Tag Archives: economics

SA Minister of Communications – Reading the Tea Leaves

Arthur Goldstuck has written a thoughtful piece on the newly appointed South African Minister of Communications, Siphiwe Nyanda, and his new deputy Dina Pule.  He does a good job of highlighting their key strengths and weaknesses.

Based on their lack of experience in the telecom sector, much will depend on who they choose to be advised by.  Good legal, economic, and technology advisors could make all the difference. I think this will make the campaign for a national broadband strategy all the more important in terms of getting a clear message from civil society through to the Department.

Optimistically, one might argue that neither Siphiwe nor Dina have “history” with the incumbents.  This might bode well for real change.

Certainly, empowering ICASA to move more quickly and decisively on things like interconnect fees would be a great first step.  Please, let us have a well-funded, fully independent regulator.

Worth considering also are the other key overlapping ministries that will have an impact on telecoms.  The Department of Public Enterprises (Barbara Hogan) would be an obvious one although she may be too busy saving SAA to afford much time for ICT infrastructure.

But most significant I think will be the new planning ministry.  If broadband is ever to take off in South Africa, it will need to be recognised at the level of an integrated national economic strategic plan.  If that can be achieved, then I think there is hope for the DoC to move forward with a mandate for change.’

Mobiles in Africa – We Need The Eggs

At the end of the movie Annie Hall, Woody Allen says,

this guy goes to a psychiatrist and says, ‘Doc, uh, my brother’s crazy, he thinks he’s a chicken,’ and uh, the doctor says, ‘well why don’t you turn him in?’ And the guy says, ‘I would, but I need the eggs.’ Well, I guess that’s pretty much now how I feel about relationships. You know, they’re totally irrational and crazy and absurd and, but uh, I guess we keep going through it…because…most of us need the eggs.

And I guess that is pretty much how I feel about mobile access in Africa.  People pay irrational amounts of money for mobile services and they keep doing it because communication is a fundamental human need and, for most, mobile is the only access available.  Yet at the same time, mobile operators in Africa are making jaw-dropping profits.

Now the conventional wisdom about this is that this is a win-win.  Indeed, if you read opinion pieces such as this April 2009 article by Rohit Singh (a researcher at the Overseas Development Instiute) entitled “Mobile Phones for Development and Profit:  A Win-Win Scenario“, you will get the impression that most “m4d” researchers seem to give, namely that there is very little downside to mobiles from a development perspective.  Rohit says, “mobile operators are able to make large profits in the developing world, while delivering development benefits.”  On the surface this is hard to contest.  There has been convincing evidence since 2005 that mobile infrastructure deployment is well-correlated with economic growth.  Anecdotal reports abound about the transformational effects of access to mobile communication and new mobile services such as m-banking.

So what’s the big deal?  The problem is one of proportion.  It offends our sense of morality when people profit unduly at the expense of others.  I’d like to expand on this a little through a comparison with a classic experiment in behavioural economics called the Ultimatum Game.  In this experiment,

two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between themselves, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal.

So, let’s imagine that you and I are playing the game and I, as the first player, receive a hundred dollars.  If I decide to split the money evenly, I imagine that you would accept the deal.  If I cut myself in for a little extra, say sixty dollars, I imagine you would still take the forty dollars remaining.  But at some point as I get a little greedier, I think you might be likely to say “Forget it! I could use the twenty dollars but not if that bum is going to keep eighty!” and you would use your power to cancel the deal even though you stand to lose twenty dollars.  Turns out that the average tipping point for this change of heart is around 70/30.  This is from thousands of instances of this experiment across a variety of cultures.

Why do we do that?  Why do we act in a way that is not to our economic benefit?  The answer is this.  We are social beings and social fairness is hardwired into who we are.  Watch Jonathan Haidt’s Ted Talk on Morality and you’ll see the same answer.  A desire for social equity and fairness is a part of being human.  In fact, it is not just human.  Higher order animals exhibit the same traits of social fairness and equity.  But it does seem weird when you think about it.  Imagine yourself walking down the street and you spy ten dollars on the pavement.  Happy day!  Lady luck has smiled on you.  Yet, imagine the same scenario with you walking down the street with someone else.  They spot a pile of twenty ten-dollar bills.  They peel off a single bill and hand it to you.  You’re still ahead the same amount but somehow there is no sense of “happy day”.  Instead the dominant emotion is likely to be one of anger at the injustice being perpetrated.

And that is how I feel about mobile operators in Africa.  The proportion is wrong and I mean wrong in the basic moral sense of right and wrong.  As I have pointed out before, Kenyans spend more than 50% of their disposable income on mobile communication.  Income that might otherwise be spent on building a savings account, their children’s education, investing in a new business, etc.  Of course that income might also be spent on booze, cigarettes and companions of questionable virtue but let’s give ourselves the benefit of the doubt.

Let’s put that 50% of disposable income up against Safaricom’s half-year profit statement from 2008.

2008 ½ Year Statement KES USD
Turnover 34,508,000,000 456,885,920
Cost of Sales -15,309,000,000 -202,691,160
Gross Profit 19,199,000,000 254,194,760
Distribution, Admin & other costs -4,194,000,000 -55,528,560
EBITDA 15,005,000,000 198,666,200
Depreciation & Amortization -5,432,000,000 -71,919,680
Financing & Forex Costs -597,000,000 -7,904,280
Net Interest Payable -274,000,000 -3,627,760
Forex – Operational -323,000,000 -4,276,520
Profit Before Tax & One-off Items 8,976,000,000 118,842,240
Taxation -2,759,000,000 -36,529,160
Profit After Tax 6,217,000,000 82,313,080

The above points to Safaricom making about a billion USD a year in turnover with over 50% of that being gross profit.  Cash in the bank profit of around USD 170 million… in one year.

Keep in mind who owns Safaricom.  The Kenyan government own 35%, Vodafone UK own 40%, and the other 25% (sold off in last year’s IPO) is spread out among Kenyan and international investors.  They are the groups that stand to benefit from Safaricom’s profits.

Back to the Ultimatum Game.   Are you feeling it yet?  Do you think, if given the choice, that the average Kenyan spending more than 50% of his/her income on mobile communication would exercise their power in the Ultimatum Game to cancel the deal?  The unfortunate answer is no.  No matter how disproportionate the division of wealth, Kenyans (and indeed all of us) need access to communication.  We can’t afford to say no.  We need the eggs.

So what is the incentive for the owners of Safaricom to offer a more equitable deal?  If you’re Vodafone, there is no incentive.  Their commitment is to maximising profit for their shareholders.  They’re wondering just how little they can offer and still have the deal accepted.  But the Kenyan government obviously has an incentive to offer a better deal.  They represent Kenyans.  Unfortunately, the Kenyan government is also interested in the revenue from cash cow that is Safaricom.  Safaricom’s IPO raised USD 800 million for the Kenyan government last year.  However, even with the best will in the world, it is unlikely that Vodafone would have allowed a public-spirited Kenyan Government to drive down Safaricom’s charges.

So what needs to happen?  Better market regulation for a start.  Regulators have two basic mechanisms for helping the market to operate effectively.  They can intervene remedially to correct market imbalances where operators such as Safaricom enjoy significant market power or they can act to introduce new market entrants to increase competition in the market.  The history of remedial interventions in telecoms regulation in Africa is not littered with successes.  Telcos are typically better equipped with lawyers and researchers than most regulators.  My guess is that the only real hope lies in increased competition.  Given that Safaricom have 80% of the market, this is likely to be challenging.  I suspect that real change will only come when when the barriers to market entry are dramatically dropped.

When is this likely to happen?  Only when there is public pressure from civil society and industry alike to say that pervasive and affordable voice and data is more important to Kenya’s social and economic future than the profits of the largest company in East Africa.

More on the 1 Cent SMS

Problem solved. You’ll be happy to know that the cost of an SMS has come down to 1 US cent….. if you live in the Philippines.  But the news is even better.  According to this article, the price of SMSes in the Philippines is likely to drop to a tenth of a cent!

South African coinsThere are estimates that Philippinos send nearly a billion SMSes a day.  Apparently the networks are capable of handling this kind of load.  Even more amazing is the fact that mobile operators still manage to stay in business at those prices.  Or perhaps not so amazing as a billion SMSes a day at 1 cent is still USD 10 million dollars a day in SMS revenue in the Philippines… USD 3.65 billion dollars in a year.

Contrast this with South Africa where the average cost of an SMS is about 7.5 US cents.  In 2008, Vodacom sent 5 billion SMSes.  Let’s be generous and imagine all of those were full value SMSes.  That would make 375 million USD in revenue for Vodacom.  Vodacom have 55% of the market, let’s imagine the same kind of volume for the rest of the market.  That would give a total SMS revenue for South Africa of ~682 million USD in 2008.

Now, South Africa has about half of the population of the Philippines, so let’s double South Africa’s SMS revenue to put it in proportion, call it 1.4 billion USD.  What’s my point with all this matchbook arithmetic?  Simply that, in this imaginary equivalency, the Philippines makes nearly 3 times the revenue while charging less than 1/7 of the price.

This is the economics of abundance.  Drop the price of an SMS and make more money.  Sounds crazy doesn’t it?  Well, that is the tip of the iceberg when you consider the knock-on social benefits and economic potential of very cheap SMSes for all.

In Praise of Taking Things Apart

The Economic Value of Taking Things Apart

In the Concise Encyclopedia of Economics, Paul Romer writes:

“Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe.”

Patak’s Madras Curry To take the analogy a little further, if I have a jar of Patak’s Madras curry paste there are a fairly limited number of tasty recipes that I can come up with. However, if I were able to disassemble or reverse-engineer that jar of pre-made curry, I would have a range of ingredients turmeric, coriander, cumin, cinnamon, etc from which I could create an almost unlimited number of recipe variations. This is obviously pretty unlikely with something like curry paste. However, not so with technology.

In The Origin of Wealth (to date the only book on Economics I have ever felt gripped by), Eric Beinhocker also explores what I am tempted to call the fractal nature of technology:

“each invention creates both the possibility of, and the need for, more inventions”… Why does technology have this exponential, bootstrapping quality? How does technology feed its own growth? Physical technologies have a modular building block quality to them. Any physical technology can be thought of as coding for both components and an architecture. A house has components (e.g. rooms, plumbing systems, windows) as well as an overall design (e.g. Mock Tudor)”

It seems fairly self-evident that understanding and being able to dissassemble technology into its constituent parts exponentially increases the opportunity for innovation, for hybridising, improving, cross-pollinating technologies into new forms of value.

The Trend Towards Un-takeapartable Technologies

In the context of the above, it is curious that technology has steadily become more and more difficult to disassemble. We have gained in push-button convenience but lost the learning and innovation opportunities that come with taking things apart and tinkering with them.

John Seely-Brown is particularly passionate on the topic of “tinkering” and argues that it is a critical strategy for learning. He argues that Open Source software has become an important place where technology (in this case software) can be taken apart and tinkered with. In the same Steve Hargadon interview with him that I mentioned in a previous post, John Seely-Brown says:

“A huge amount of the learning that a lot of us do, that formed the foundations of all the formal education that we got afterwards, could be called “tinkering.” Because of changes in electronics and cars, a whole generation couldn’t tinker. In the last ten years, these participatory architectures have introduced tinkering again. It is virtual and social tinkering, not necessarily mechanical, tinkering. And what is interesting is that it is relatively non-gender-specific. You are going to find women tinkering as much as guys do.”

This recognition of the importance of taking things apart and its role in learning has grown to the point where now in California, you can send your kids to a Tinkering School which builds the confidence of children to take technology apart and to be creative with technology. I can recommend a short, entertaining TED talk by the school’s founder Gever Tulley.

In industry, the notion of opening up technology to customers in order to facilitate innovation, Open Innovation, has been gaining traction for a number of years. The Economist has a good summary of this trend.

Taking Things Apart Not Things Falling Apart

From my perspective, this is a particularly important issue in places like Africa where history of technology transfer has often been a particularly disempowering one. The two-fold potential of empowering learners and fostering innovation make a compelling argument to encourage a culture of taking technology apart in Africa.

It is why I am so inspired by the innovation that is happening with wireless routers and the exploration of their potential as an alternative communication infrastructure for parts of Africa not well-served by existing telecommunications carriers.

Make Magazine - TshirtMake Magazine, a publication for people who like to take technology apart, have a great motto on one of their promotional T-shirts: “If you can’t open it, you don’t own it”. It strikes me that that is a pretty good motto for African technologists. Opening technology opens innovation and teaches skills that are difficult to learn any other way.