Telecom Analysis --

Pricing will be key to broadband growth in emerging markets

With mobile voice subscriber growth starting to slow in many emerging markets, service provider attention is shifting to data services, with a particular focus on the broadband access opportunity. The lion’s share of broadband growth is shared between providers offering DSL, HSPA, and WiMAX. Our recent study Broadband pricing in emerging markets: a comparison of DSL, WiMAX, and HSPA examines the comparative prices and affordability of broadband services in 15 selected emerging markets. It concludes that broadband services are expensive, especially in Africa and Asia, andthis is one of the key reasons for the low demand and relatively slow uptake.

Broadband is unaffordable for most emerging market consumers

Our study found that average broadband prices in emerging markets are two to three times higher than their developed market equivalents, primarily as a result of a relatively muted competitive environment which enables providers to “skim” the market. Considering the low GDP per capita in most emerging markets (particularly those in Africa, Asia, and parts of South & Central America), broadband is unaffordable to most consumers other than those at the very top of the socio-economic pyramid. For example, we found that the average cost of entry-level HSPA services in our sample of countries was $381 per annum, with an average 1GB usage cap. WiMAX services cost on average $432 per annum, which makes WiMAX the best-value broadband option overall, considering the far higher usage caps available compared to HSPA alternatives. The average price of an entry-level DSL service in our sample of countries was $542 per annum, which is the highest among the competing technologies.

We have also noted surprisingly large price differences between similar services across markets. For example, while a 512kbps WiMAX service costs $123 per year in Pakistan, it costs $1,296 in South Africa. In India, a 512kbps DSL service costs $197, compared with $2,118 in Nigeria. Even HSPA services vary wildly: a 2GB capped service costs $223 in Poland, but $2,924 in Colombia.

Attractive pricing will be key to future broadband growth

Emerging market consumers are highly price sensitive, and our research suggests that they make careful purchasing and usage decisions based on price, or (more specifically) affordability. There is little doubt that affordability will improve across all emerging markets, driven by both income growth and reduced broadband prices. In the short term, we expect substantial broadband price decline as competition within each market intensifies. In addition, greater pricing innovation in the form of “sachet pricing” (i.e. low usage caps, shorter-period contracts, and prepaid packages) will further boost broadband affordability.

However, the underlying cost drivers within each key service and technology area will set the floor for further price reductions – particularly factors such as economies of scale, cost of equipment, and incremental cost per customer. We expect HSPA services to see the steepest reduction in price in emerging markets. This will be driven partly by natural reduction from the current high prices per megabyte, and also by a rapid increase in competition as mobile operators focus on driving up data ARPU with mobile broadband services.

We expect WiMAX to have the flattest price curve. WiMAX players will have limited scope for further price reductions as a result of lower economies of scale deriving from the muted uptake to date, and also the flattest cost curve, as the WiMAX vendor ecosystem appears to be shrinking. We expect DSL service pricing to decline at a rate between that of HSPA and WiMAX services. While DSL players do have the potential to reduce costs due to greater economies of scale, most DSL services are provided by former incumbents, which are generally among the least efficient players in the market and face little wireline competition.

Service providers’ pricing – and more broadly their marketing and retailing skills – will be key determining factors in both their future broadband growth and their profitability. Getting it right will require much more of an “outside-in” mentality, which starts with the customer and works backwards to players’ marketing and operations, as opposed to the current “inside-out” mentality of many telcos, which can be summarised as “build it and they will come.”

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