I agree with Martin Creaner that the telecom world of just 20 years ago might look quite quaint "to someone who wasn't even alive when AT&T broke up into the Baby Bells, setting the stage for what's now known more broadly as the communications industry," (The Telecom Evolution: The View from a Front Row Seat). Twenty or 25 years ago, the faith of the telecom industry was fundamentally dictated by the evolution in developed markets. In the 1980s, many believed in the trickle-down effect. At the outset, a technology may be so expensive that only the affluent countries can afford it. Over time, however, the price will fall until it is inexpensive enough for some (and I stress, just some) poorer markets to absorb (I slightly adapted the definition of the trickle-down effect provided by Wikipedia).
In 1984, the International Telecommunication Union (ITU) published a report on the major disparities in the provisioning of basic telephone services throughout the world. This was indeed factual in an era dominated by fixed telephony. Mobile telephony was introduced to a few markets during the 1980s, and it expanded in the mid-1990s. However, by early 2000, the majority of mobile subscribers were still in developed markets. Today, the largest growth rate of mobile subscribers globally is in Africa.
In the past, "experience has shown that when low-income people in just about any country begin to enjoy a bit of economic prosperity, one of their first purchases is a cell phone. Many new cell phone customers in emerging markets are agricultural workers ("The Importance of Frugal Engineering," Vikas Sehgal, Kevin Dehoff and Ganesh Panneer, strategy+business, May 25, 2010). But what's taking place is not a trickle-down effect anymore – it's a more complex scenario. While there is much discussion of technology transfer to aid poorer countries, in some areas emerging markets are rising as leaders. According to the International Monetary Fund (IMF), in the next five years GDP growth in emerging markets will be significantly higher than in developed economies. As a result, the demand for communications services will be further reshaped throughout the world, and with it, a new world order in the communications industry is materializing.
Innovation is Now a Two-Way Street
In one of my recent articles, I discussed the growth of mobile Internet in emerging markets. Further to my discussion, Venkatesh Bala, Chief Economist, The Cambridge Group, explains that "Internet penetration for established economies follows a fairly typical pattern, rising with income levels and requiring a threshold of around $20,000 of per capita GDP to achieve 50 percent penetration… Not so for mobile communication, for many reasons… while mobile phone penetration also rises with per capita GDP, it happens earlier and faster than Internet adoption. Instead of a $20,000 threshold, in many countries mobile phone penetration exceeds 50 percent with a per capita GDP as low as $5,000 ("Going Global Means Going Mobile in Emerging Markets," August 17, 2010, Venkatesh Bala, Chief Economist, The Cambridge Group).
According to Bala, "Because the vast majority of world economies can be classified as mobile dominant versus mobile/Internet balanced, a reverse innovation model is evolving, where effective mobile advertising platforms are identified first in emerging markets, then transferred back for further refinement in established markets. For example, mobile banking holds much greater potential than online banking, with a high likelihood that it will leapfrog online financial activity in emerging markets. Value-add services ranging from personalized weather reports, to product and price information on-demand, to location-based and remotely-activated services will continue to bolster demand for mobile offerings."
In my article "Rethinking Innovation: Are You Really Thinking Outside the Box?," I discussed the concept of frugal innovation, which acknowledges the fact that simply eliminating certain features from existing products to sell them cheaper in emerging markets is not a winning strategy. But Bala is talking about a notion that I've been endorsing for a while now. Innovation can take place in emerging markets first and then get transferred to developed economies. Ladies and gentlemen, we are witnessing a new world order in the communications industry, one of reverse innovation.
China is now the second-largest economy in the world, and the United Nations World Investment Report indicates that there are currently about 21,500 multinationals based in the emerging world. The number of companies from Brazil, India, China or Russia (BRICs) on the Financial Times 500 list grew more than four times in 2006-08, from 15 to 62. Additionally, Western multinationals are investing heavily in emerging markets. Multinationals expect about 70 percent of the world's growth over the next few years to come from emerging markets ("The World Turned Upside Down: A Special Report on Innovation in Emerging Markets," April 17, 2010, The Economist).
The Need for New Business Models in a Whole New Light
What we are witnessing in today's communications industry is not about new products or technologies, but about a new emerging business model. Contrary to the ongoing discussions related to new business models that, thus far, have been taking place within the scope of TM Forum, I'm trying to introduce a much different, bigger discussion – that sooner or later will have to take place. We can't discuss new business models in the communications industry with a trickle-down mentality, or we'll fail.
According to Mark Johnson, Chairman of Innosight, a strategic consulting and investing firm, many Western multinationals have exported their operating models to emerging markets "and performed passably in locations that roughly resemble their domestic markets. But if they are to capture the middle and lower part of the income pyramid in countries that encompass approximately 80 percent of the world's consumers, they will need to innovate. Not primarily in products or technology, but in business models that address the myriad difficulties of extremely challenging markets."
The communications market in developed nations is saturating, so the next substantial wave of growth will have to inevitably come from emerging markets. The trickle-down effect is somewhat still happening, but we are witnessing a new set of innovation forces that are altering the nature of the communications industry. Domestic companies in emerging markets are generating innovative products - frugally engineered - and effective business models.
The next big project that TM Forum would probably need to undertake is related to how business models are developing and operating in emerging markets and incorporate such know-how into the overall work that the Forum has been effectively generating in the past 20+ years. TM Forum has a unique space that cuts across regions, challenges and opportunities and is in a great spot to impact a much broader community globally.
By Monica Zlotogorski, Editor of TM Forum's Inside Latin America and Vice Chair of TM Forum's Latin America Advisory Board