Mobile phone adoption goes crazy in Pakistan

Incredible things are happening in Pakistan. Mobile phone subscribers grew from 2.4M in 12/2003 to 5M in 12/2004.  That’s impressive, but going from 5M to 18M subscribers in the first 10 months of 2005 is incredible!  Since telecom has a strong positive impact on productivity (exceeding that of roads, electricity and even education), I wanted to understand what had triggered this growth.  The answer appears to be three things:  increased competition, reduced restrictions on foreign direct investment (FDI) and reduced taxes, especially on service activation.

Here’s the story.  In mid-November I stumbled on an article about the incredible growth of mobile phone service in Pakistan.  Then just a few days later a good friend, Imran Qidwai, returned to Boston after visiting his family in Pakistan, so I quizzed him about what was going on.  Imran’s account was fascinating, but based on snapshots at times he’d visited his family.  I looked up the readily available statistics and found these: Mobile_phones_in_pakistan.pdf.   I also found and printed some other articles.  Then I got busy and dropped the subject for a few weeks.  Three days ago I caught up on my reading while on the plane to Bangkok and I’ve done some more research on the web at strange hours here in my hotel.  Finally, I realized I had another possible source of information, Usman Latif, who blogs as Techuser and lives in Sialkot, Pakistan.  Sure enough, Usman filled in the missing details.

Here's Imran’s timeline as I scribbled it down a few weeks ago (apologies to Imran if I've mistaken something).  Mobile phone service was introduced in 1990, with two operators but heavily regulated and taxed.  (Usman recalls an activation fee of Rs. 20,000 as late as 1996, which I calculate as several times the average annual income at that time). What's more, service was blocked completely in some cities at some times to prevent terrorists from using cell phones.  Things gradually began to change after a new telecom act in late 1996. As a result, when Imran visited in 1998, service was back on everywhere, but his brother didn't feel any need to have a mobile phone.

By 2001 there were four operators in the market (with the PTT entering the mobile market at the beginning of the year under the brand name UFONE) and the activation tax was down to Rs. 5000 (~US $85) .  Things started to accelerate.  By the end of 2002 there were 1.2M mobile subscribers and Imran's brother was now one of them.

It appears the real changes happened in 2004.  First, in April the government granted two more licenses.  Telenor won one of those licenses, built a network and launched services in February 2005.  Warid won the other, launching services in April 2005.  Second, in June 2004 the government abolished the remaining restrictions on foreign direct investment permitting foreign investors to retain 100% equity in their investments.  And third, they dropped the activation tax to Rs. 500 (~ $ 8).  Clearly, the two new operators coming on line in early 2005 have caused a lot of market activity, but their network build out was helped by the largest annual foreign direct investment that Pakistan has ever seen.

Finally, the cost of acquiring service has fallen below a critical breakpoint, in part by the reduction in activation fees and in part by the ever declining costs for mobile phones and mobile phone infrastructure.  Usman has the best summary of where things are today:

“<a> critical factor in the rise of the mobile subscriber base in Pakistan has been the reduction in activation fees. <…>

“Also, I have noticed lots of poorer folk using used mobile handsets here. I don't have an accurate estimate of how much a barely functional used handset costs, but I believe the cost to be around Rs. 600 ($10) or less. This means a new subscriber only needs to spend a very nominal sum on a mobile connection these days, and pretty much everyone can afford to have a mobile connection.

“Another factor for the growth of the mobile subscriber base has been the rise of prepaid mobile access. The way prepaid service works is that a subscriber signs up for a mobile connection and periodically prepays for mobile service she is planning to use by buying fixed denomination scratch cards. There are no monthly connection charges in this system (although the prepaid credits, if not used, expire after a certain time) and the scratch cards are available in almost all retail locations. Additionally, the scratch cards are very affordable and start as low as low Rs. 250 (a little more than $4).”

Today, Imran’s brother’s family has four mobile phones.  Only the youngest child is without and that's about to change.  What’s more, he’s gotten prepaid phones for the cook and driver, so they’re always reachable.  As Usman concluded his email “in Pakistan one can have very basic mobile service for less than a dollar a month, and there is absolutely no reason for anyone in Pakistan to be without a mobile number.”

All and all it’s a wonderful example for the rest of the developing world.

 

Comments

[anonymous]

This is largely correct, however one of the factors for the recent (last 18 months) explosive growth in the mobile sector is I believe missed out. That is the long predicted death of distance. Until mid-2004 mobile companies raked in charges for roaming, I believe under pressure from the new license holders (Telenor & Warid). The mobile companies in mid-2004 removed roaming charges for On-net calls i.e. Mobilink to Mobilink call was treated as a local call anywhere in Pakistan without any extra charges irrespective of the fact where in the called or the calling party were. This has now culminated in Ufone now offering Rs 2.50 per minute tariff to any number in any mobile or fixed network in Pakistan. More interestingly Paktel has very interesting international calling tariffs they are the same as Nation wide calling tariffs (Rs 3.xx) albiet to select countries (North America, UK etc.). So not only acquisition is now cheap (new mobile sets start around Rs 3,500 for the base Nokia model, used are even cheaper), the operational cost is also now very low.

During this rapid expansion customers actually suffered due to low quality of service as the operators struggled to expand their network and meet the enormous demand. And the regulator imposed fines on the mobile operators several times, results of surveys conducted by the regulator can be found at their website www.pta.gov.pk. The site also has useful statistics and information.

The next big thing in the mobile sector due to happen in the next few months is mobile number portability. This will allow customers to switch operators without changing their numbers, giving customers true choice in terms of tariff plans they are most comfortable with and allowing them to switch operators because of QoS issues. This will open the doors to true competition in the mobile sector - I have been wanting to change operators for a long time now but I am stuck with the number I have.

Recently Mobilink has also started Blackberry services etc. etc. And the phenomenon continues.

[Brough]

Clearly the death of distance (which I wasn't aware of), declining rates and reduced costs to start service combine to drive the upsurge in subscribers. My thought was that the declining rates were a direct result of more competitors, with access to capital (due in part to eliminating restrictions on FDI). My focus here is in lessons for other countries.

[anonymous]

I agree completely with you in that the declining rates are a direct consequence of the competition brought in, particularly by the new operators Warid & Telenor. When Mobilink first removed roaming charges for one of the new license holders, I believe it was Warid, took out a full page ad in all the major national dalies with words to the effect "Don't you wish we had arrived earlier"

An interesting fall-out of this competition is the impact on fixed line telephony. Until very recently PTCL did not perceive the mobile sector as serious competition. Their attitude was typical of incumbent PTTs, mobile caters to a niche market consisting mainly of the elite. However with declning rates and lowering of the cost of acquisition and the convenience of a mobile there is serious pressure on PTCL, there is visible churn and loss of minutes. Finally PTCL has woken up and is now lowering tariffs.

It is also interesting how I came to be a mobile user about 6 years ago. I had eschewed mobile myself as the costs did not justify having a mobile. Six years ago I opened the off-shore development center of a California based start-up. For business reasons I needed to make conference calls to the US at least once a week. To activate my international calling facility on the PTCL fixed line I was required to make an upfront deposit of Rs 100,000 (US$ 2,500 at the prevailing exchange rate), for mobile the upfront deposit was Rs. 10,000. Bingo - and I have not looked back since then. Now neither PTCL nor mobile operators look for upfront deposits for international calling activation. And if they do it is very nominal.

Another contributory factor that I failed to mention was the introduction of Calling Party Pays regime in late 2000 early 2001. Prior to the introduction of CPP, both the calling party and the called party were charged for airtime. Since CPP only the calling party is charged. Consequently small traders and service providers such as plumbers / TV repairmen / electricians (whose services are in high demand) bought a mobile connection and were reachable throughout the day whether they were on call or in their shop.

[Imran]

Now, after the boom in Mobile Phone Adoption, PakCallAnyWhere.com A service is started Only for Overseas Pakistani's to get connected to their Families. The Prices are Nominal and You can get talk for Unlimited Time to Your family and Friends. The best thing that I like about PakCallAnyWhere.com is the concept of Virtual Presence, Though Too far from your home country, Now you are having Virtual Presence in Pakistan which would promote Direct Calls from Pakistan.

[Aqib]

Now Ufone is offering the world least calling tarrif rs 1 per min to any ufone number and rs 1.40 to any other mobile number. sent 5000 sms for only rs 150. All other mobile services charge approximately same calling rates with some other functions.