- Many who can access the internet do not – a huge opportunity for innovators in the telco and tech sectors
- Telcos have an information advantage, tech firms have an innovation advantage
- We think partnerships between the two will yield the most profitable ventures, for example Ant Group and Vodacom
The ‘usage gap’ – people that have access to the internet but are not using it – at end-19 stood at 44% (GSMA data), representing a global population of 3.4bn. As seen in the table below, although the coverage gap has narrowed over the past few years, the usage gap has remained very stable. Three regions have a wider usage gap than the global average: the Middle East and North Africa (47%), Sub-Saharan Africa (49%) and South Asia (61%).
Factors that create the usage gap
The three main issues that lead to a persistent usage gap are low affordability, low relevance of internet content and low levels of digital literacy. Digital literacy problems can be addressed through government policies, such as introducing free computers and internet in schools, but, to evaluate the profitability opportunities for firms, this report focuses on the first two issues.
One reason for wide usage gaps can be the high cost of smartphones, and of data. Looking at low- and middle-income countries, despite costs decreasing year-on-year, the average price of a smartphone is still far from what the GSMA puts as the “affordability threshold” – 5% of monthly income.
Meanwhile, the UN Broadband Commission targets 1GB of data to cost less than 2% of monthly income per capita by 2025. GSMA data shows that, globally, the average cost of 1GB of data as a percentage of monthly GDP per capita declined from 8% in 2016 to 4.4% in 2019, but two regions failed to meet this threshold in 2019 – Sub-Saharan Africa (4.2%) and Latin America & Caribbean (2.7%).
2. Relevance of content
The perceived relevance of the content available on the internet to users, especially in regions with a diverse language pool such as Sub-Saharan Africa, can prevent internet use. Moreover, high-income countries (largely English speaking) monopolise the development of mobile applications and content services.
Although more economically powerful developing countries, notably China, have been able to bypass this issue by generating content that is accessible to its population, Sub-Saharan Africa, for example, suffers from poor access to locally relevant content. The digitisation of government services (paying taxes, health care and education access) also plays a role in improving content relevance – again, there is huge differentiation between countries and regions on this factor.
How tech firms and telcos are capitalising on the usage gap
Telcos launch their own innovations targeting the usage gap
Telcos for their part have mainly been providing lower-cost data bundles to attract those who fall into the usage gap, as well as incentivising existing data customers to increase their usage, thus increasing data revenues. But some have created their own products to capture the usage gap opportunity.
MTN Group’s Ayoba is a prime example of a telco-owned product curated for its customer base. Ayoba is an instant messaging up launched in 2019 that also facilitates mobile money transfers and access to content in a variety of African languages. By March 2020, Ayoba had 2mn active users – 0.7% of MTN Group’s user base.
At first glance, Ayoba sounds like a great solution to address the lack of relevant content for African audiences. MTN Group has a unique understanding of customer consumption However, some use cases are restricted to MTN customers (such as mobile money transfers) and global apps such as WhatsApp and YouTube are also offering similar services to the same client base. This means that uptake will be lower as customers are not adequately incentivised to switch to Ayoba.
This in our opinion is the largest drawback to telco-led innovations targeting internet usage. Telcos have a unique understanding of what their users consume and the gaps therein. However, their scope of understanding is limited to their particular user base, which also significantly limits their scale of innovation. This explains why M-Pesa has succeeded in Kenya and Tanzania and not in South Africa – which has different customer behaviour and needs. Telco innovations have been driven by customer retention, rather than scale.
Tech firms launch standalone services to profit from the usage gap
Amazon’s foray into e-commerce in India and the provision of Indian film content in various languages via Amazon Prime Video has yielded impressive metrics. Press reports indicate that, in June, India had the highest market share of global Amazon Prime Video downloads, at 29%. By August, Amazon Prime India had 1mn customers.
However, Amazon faces competition from Flipkart which, despite its Walmart shareholding, still adopts a ‘home grown’ strategy as a differentiator. In three Indian languages compared with Amazon’s one, and with a stronger focus on the low-middle class customers, Flipkart has been able to sufficiently compete with an internationally renowned brand in e-commerce.
The newly launched WhatsApp Pay in India seems lucrative when considering the 400mn WhatsApp users. However, the chances of WhatsApp Pay echoing Tencent’s success in China is limited by the competition from Paytm (and Google, when looking specifically at the UPI interface). Moreover, government regulations restricting the initial user uptake and market share volumes also dampen the possibility of scale.
Tech firms have a strong advantage in terms of scale as their innovations target mass adoption globally. However, developed markets and emerging markets differ in user behavior. Therefore, a local innovation that has first-mover advantage may prove difficult to beat due to its unique understanding of local customer profiles. We believe that tech firms should consider partnerships with or acquisitions of domestic operators, especially in emerging markets, to circumvent this problem…
Tech companies partner with telcos on innovations to bridge the usage gap
Technology companies have partnered with telecommunication firms (telcos) locally to introduce products to narrow usage gaps.
Google has partnered with telcos, such as Safaricom (Kenya) and Reliance Jio (India), to provide low-cost smartphones. Safaricom’s Lipa mdogo mdogo product, launched in July, grants access to a 4G smartphone worth US$60 that customers can pay for in instalments. Thus far, 50,000 customers have been approved. Reliance Jio’s complementary strategy to launch affordable 4G smartphones for its customers is expected to kick off in December.
Regarding increasing the amount of relevant content to under-served populations, Ant Group announced a partnership with Vodacom South Africa in July to launch an app for financial services, news and music streaming that is expected to launch in 2021. Airtel in India has also partnered with Amazon by offering free access to Amazon Prime for customers spending over US$4.7 a month on its telecom services.
These examples illustrate that tech firms are able to easily scale their market share by accessing an already vetted subscription base courtesy of the telcos that they have partnered with. The telcos, for their part, increase their share of data usage and customer retention in their networks without incurring the significant costs of innovation.
Verdict: Watch out for partnerships between local telcos and international tech firms
Telcos have incredibly granular data on customer behaviour and are therefore best placed to launch products that can bring their own customers out of the usage gap. However, international tech firms are better at innovating and driving up market demand on a larger scale.
The most optimal way to profit from the usage gap problem is for telcos and tech companies to partner up, leveraging on telcos’ local know-how, and the technological innovations and scale that international tech firms can provide.
As tech firms continue to pursue the next growth avenue across emerging and frontier markets, we expect those who choose to partner with or acquire local entities, such as Google’s Jio stake purchase and Ant Group and Vodacom’s partnership, to be most successful.
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