Jul 16, 2008

An Emerging Markets Cellular Behemoth Means Opportunity

by Tim Ogden

The gossip in emerging markets investment circles these days is focused on a family battle in the Reliance empire. Reliance Group is an Indian conglomerate built by the late Dhirubhai Ambani; the group was effectively split between his sons Anil and Mukesh in 2006. Reliance Communications, which is owned by Mukesh Ambani and is one of the largest cellphone operators in India, is in advanced merger talks with MTN, one of the largest cellphone operators in Africa and the Middle East. Anil Ambani reportedly objects to the deal and his ability to block it under the terms of the split-up agreement is a topic of hot debate.

The juicy nature of conflict in one of the world’s richest families is dominating the coverage of the merger. Yet the development and investment opportunities inherent in a fusion between MTN and Reliance Communications are far more interesting. The combined company would have more than 100 million subscribers, almost all in developing countries, stretching from South Africa to India. Those numbers would make it second only to Vodafone Group in terms of global cell phone subscribers; in emerging markets it would be by far the largest.

A company of that size would have the potential to make capital investments in infrastructure that could drive faster subscriber growth in key geographies. We’ve written before about the positive development impact that increasing cellphone use can have at a local level by improving information flow in local markets. One study in India showed that fishermen using cellphones to learn the current prices at various seaside markets raised the average price they received for their catch while simultaneously decreasing average prices paid by buyers. A number of studies plausibly conclude that there is a strong correlation between cellphone penetration and national GDP growth on the order of a .6 percent GDP growth increase for every 10 percent increase in cellphone penetration. This macro impact is most likely driven by the compounding effect that occurs when many local markets operate more efficiently.

The larger and more exciting possibility for development experts, philanthropists, and emerging markets investors is the possibility of using cellphones as a transaction mechanism. A huge barrier to the development of consumer markets in developing countries is high transaction costs. Many people do not have access to bank accounts, cash can be unsafe to keep or carry, brokers may not be trustworthy, creditworthiness of customers is difficult to ascertain, identity can be impossible to prove, and so on. Cellphones could mitigate most of these problems. There are plenty of initiatives involving the use of cellphones for transactions in the developing world. Microfinance institutions are experimenting with cellphones as tools for both clients and loan officers. Mastercard, the GSM Association, Citigroup and Vodafone are involved in various experiments to send remittances by cellphone. SafariCom of Kenya has widely deployed an application called M-PESA that allows subscribers to transfer funds to any other subscriber. While these experiments have been interesting, a carrier with the scale of a combined MTN/Reliance would make investing in such applications far less risky, both for its own capital and for that of developers. The volume of users, both buyers and sellers, could drive down the deployment costs for merchants, microfinance banks and other nodes in the system. Cellphone minutes could even become an alternative trans-national currency.

A developing world cellular behemoth could therefore enable dramatic improvement in the efficiency of transactions, in turn contributing to more rapid development of a middle class in these emerging markets, which would drive more consumption of goods and services and further economic growth. All that means opportunity.