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The cost of connectivity

Written by  Christian Fruean
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Christian FrueanIssue:Asia-Pacific II 2010
Article no.:8
Topic:The cost of connectivity
Author:Christian Fruean
Title:CEO
Organisation:Digicel Samoa
PDF size:235KB

About author

Christian Fruean is the CEO of Digicel Samoa. Mr Fruean oined the company as its Commercial Manager and subsequently took over as CEO to oversee the launch of its services. He had previously worked for the government-owned incumbent, Samotel. Christian Fruean holds a Bachelor Degree in Management from Waikato University, New Zealand; a Masters of Commerce from the Australian National University (ANU); and is a Certified Public Account.

 

Article abstract

Since the Pacific Islands spread across one third of the earth’s surface, investment in connectivity is critical to the development and prosperity - to the very lives, of Pacific Islanders. Telecommunications, aviation and shipping are the bridges that connect Samoa to the outside world. So telecommunications are especially vital to the economic and social growth and development of the Samoan nation. The introduction of competition in telecommunications drove a significant increase in connectivity investments that provide the population with tangible dividends.

 

Full Article

The independent state of Samoa has a population of close to 200,000 people and is located halfway between Hawaii and New Zealand in the Polynesian region of the Pacific Ocean. The country is approximately 3000 square kilometres in size and is made up of the two large islands of Upolu and Savai’i and eight smaller islands. The main island of Upolu is home to nearly three-quarters of Samoa’s population, and of our capital city Apia. The economy of Samoa has traditionally been dependent on development aid, family remittances from overseas, agriculture, and fishing which makes up 40 per cent of GDP. Agriculture employs two-thirds of the labour force and furnishes 90 per cent of exports, featuring fish, coconut cream, coconut oil, and copra. In 2002 only 1.5 per cent of the population in Samoa had a mobile phone while fixed line penetration was as low as seven per cent; meaning connectivity from a telecoms perspective was the preserve of just a tiny and wealthy minority. To credit of the Samoan Government they were one of the first countries in the region to consider liberalizing the telecoms industry with a view to improving the country’s infrastructure and providing a much needed boost to the economy and the lives of its population. Mobile phone subscribers to the government-owned operator started rising in 2003 as the country moved towards competition and the incumbent began to prepare for the inevitable. In 2005 the Government of Samoa passed a new Telecommunications Act which for the first time allowed for competition in the industry and created the Office of the Regulator. By 2006 and even before the launch of second operator mobile penetration had increased to 8.3 per cent. The government also moved to establish a joint venture between the state-owned enterprise and Telecom New Zealand. This new entity gave up its exclusivity in the market in return for a licence to operate based on GSM technology. In 2006 the government issued two other licences to operate mobile phone technology, one of which went to a new entrant in the region. Competition finally arrived in Samoa on October 31, 2006 when the country’s second mobile provider (Digicel) launched its services. Within less than one year, over 45 per cent of the population had a mobile phone with the number jumping from 22,000 people in late 2006 to over 80,000 less than 12 months later. In the year after deregulation in Samoa, mobile penetration increased four-fold and has continued to rise to this day; the penetration is now at 85 per cent of the addressable population of 14 to 64 years of age or 55 per cent of the total population. So what changed? The average price of a handset in emerging markets is currently US$58, which is still a significant burden for billions of individuals living on just a few dollars per day, but experience and the bottom line tells us that these low-income, first-time buyers have demonstrated an absolute willingness to purchase and use mobile phones.1 In Samoa in 2006 the cost to ‘connect’ to cellular telephony fell from an average of US$80 for a mobile handset to under US$20 in 2007. Put simply the introduction of competition saw the providers race to reduce the cost of connectivity and remove price as a barrier to the thousands of previously excluded users. As prices fell with competition, access to this new technology now became within the reach of thousands of Samoans for the first time The slashing of handset costs, coupled with the adoption of a predominately ‘prepaid’ subscriber strategy by the new telecom operator, together with the ability to ‘top-up’ with even the smallest denominations, and the move from a per minute charge per call to per second charge, dramatically decreased the cost to the end user. The access cost barrier to connectivity had now essentially been removed. Cost of course is not the only barrier to connectivity. Despite high rates of rural-to-urban migration across emerging markets, 56 per cent of developing populations still live in rural areas. However, mobile phone coverage in developing countries is predominantly centred in urban areas. In Latin America, geographic coverage is limited to less than 50 per cent in all but four relatively small countries and ten Latin American countries have less than 20 per cent coverage. Some countries, however, have high penetration rates; Brazil’s mobile penetration currently stands at about 92 per cent. The Philippines’ largely urban population is almost entirely covered by cellular service, but geographically only 50 per cent of the country is covered. In India, 40 per cent of the country has area coverage that reaches only 60 per cent of the population.2 These low levels of population and/or regional coverage are primarily due to geographical challenges that make it quite costly for telecom operators to roll out network coverage in many areas. These challenges are very familiar to those of us who operate in the Pacific. One of the main factors contributing to the success of mobile penetration in Samoa is that today Samoa has 97 per cent population coverage giving wireless access to practically all of the two main islands in Samoa (Upolu and Savaii). Geographically, Savaii is the larger of the islands but Upolu has over 70 per cent of the population with 22 per cent of Samoans living in the capital of Apia. This level of coverage was the result of a huge upfront investment in the network and a belief that the returns would follow. Our experience in Samoa and across all of our six Pacific markets is that if you provide the service that meets the needs of the population at affordable prices, these communities will embrace the opportunity. What does 97 per cent population coverage mean to the rural areas of Samoa? On the North West coast of the island of Savaii there is a small rural fishing village called Falealupo with a population of approximately 400 people. Prior to deregulation in 2006 the people of Falealupo had no mobile phone coverage and access to only one payphone for the entire population. Today the village has full mobile phone coverage with over 200 people using a mobile phone. There are over 100,000 Samoans living in New Zealand and the importance of keeping in touch with home is a strong part of Samoan culture. The large queues for the village pay phone are now thankfully a distant memory for the people of this village and with competition the price of calling overseas has decreased by more than 70 per cent. Enabling Samoans to stay connected helps to preserve links to home and encourages continued remittance flows, a key element in the stability of the Samoan economy. Due to the upfront investment in a state of the art GSM network the people of Falealupo now also have remote access to their banking via their mobile phone, enabling them to check their bank account balances without needing an hour long bus journey and then a ferry to Main Island to visit their bank. They can also top up their electricity via their mobile phone by simply texting their meter and voucher number directly to the power company. This new technology is both simple to use and affordable for the end user; these are key issues in a developing country - they will determine the success of any new technology, once the initial barrier of access has been addressed. Another key point is that in developed countries many services are easily accessible via the Internet and are taken for granted, but with PC penetration of less than 5 per cent of the population in Samoa, where basic public transport and infrastructure still remain a challenge, these value-added mobile services make an immense difference to people’s lives. Staying connected In Samoa, economic growth driven by connectivity has lead to the viability of, and investment in, other infrastructure. As a result, economic development - especially in the area of tourism - now accounts for 25 per cent of the country’s GDP. The World Bank’s Ease of Doing Business Ranking sees Samoa on the rise. Although developing tourism needs more than just improved connectivity - preserving natural attractions, ensuring law and order, and political stability are also essential - there can be no significant tourism without external connectivity. The tangible returns from investing in connectivity are evident right across the region with a recent AusAid Pacific Economic Report crediting a 2.5 per cent increase in PNG’s (Papua New Guinea) GDP to the introduction of telecommunications competition in 2007, while a similar GDP increase of 1 per cent in Vanuatu was reported following liberalization in 2008. Samoa’s focus is always on the three connectivity sectors - telecommunications, aviation and shipping - that connect Samoa to the outside world. These same sectors are also all-important for internal connectivity; they link islands and communities with towns, governments, and markets. The three sectors are similar in terms of structure; they are all operated by companies (some government-owned and some private) and generate revenue by charging user fees. Connectivity for Pacific Island countries has always been and will always be the key to growth and success. In the Pacific Islands, isolation is a recipe for future poverty and instability.

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