Mobile cheque-book

Mobile telephony has been nothing short of revolutionary in India. Within 12 years, tele-density has gone from 1% to 40%.

That is, apparently 40% of India’s 1.1 billion have acquired phone — usually cellular — connections. But this is only the beginning: the next step may be for mobiles to become the payment mechanism of choice.

When a phone SIM card is used as an electronic wallet, many transactions may become easier and cheaper — for instance, old-age pensions for the poor, or even buying groceries from the corner shop.

Cellular telephony is available to far more people than banking services are. In several African countries, mobile payment is now commonplace.

But is there money to be made in this business? India is the fastest-growing market, and some call rates are the cheapest in the world, as low as 30 paise per minute.

There is a price war; however, the carriers are not hurting. The current auction for 3G spectrum is vigorously contested, and billions of dollars are being bid on the right to offer 3G services.

Clearly the companies bidding expect to make money. There are several ways in which mobile telephony can be profitable. One is to simply grab the wireless spectrum, through means fair and foul, and sit on it.

The second is to make process improvements to squeeze maximum productivity out of the system. The third is to create radical new business models that change the rules of the game.

The spectrum-grab has been highly successful in many countries, as wireless frequencies are a scarce resource whose value increases dramatically through network effects.

As more and more customers sign up, the value of the ‘raw material’ goes up exponentially. In the US, fortunes were made through capturing the spectrum, much as 19th-century railroad ‘robber barons’ made fortunes through land-grab wherever the new rail lines were built.

In India, of course, there is a twist to this: there are persistent allegations that the older generation (2G) spectrum was parcelled out in sweetheart deals by rent-seeking politicians and bureaucrats.

Indeed, strange things did happen — the deadline for submitting a bid was suddenly shortened by a week during the bidding process a few years ago. The winning bids, surprise, surprise, were at rock-bottom prices.

New and incriminating information, it is alleged, has come out recently. Be that as it may, some of the winning bidders had no prior or later experience in mobile telephony. They simply turned around and sold the spectrum to actual mobile players at hugely inflated prices, thus pocketing a healthy profit.

The second mechanism is process improvement. India’s carriers are now seen as models for process innovation. Airtel, for instance, has outsourced its entire network to switch manufacturers who are paid for a certain number of calls completed; its IT operations are handled by a major IT firm; Airtel is in essence a telephony marketing company. This has enabled Airtel to be profitable despite the very low calling rates.

This model of process innovation is admirable. The late management guru CK Prahalad has pointed out how a number of Indian service entities are indulging in frugal engineering in the way they do business — for instance, the medical services organisations Aravind Eye Hospital and Narayana Hrudayalya. By radically rethinking their operations, they have been able to squeeze profits out of low-priced offerings.

The third mechanism, of changing the business model, is currently making waves. It is data transmission, including Internet access, that is key (and it is clear that data, including SMS text messages, appeal to even customers in poorer countries).

Companies like Apple have disrupted the status quo through incremental innovation. Smart-phones like the iPhone have created a new paradigm — touchscreens and ease of use are making them the primary Internet access devices.

Moreover, there is a new distribution mechanism for applications: application stores create a new ecosystem wherein software developers can reach customers relatively easily. This has led to an explosion in creativity, and the focus of computing is shifting to ubiquitous mobile phones. The recent entry of HP into the fray by buying Palm shows how the worlds of computing and cellular telephony are converging.

Some rich countries are already rolling out the next generation (4G at 100+ mb/sec), which promises much faster data connections. Indeed, critics suggest that India has missed an opportunity to leapfrog onto 4G because of unnecessary delays in the 3G deployment.

Despite the possible shenanigans, cellular telephony has created vast improvements for the public. Macroeconomists estimate that it has added as much as 0.8% to the GDP growth rate. Profiteering by a few clever people may then perhaps be seen as teleologically acceptable — the greatest good for the largest number.