society. Furthermore, we are starting to see a trend of mobile phones displacing fixed-line telephones. In developed countries, it is the convenience of being reachable anytime and anywhere that drives the trend. The phone number is tied to the person and not to a specific location. Whereas residents of a household are likely to share one fixed-line telephone, it is highly likely that each individual within a household will have his or her own personal mobile phone. In the case of developing countries, it is the speed of deployment and lower investment costs that drive the take-up of mobile phones. A strategically placed radio base station can almost immediately bring communications to everyone within a 5–10 km radius compared to the months it may take to plan, obtain all the necessary permits and deploy a copper infrastructure to cover the same area.
The first generation mobile phone system was introduced by AT&T Bell Labs in Chicago in 1978 and it achieved success with the business community. The second generation mobile phone used digital technology to improve its capabilities. In this way, mobile phones began to make an impact on the general population. Besides voice, the second generation mobile phone system also has some basic data capability, such as the General Packet Radio Service (GPRS) and the Short Message Service (SMS). While GPRS saw only limited success, SMS turned out to be a big hit. GPRS provides a data connection capability between the handset and the phone network and from there onto the Internet. The lukewarm reception towards GPRS may be due to the fact that it could only support a relatively low data rate of about 20 to 40 kbps and users have found it to be an expensive service. SMS allows the user to send short alphanumeric messages of up to 160 characters to other mobile phone users. SMS is extremely popular with youngsters and even businesses have found innovative ways of using SMS to take advantage of its low cost and the ubiquity of handsets. Last year, over one trillion SMSs were sent globally and it now accounts for a significant portion of an operator's revenue. For example, 16 per cent of China Mobile's 2004 revenue came from data, and SMS sent in China grew from a mere 0.44 million in 2000 to 300 million in 2005 (ITU 2006).
The third generation mobile phone exploits wideband digital communications to further improve on the second generation phone system. One key improvement is the capability to support multimedia applications. Another key benefit is the fact that third generation mobile phone systems can deliver voice services at a fraction of the cost of second generation systems, potentially making mobile phone service even more affordable than before.
The success of mobile phones is due to the work of many players. These include the European Telecommunications Standards Institute (ETSI), the body which created the technical standards for GSM, the dominant mobile phone system in use today, and the International Telecommunications Union (ITU), an intergovernmental organization of public and private entities. The ITU, working together with National Administrations, endorses standards and regulations and harmonizes the radio frequency spectrum to be used by mobile phone operators around the world. Standardization of equipment enables production volumes to be efficiently scaled up, thus bringing down per unit costs. Through market competition, these savings can then be passed on to the consumer. A harmonized radio spectrum makes international roaming possible with just one handset. An extensive network of inter-country, inter-operator relationships have sprung up to enable seamless service across countries around the world. This is made possible by the fact that each mobile phone subscriber has a direct billing relationship with his or her home operator and can be uniquely identified through the personal subscriber identification module (SIM) associated with his or her phone subscription.
A country's telecommunications regulator has a strong influence on whether there will be a high take-up of mobile phone services in that country. The regulator influences the degree of competition and vibrancy of the market by the number of players it permits to play in that market. If there is insufficient competition, subscribers may end up paying more because operators need not fight too hard for the market share. However, it has also been argued that too much competition will create a market where the operators may not make enough money for re-investment to keep the infrastructure up to date.
Regulators also control the quantum and pricing of the radio frequency spectrum. It can be shown that there is an inverse relationship between the quanta of spectrum allocated and the intensity of infrastructure (related to capital expenditure) needed to service a particular distribution of subscribers. The cost of the radio spectrum can vary dramatically; some governments see it as a means to raise as much revenue as possible, while others may see it as a tool for telecommunications development and thus charge only a nominal fee. However, the trend is for regulators to use the auction mechanism and let the market establish a price for the radio spectrum.
Regulators must also play the role of referee to ensure a level playing field for the market mechanism to work effectively. The regulator needs to establish clear rules for interconnection between mobile operators and between the mobile and landline operators, and ensure access to critical infrastructure such as telecommunications ducts and pipes and access to telecommunications towers and exchanges. The regulator must also ensure that operators do not adopt anti-competitive practices such as locking of handsets and imposition of excessively long service contract periods. The regulator should also ensure that there is a mechanism for mobile number portability so that users can freely switch operators without worrying about losing the telephone number that has become personal to them.
Another very important player is the GSM Association (GSMA), a global trade association representing more than 690 mobile phone operators and more than 180 equipment manufacturers and suppliers. Their primary goal is to ensure that mobile phones and services work globally, creating business opportunities for their members. Ground-breaking initiatives launched by the GSMA include the 'Emerging Market Handset Programme' (EMH) designed to bridge the digital divide by catalyzing the development of affordable handsets. The programme seeks to achieve an ex-factory price of below USD 30 per handset. This is much lower than the price of handsets in the market today. EMH handsets have been supplied through 10 participating operators in countries such as India, South Africa, Nigeria, Democratic Republic of Congo (DRC), Egypt, Algeria, Tunisia, Bangladesh, Turkey, Thailand, Philippines, Malaysia, Indonesia, Pakistan, Yemen, Sri Lanka and Kenya. Other important programmes launched by GSMA include the GSMA Development Fund and studies on the impact of government taxes on the affordability of mobile phone services.
Mobile phone operators play a very important role in the mobile phone ecosystem. A savvy operator can extract maximum revenues from businesses and yet still provide affordable services to the masses with a well structured service offering. Some of the most important tools for developing the mass market include the availability of handset subsidies, prepaid service plans, Caller-Party-Pays (CPP) plans and discounted or free buddy call plans.
Studies by GSMA have shown that handset cost is one of the major impediments to mobile phone penetration in developing countries. This problem can be mitigated by an operator bundling a subsidized handset with a service plan and amortizing the cost of the handset over a service period of 24 or more months. Another very successful tactic is for the authorities to encourage the development of an orderly and active market for secondhand handsets. In many developed markets, handsets have become fashion items and they may be traded in for new models after only one or two years of use. These used handsets can be purchased at a fraction of their original price and they can be redeployed in the price-sensitive market segment.
The availability of prepaid or pay-as-you-go price plans is particularly important to stimulate growth of the price-sensitive market segment. This type of plan appeals to people with a limited or uncertain income stream and who may not be able to commit to any fixed monthly subscription plan. Prepaid plans also permit users to moderate their usage based on what they can currently afford. Prepaid plans have been so successful that in Africa, prepaid subscribers accounted for 87.4 per cent of all subscribers in the year 2004 and the global average for that year was 46.3 per cent (ITU 2005b).
Another very important tool for growing the price-sensitive market segment is a CPP plan. Under this settlement regime, it is the originating party that pays for the call while the terminating party is not charged at all. Operators have found that CPP appeals to the price-sensitive market segment, especially students, teenagers and blue-collar workers even though it may cost more on a per-minute basis compared to the Receiving-Party-Pays plan. This is because CPP subscribers can manage their telephone bills by controlling the amount of calls they make while freely accepting calls to their mobile number. A good example of how the introduction of CPP boosted user uptake is the case of Mexico: the number of mobile subscribers in the country grew by over 100 per cent to more than four million within a year from the introduction of CPP plans in 1998 (Petrazzini 2000).