Wanted: New business models for profitable rural expansion

Driving high performance for mobile network operators in India through profitable expansion into India's rural markets

Accenture Research Report

Table of contents
Summary The challenge: Expanding into rural markets that are more expensive to serve Accenture research findings What mobile network operators have to get right Conclusion: Achieving high performance in new mobile markets Sidebar: The rise of India's mobile industry Page 1 Page 3 Page 4 Page 10 Page 14 Page 16

About the research

In 2009, Accenture conducted a research study into the future of mobile industry expansion in rural India. We explored the views of rural consumersboth current customers and non-usersand also interviewed senior-level executives from companies that occupy strategic positions across the mobile telephony ecosystem. The key objective of this research was to understand the value proposition of mobile services to rural customers, and also to see how the potential to serve rural markets is making mobile network operators re-think key elements of their existing business models.

This first phase of this research consisted of 15 in-depth, hour-long telephone or in-person interviews completed in June and July 2009 with executives in India representing mobile operators, handset manufacturers, passive and active telecom infrastructure providers, technology enablers/application providers, and content developers and aggregators. Additionally, in association with an independent research company, Accenture conducted an exploratory qualitative study using a focus group discussion methodology. The focus group invitees included primary wage earners, homemakers and students from rural areas.

For the second phase of the Accenture research, more than 2,400 rural citizens in India were surveyed802 current mobile customers and 1,634 non-users to gain a broader understanding of what customers value most in mobile devices and services. The insights drawn from this research can help mobile network operators evolve their business models, and can support more effective design of profitable packages for rural consumers.

Summary: New business models for profitable rural expansion of mobile services
An important part of mobile network operators' agendas for profitable growth and innovation is expansion into the rural areas of developing countries, especially India. However, mobile network operators face many challenges in capitalizing on that opportunity. Our research suggests that operators have yet to create and implement business models capable of driving profitable growth through a rural expansion strategy. An important prerequisite in the creation of successful business models is an understanding of the needs and buyer values of the emerging rural consumer. Our research has found that some fundamental disconnects exist between the current presumptions of mobile network operators and the reality of consumer needs and desires when it comes to mobile services. Operators must develop a more accurate understanding of the mobile value proposition in rural communities, as well as potential barriers to adoption, if they are to achieve profitable growth and high performance through rural expansion. The success of mobile operators in rural markets also depends on business models that work in the short term as well as the long term. Sacrificing short-term revenues in the name of expanding a market footprint may not be the best strategy for mobile operators. Growing competition in urban markets is likely to prevent operators from cross-subsidizing their rural expansion strategies. A business model that generates profits in the short run is therefore essential. This Accenture research report enables operators to revisit some of their tactics for rural expansion, serving as a kind of mid-point review of some of the key presumptions, strategies and models they have used to drive their rural strategies over the past couple of years. This report presents a number of important findings: Basic services are more important than higher-end ones in the short term. Operators need to generate short-term revenues through voice and more basic value-added services, rather than spending money on highend services and content requiring expensive fees to content developers.

Page 1

 Mobile operators should focus on ways to reduce the costs being borne by the customer after being connected. Rural consumers are more concerned about their ongoing costs of operating a live connection than they are the initial fixed costs. Operators business models will therefore need to focus on providing various packages of voice and valueadded services that are appealing to rural consumers.

Simplicity continues to be the name of the game. Rural consumers want basic, simple services, and a device that is easy and inexpensive to operate. Voice rather than value-added services continues to be the priority of customers.

Cost management will drive profitability, at least in the short term. In the rural environment, which has a lower average revenue per user (ARPU) rate, profitability will be driven by effective cost management capabilities. A better understanding of customer needs, preferences and barriers to purchase will be essential to reducing marketing and aftersales costs.

Page 2

The challenge: Expanding into rural markets that are more expensive to serve
The mobile industry in India faces a number of challenges in the coming years. Although the countrys mobile operators have enjoyed sustained growth, high levels of profitability and robust valuations, growth to date has been fueled primarily by urban markets. As penetration in some metro areas begins to exceed 80 percent (more than 100 percent in New Delhi, Indias capital), it is clear that operators cannot sustain their current growth rates only through additional take-up in large cities such as Bangalore, Chennai and Mumbai.

For most operators, one part of the answer to fueling future profitable growth is to look to the rural markets of India, where mobile penetration currently ranges roughly from a high of 32 percent to a low of about 4 percent. The major operators are keenly aware of the growth projections: 70 percent of all future mobile subscribers in the country will come from rural areas.1 In spite of the opportunities available through rural expansion, providing mobile service to the rural populations of India presents numerous unique challenges, including: An acute shortage of technical infrastructure across rural India, which slows the pace of mobile expansion and makes it more expensive. Diverse cultures, educational standards and technical knowledge in rural areas. Frequent power shortages across India, and the more rugged environmental conditions in rural areas.

Mobile network operators in India thus find themselves in a difficult predicament. They must grow their existing subscriber base by moving into India's rural areas. At the same time, they must devise strategies and develop business models that will enable them to retain medium-term profitability, even as they try to reach a customer base that is more expensive to serve. The challenge is to minimize the costs of acquiring and serving rural customers to cover the initial investment, and then to drive future growth and higher valuations with the right kinds of services for this population. New Accenture research has generated important insights into how mobile network operators must modify their business models to serve rural markets profitably. (For details on the research methodology, see "About the research.") Our research finds that operators in India must gain a deeper understanding of the distinctive service needs of rural

customers. They must engage in more detailed customer segmentation, and also provide after-sales service appropriate to rural populations. Cost reduction is certainly important to achieving high performance through rural expansion, and many operators can benefit from outsourcing strategies to help control costs and maintain high levels of quality and service. Infrastructure challenges present a serious risk to rural expansion, and operators must collaborate to address that challenge. Perhaps most important, operators must understand their customers deeply enough to develop relevant and innovative value-added services geared toward the rural population. Rural markets offer the possibility of volume, but operators must deliver value to generate profits from this untapped consumer segment.
1 Measures to Improve Telecom Penetration in Rural India The Next 100 Million Subscribers, December 2008, Telecom Regulatory Authority of India (TRAI).

Page 3

Accenture research findings

Buyer values are changing rapidly in rural India and the mobile industry is not necessarily keeping pace.
Do executives properly understand the needs of rural customers? One of the important outcomes of this phase of the research has been the opportunity to compare the perspectives of mobile industry executives about the needs of rural customers with the opinions expressed by some of those customers themselves. We found a number of disconnects in the industrys understanding of the buyer values of rural consumersan understanding that is a critical prerequisite for a profitable business model. In summary, industry executives appear to underestimate the complexity and the maturity of the rural consumer base and their respective rationales for making buying decisions. The mobile value proposition Is there justification for believing that consumers in rural areas of India are interested in mobile devices and services, and that they have needs and interests that can be met and also sustained by mobile operators? In the first phase of our research program, we asked executives to rank the top three value propositionsthe needs or motivators that they believe could drive rural consumers to become a mobile customerand we asked the consumers themselves the same question. (See Table 1) Consensus Both groups agreed about the number-one value proposition for mobile services: mobile phones are the cheapest way to communicate over a distance for both personal and business reasons. As one executive for an Indian operator explained, A mobile connection Page 4 Table 1: The value proposition of mobile services: Executives' vs. consumers' perspectives Top three mobile value propositions Types of needs Identified by: Rural consumers Cheapest way to communicate over a distance for personal or business purposes Reliable tool for communication Tool to enhance privacy in direct communication Style/status A platform for entertainment at a personal level or for the household (e.g. songs, games, videos) Cheapest source to know about opportunities (e.g. employment, business) Educational tool at a personal level and for the household 1 Senior executives 1

2 3

2 3

has reduced relationship costs at all levelsat the level of the family or at the level of businesses. The consumer focus groups agreed: "You can call from wherever you are, at any time," said one student. "My husband sometimes leaves a message with my sister-in-law and she forgets to tell me," said one homemaker. "I wish I had a mobile." and disconnect Executives were not on target, however, in terms of their other rankings. The second most important reason they cited for a rural customer wanting to

own a mobile phone was its role as a status symbol. Executives claimed that rural consumers are keen to showcase how their phone is different from those owned by others. As a senior executive with a mobile device manufacturer put it, "The device becomes a talking point for the owner amongst friends, if it has been acquired even at a marginally higher cost in comparison to normal phones." However, the rural consumers participating in our phase-one focus group discussions felt that mobile phones no longer serve as a status symbol. As one focus group participant noted, "Earlier it was a prestigious thing

to have a cell phone because only the rich could purchase it. Now everyone has a cell phoneevery vegetable vendor has one." Or, as one student put it, "Such phones are everywhere; it has become normal." Executives also noted one other motivator that was not ranked as highly by rural customers: the belief that a mobile phone connection and device become an effective entertainment platform. Because of poor electricity infrastructure, rural areas are often entertainment starvedunable to enjoy television on a regular basis. According to one device manufacturer, "If an operator or a device manufacturer at a very affordable price can facilitate the download of a limited number of songs and videos, this provides an identity to the cell phone user amongst his peers. However, the role of a mobile phone as an entertainment platform did not figure as highly in the consumer rankings. What did rank higher according to the rural consumers in our focus groups? Reliability was the second most important motivator according to our study. In rural India, mobile phones are seen as having fewer connectivity problems than landlines, which our focus groups noted as having recurrent disconnection problems. The third most important motivator for becoming a mobile customer according to our focus groups was the ability of a mobile phone to enable privacy and more direct communication: The homemakers with whom we spoke frequently expressed the desire to have a mobile phone to be able to speak with family members directly and privately. As one woman put it, "My husband works in another town and I want to be able to talk to him every day. A mobile would enable me to do that." Probing the mobile value proposition Our phase-two research, focusing on a larger population of more than 2,400 rural consumers, probed the mobile value

proposition more deeply. We found, for example (see Table 2), that usability of the mobile device was the most important characteristic affecting the choice of mobile connection. In rural communities, although consumers have basic knowledge of the functionality of mobile phones, the design itself must be clear and the device must be simple to facilitate quick and reliable connection. In accord with the phase-one finding about disconnection problems with landlines in rural India, the consumers in the larger sample size felt that the usefulness of a mobile connection during emergencies is a key value proposition. The ability to contact people quicklythe number-one value proposition cited by the phase-one focus groupswas also noted as a key value point.

These findings point to the strong need within the mobile industry to understand more precisely the needs of its customersneeds which may vary significantly across geographies and age groups. If the strategies of mobile network operators are not aligned with the actual needs of rural consumers, product development and allocations for sales and marketing may not achieve the desired results. For example, a campaign using style or status as a motivator might fail to result in adequate uptake. Companies will realize a better return on their marketing spend if they focus on motivators that ranked higher with consumerssuch as phone durability or privacy.

Table 2: Aspects of communication devices most important to rural consumers Aspects of a communication device Ease of use Usefulness during emergencies Ability to contact people quickly Reasonable price Usefulness in keeping in touch with family Low ongoing operating costs Usefulness while traveling outside the city or village Usefulness in contacting customers or suppliers Efficient alternative to normal telephone lines when busy or not working Ease of charging Usefulness while traveling within the city or village Support for finding information quickly and easily Makes life easier
* Total is not 100% because some respondents did not rank all options

% responses* 21 19 13 10 9 5 4 3 3

3 2 2 2

Page 5

Another implication of our research is that the bundle of a handset and prepaid card needs to be seen as a base platform, and then value-added services can generate a feeling of owning a differentiated product. Moreover, if privacy and reliability override entertainment as a priority, then operators may have to focus their efforts on marketing a prepaid connection with an instrument that has longer battery life and which can re-charge itself through renewable sources of power (e.g., solar and wind). To gain and retain the loyalty of rural customers, the mobile operator should focus more on fundamental features rather than additional capabilities such as entertainment.

views of rural consumers. Executives cited a lack of information available to rural customers about a company's offerings. Operators are concerned that in spite of their communication and marketing efforts, rural customers still lack detailed information about the distinctive services offered by a provider. The consumers themselves, however, did not mention this point as a top barrier in their eyes. The general understanding of mobile offerings appeared strong among our focus groups. A detailed understanding of how one operator differs from another may not be present. However, whether that situation is actually unique to rural areas, or something also experienced by urban customers, given the growing complexity of mobile products, has yet to be determined. According to one interviewee, a senior executive of a mobile services company, it is extremely

critical for operators to create simple tariff plans that can be understood so that the customer is in a position to compare it with other tariff plans easily and make a choice." A final barrier mentioned by consumers but not industry executives was the issue of whether rural areas will have consistent enough access to electricity to keep a mobile phone charged. Probing the issue of barriers to adoption Our phase-two research looked in more detail at potential barriers for rural consumers becoming mobile customers. Here the primary issue was quite clear: Its primarily about cost. (See Table 4) The primary concern, mentioned by 36 percent of all consumer respondents, was the cost of the device itselfreinforcing the opinions of our consumer focus groups. The next most important barrier was the cost of operating the device.

Potential barriers to becoming a mobile consumer

What are the obstacles to greater adoption of mobile services by rural customers? Are the barriers primarily about cost, the inability to pay, insufficient education, inadequate infrastructure, an absence of information or some other issue? Consensus According to the executives as well as the consumers in our phase-one focus groups, the primary obstacle for a rural consumer to become a mobile customer is the cost of the handset. (See Table 3) Rural consumers are keen to have a handset with attractive basic features camera, speakerphone, torchlight, etc. at an affordable price. As mentioned by an executive, The key value proposition we have identified is that while consumers are looking for affordability, they are also looking for functionality. This means that for rural consumers, 'cheap' is not equal to 'de-featured.' Cheap is not without bells and whistles. So, affordability does not come by taking something out of the handset. and disconnect The third most important barrier noted by executives did not align with the Page 6

Table 3: Barriers to mobile take-up in rural India: Executives' vs. consumers' perspectives Top three barriers to mobile Types of barriers adoption identified by: Rural consumers Cost of handset Lack of mobile infrastructure leading to poor reception Inability to access electricity when required for charging the handset Lack of information on available offerings Inability to identify benefits from having mobile connectivity Inability to understand differences in tariff plans Lack of confidence to pay for the mobile service in a sustainable manner Absence of maintenance and after-sales support 1 2 Senior executives 1 2

Usability issues and concerns about the durability of the device were also on the minds of consumers. A full 14 percent of those surveyed about barriers to adoption said they simply do not have a need for a mobile phonethough turned on its head, the implication here should be heartening to network operators: that 86 percent of rural customers do not say they have no need for a mobile phone. Indeed, Table 5 demonstrates that high percentages of the rural population who are not yet mobile customers have an intention to become one in the next three months. Fifty-four percent of consumers said there is at least a 50-50 chance of purchasing a mobile phone in the short term. For almost one in five, that chance is above 80 percent. Implications An inability to adequately understand the barriers faced by consumers in adopting mobile services could have profound effects on the overall success of procuring mobile customers in rural areas. For example, mobile operators could spend significant time on reducing handset costs with manufacturers and also on special handset subsidization packages, when what consumers really need are new, innovative tariff plans that can reduce ongoing costs, or perhaps bundled services that could meet additional needs of consumers by providing better value and justifying their spend. Some phone manufacturers have understood the need to develop innovative approaches to addressing the electrical problems in rural India. For example, one manufacturer has developed a solar-powered mobile phone to reduce the need for electricity to charge the phone. However, operators may not sufficiently appreciate this issue as a barrier to adoption. Different situations in different regions, in terms of the power grid, also need to be better understood prior to launching any rural

Table 4: Most important barriers to adoption according to rural consumers Barriers Cost of a mobile phone is too high Cost of making calls is too high Mobile phone not needed Using a mobile phone is difficult Mobile phones are easily damaged Poor network coverage Mobile phones are too small Difficult to understand various payment schemes Not allowed to use a mobile phone by family / parents / husband Difficulty in aquiring a mobile phone connection Poor reception Confusing advertisements and sales calls Health risks
* Total is not 100% because some respondents did not rank all options

% responses* 36 18 14 6 5 4 3 3 3 2 2 1 1

Table 5: Mobile connectivity intentions of rural consumers during next three months Intention to be a mobile subscriber during next three months 99 chances in 100 90 chances in 100 80 chances in 100 70 chances in 100 60 chances in 100 50 chances in 100 Below 50 chances in 100 % responses 7 4 8 9 10 16 46

Page 7

Table 6: Awareness about mobile telephony functions and services among rural consumers Awareness levels Universal Awareness (93% plus) Mobile telephony functions and services Incoming calls Ring tones Camera Radio SIM card Prepaid Postpaid Outgoing Signal SMS Memory card Voice recording Alerts Voice mail Mobile banking Video conferencing WiFi CDMA GSM Network Subscriber trunk dialing (STD) Speaker phone Picture messaging

initiative. Given the size of serving rural India, operators face significant challenges in providing rural coverage. Perhaps foremost are the high costs and potential delays of constructing a sustainable infrastructure in mountainous or otherwise challenging terrains. The logistics of actually building out and maintaining the network are also difficult. In addition, network deployments can be slowed by the approvals required from local authorities, and by disputes that frequently arise about land titles and ownerships. The current fractured approach from within the industry to providing mobile coverage will slow infrastructure rollout and also significantly add to the cost of this access for individual operators. This will put pressure on the business case to provide national access in the first place.

High Awareness (75-89%)

Moderate Awareness (50-74%)

Low Awareness (Less than 50%)

Internet International subscribers dialing (ISD) Bluetooth Caller ID Touch screen MMS GPRS

Table 7: Most important instrument features to rural consumers Features % responses* 23 19 11 11 8 6 6 4 2 2 2 2 2 1

Overcoming a lack of awareness of network-enabled services

Our phase-two consumer research uncovered another significant challenge to operators as they strategize about mobile expansion: a lack of awareness of mobile services, beyond the functionality of the device itself. As shown in Table 6, rural citizens who are not yet users of mobile phones have a high degree of awareness of the functions of the device itself: making and receiving calls, camera, ring tones, etc. Awareness dips precipitously, however, as one asks them about network-enabled services or other types of value-added services: mobile banking, SMS, Internet and so forth. This finding is corroborated by another question from our survey, one that asked consumers to rank the most important functions of the mobile instrument itself. Basic functions scored quite highly (see Table 7): camera, torch light, radio. Certain capabilities important to rural citizens were also noted: dust resistance and a long battery life. Page 8

Camera Dust resistance Torch light Long-life battery or extra battery FM radio Internet Access Clock / alarm clock Games Reminders Music Speaker phone Quickly recharged / powered Keypad instructions / buttons in common language Videos / movies
* Total is not 100% because some respondents did not rank all options

Rated quite low, however, were once again value-added or network-enabled features such as access to the Internet, music and video. Even when prompted about specific kinds of value-added services, network-enabled services scored quite low. (See Table 8) A basic communications function, SMS, received the most interest, followed by the relatively mundane service of downloading ringtones. Internet browsing, mobile banking and more sophisticated services were of very little interest. Given the success in other emerging markets such as Kenya of services such as mobile banking, and the potential advantages of this service to rural consumers in India, additional consumer insight is required. Such information gathering would need to be conducted in conjunction with a knowledge marketing campaign of value-added services which would also need to support the development of the service as well as training on those services at a retail point of sale.

Table 8: Most important value-added services to rural consumers Value-added services SMS Download ringtones / wallpapers Agricultural alerts / news in local language Parenting alerts / news in local language Games Employment alerts / news in local language Internet browsing / surfing Weather alerts / news in local language Mobile banking in local language Video conferencing Picture messaging
* Total is not 100% because some respondents did not rank all options

% responses* 31 19 9 8 7 5 4 3 1 1 1

Page 9

What mobile network operators have to get right

Based on Accenture analysis, here are some of the important strategies and activities that mobile network operators must get right if they are to achieve high performance by successfully expanding into rural areas of India:

Gain a deeper understanding of the distinctive service needs of rural customers Our research shows that mobile network operators have begun to consider how to create and implement business models that can deliver profits from rural expansion. However there still remains a disconnect in the industry's understanding of the customer value proposition when it comes to mobile services. Until those propositions, as well as barriers to adoption, are fully understood the industry will struggle to profitably acquire customers in rural India. A simple cut and paste from the successes of the urban business model will not lead to automatic success in this market. Engage in more detailed customer segmentation Operators will need to carefully consider which regions, towns and villages they will choose to serve and in what timeframe. A one size fits all approach will not be successful. Within rural India is a myriad of regions, segments and Page 10

sub-segments, each with different needs and attributes. Deep segmentation analysis of target customers must be performed. This position has been reinforced in this study by the clear disconnects between the industry and the consumer perspective on a number of issues, such as consumers' motivation for acquiring a mobile connection and the types of services and products likely to be popular and profitable. Provide after-sales service appropriate to rural populations The key to successful customer acquisition and retention is how an operator treats the customer before, during and after the sale of the mobile connection. The rural consumer does not want to feel neglected after becoming a customer of a mobile services provider. Customer relationship management in rural markets is, as one operator put it, very tricky. Customer service must cater to the cultural specificities and typical inquiries of rural consumers. This kind of service will require skills training of a high order. Customer relationship

management in rural markets must be highly person-driven rather than system-driven. Expecting the customer to ring the call center to resolve complaints is a big risk, as it can be challenging for such customers to navigate call-center protocols. "The customer wants faceto-face servicing," said one executive, "and achieving this in the geographically dispersed rural markets is extremely expensive. Companies are still grappling to crack an after-sales service and customer relationship management model that will help them create a face-to-face customer relationship experience while optimizing the costs of delivering a high-quality experience. Develop a clear distribution strategy Our research found that rural consumers have a preference for retail outlets located in the nearest city, rather than in a customers village or a nearby village. (See Table 9) One mobile services

Table 9: Outlet preferences Outlet location To aquire a mobile instrument % Responses A shop in the city A shop in nearby town / village A shop in my village 64 26 10 To aquire a mobile connection % Responses 60 26 14 processes and information systems to support a rural-relevant business strategy. While companies have spent an enormous amount of energy in customer segmentation, they are still trying to understand how to effectively deploy these large data sets to connect rural populations on their network in a sustainable fashion. The workforce at most operators is trained in the processes and information systems created to serve urban markets. Senior executives from mobile network operators believe that a fresh perspective will be required to deliver the necessary business processes and systems support to profitably expand their presence in rural areas. Collaborate to address the infrastructure challenge From our research it is clear that a number of key infrastructure issues need to be addressed. It is interesting, for example, that when we asked rural customers about aspects of the service environment that were most important to them, reliability of network coverage and quality of the connection actually ranked higher than the quality of customer service or the type of tariff or payment plan. (See Table 10) Operators are considering different ways to overcome the infrastructure challengeacting individually, in partnership with an infrastructure provider, or cooperating as part of an industry-wide, collaborative initiative to provide one network to rural India. Acting alone to roll out a network will significantly add to the cost and time needed to provide mobile services, and likely will significantly damage the business case for addressing this market in the first place. It will be difficult, if not impossible, to pass these costs on to rural customers, as cost ranks as a primary barrier to adoption of service. Partnerships or an industry-wide collaborative strategy seem more likely to be successful. Page 11

Type of shop

To aquire a mobile instrument % Responses

To aquire a mobile connection % Responses 39

Exclusive mobile showrooms with multiple mobile brands Shops which sell multiple mobile brands Exclusive mobile shops owned by manufacturers Shops owned by service providers

51

39 8

40 4

17

operator discussed how his company's rural customers would travel for many hours to get to a service center, just because they wanted to resolve their queries face to face. His company executed a plan to reach the after-sales service to the customer by establishing low-cost contact points at various locations in two states. This reduced the time for the consumer to acquire a personal service to about two hours instead of four. The consumers rewarded the company by continuing to remain on its network. A number of companies are also linking up with local institutions such as the Indian Technical Institutes to train local youth in providing necessary technical after-sales services. This has helped operators to provide a personalized service to their customers in a cost-effective manner. Consumers also indicated a clear desire to be able to choose between a number of brands of mobile phones and of the different operators, at the point of sale. This was in stark contrast to mobile retail stores offering only a single type of

phone or one brand of network operator and would indicate a clear preference for independent retailers of both devices and services. In addition, consumers showed a preference for retail outlets dedicated to mobile phones only rather than stores that also sell other products such as groceries. This finding, however, needs to be balanced with the cost to provide this level of dedicated retail presence in rural India. It should be noted that rural consumers noted their willingness to travel to larger, more urban centers to find a mobile-focused retail store offering more choice of products. This fact could have a major impact on how companies successfully distribute their products. A deeper understanding is required of what an effective retail presence means before launching expensive retail strategies. Adapt technologies and processes to the rural environment Operators are concerned about inappropriate or inadequate business

Reduce OPEX-related costs Operators must focus on cutting OPEX-related costs which are essentially concentrated in the domains of marketing and after-sales service. These actions can be taken, according to one executive interviewed, by utilizing local resources in rural markets. Commenting on the cost issue from a fixed-cost perspective, one executive further pointed out the imperative for mobile operators to share passive and active infrastructure, as well as the importance of the government in providing direct funding for creation of passive mobile assets in rural areas. Leverage an outsourcing strategy to help control costs Some innovative practices that have reduced the cost to acquire customers in an urban environment have promise in being successful in the rural markets as well. One such practice is infrastructure maintenance outsourcing in areas such as network and access, fault and repair, and business process outsourcing for functions such as finance, procurement and customer service. One executive interviewed, noting the importance of making the best use of technology and people to minimize costs, advocated outsourcing infrastructure creation and maintenance activities. Develop innovative, value-added services to drive adoption While rural consumers are aware of the mobile value proposition, it is becoming increasingly expensive to acquire them, encourage them to use a variety of value-added services, and retain them for a substantial period of time. As one content aggregator put it, Rural markets are offering volume, but what about value? With regard to the revenue mix in rural India, one executive commented that, The way a company positions valueadded services as a part of the package delivered to the consumer is going to define the revenue mix. Executives surveyed unanimously agreed about the Page 12

Table 10: Most important service aspects to rural consumers

Aspects Reliability of network coverage Quality of connection Extensive network coverage Quality of customer service Ease of getting connection Ease of pre-paid connection extending / getting recharge cards Special offers Tariff / payment plans Discount schemes Other value-added service such as caller ring-back tones, devotional songs etc.

% responses 55 54 52 51 51 49 47 36 34 30

importance of value-added services as a driver of new mobile connections and to increase ARPU rates in rural markets. Our interviews suggest that mobile operators are aiming to achieve at least 20 percent ARPU in rural markets from value-added services, with 80 percent coming from voice products. One executive noted that, While this mix is ambitious, it is very much possible. Explaining how this could be achieved, one of the operators pointed out the growing proliferation of wireless Internet data cards in villages. According to this executive, a large number of young consumers are utilizing the cards to make voice calls as well as to access data and other value-added services from the portals of mobile network operators. This has significantly enhanced the sales of value-added services across some rural markets in India. As explained by an executive of a content-development company, "Rural ARPUs are very low and voice alone

will not support sufficient revenues because voice rates are so low in India and steadily going down. Value-added services will increase revenues and also increase the number of subscribers because more people will buy the service for the first time and many people will come back to it if they see value. And value-added services could also be points of differentiation, as consumers make their choice of carriers. If a particularly important service is available only from one carrier, or only available in an attractive format from that carrier, that can be the difference in the consumer's choice." Mobile operators, handset manufacturers and content providers will also need to focus more on services aimed at improving the capabilities of rural business customers. An executive of a company providing mobile content services for farmers in India explained that, Having the right information at the right time is extremely critical for the farming sector. It has a maximum

Table 11: Most trusted sources of information to rural consumers

Sources of information

Mobile handset % responses

Service Provider % responses 77 60 34 22 29 14 2 2 1

Family / friends / colleagues / neighbors Mobile phone showroom Television Newspaper Recharge coupon centers Radio Grocery store Internet Fertilizer shop

91 73 59 48 40 29 6 4 2

impact on their production and marketing risks." This executive believes that, although such information is most often accessed over the internet in an urban market, delivering relevant information on mobile phones is important in rural areas because it makes the information personal and timely. Develop rural-centric marketing capabilities According to a senior executive of a handset manufacturer, it is critical to identify the entity with whom an operator should piggyback to cut its costs of reaching rural consumers. Even if it is a tooth powder company in one rural market and a food products company in another, so be it." Another mobile services provider noted that, It makes sense to locate influential people in the village community and explore the opportunity to use them to market your voice and value-added services offerings." For the purpose of selling re-charge cards, one senior executive

identified agencies selling fertilizers and seeds as one of the best options. At an organizational level, an executive of a value-added services provider stressed the importance of building skills of the sales, after-sales and marketing teams to engage in rural-centric marketing. Without accommodating the unique rural environment, even the best tariff plans and the most useful value-added services will not achieve the desired results. Our research found, for example, that personal relationships are the most important source of information to rural customersfamily, friends and neighbors. (See Table 11) As corroborated by other parts of our research, physical showrooms ranked high as well. The importance of personal relationships dictates different forms of marketing, leveraging the power of a group or social network rather than the power of a one-to-one communication.

To achieve better rural-centric marketing capabilities, it is important to establish partnerships for sales and service in rural areas. The industry's ability to sell a connection and provide a mobile phone is severely hampered by the lack of a dedicated mobile retail presence in rural India. A number of the interviewees in our study were keen to have a high-density retail presence in rural markets without incurring significant additional costs. Innovative solutions to this problem will be critical to success. Partnerships with existing organizations with a retail presence in rural India will have to be explored. Innovative solutions may include using a bank or other companies with a national presence to sell mobile phones. If each operator creates its own specific retail presence in rural areas, the business case for rural expansion will suffer. An industry-wide solution may provide the best financial model going forward.

Page 13

Conclusion: Achieving high performance in new mobile markets

The rural markets in India represent a significant opportunity for continued growth of the mobile industry, and for the economic health of the country as a whole. However, our research indicates that operators must overcome significant challenges in providing mobile coverage profitably to the rural population.

According to our executive interviews, generating sufficient cash flow from a rural business model is the key risk faced by operators looking to expand their mobile presence in non-urban areas. Mobile network operators are keen to transform their rural initiatives into independent profit centers that do not require cross-subsidization by the urban business. However, as one executive noted, No one has yet cracked a business model for this. Executives are concerned about the long learning curve required to understand the distinctive needs of rural customers, and then to devise a compelling suite of products and tariffs.

The senior executives in our study were unanimous in their opinion that the possibility of achieving significantly high margins on a pre-paid rural connection is not strong in the short term. (Indeed, our research found that 95 percent of the rural consumers surveyed favor a pre-paid plan.) One senior executive from a mobile operating company pointed out that, given the low ARPUs in rural markets, it is important to use a cost structure that is 30 to 40 percent below the one incurred to serve urban markets. According to another executive, "The game at hand is going to be a volume gameone in which costs will need to be minimized while simultaneously achieving the desired rural penetration to gain a first-mover advantage.

However a focus only on cost will not lead to successful business models. Our research shows that mobile network operators must focus on the valueadded services appropriate to the rural community. The development of agricultural market information and sports downloads on a mobile device are good examples of innovative, value-added services which have proved useful to rural consumers. The development of such services is likely to be the main differentiator between operators in rural India. Differentiation on price alone, as the industry has experienced in urban markets, will only put pressure on profitability. Differentiation of services and offerings will be required to achieve profitable growth and high performance through expansion into the rural areas of India.

Page 14

Page 15

The rise of India's mobile industry

India's mobile industry has enjoyed unusually strong growth over the past decade. With its mobile subscriber base expanding at a staggering compounded annual growth rate of 76.3 percent from 1998 to 2008, India has emerged as a key market destination for mobile telecom operators.
Operators have also enjoyed high levels of profitability: Although India's mobile subscribers have among the lowest average-revenue-per-user (ARPU) rates in the world, Indias mobile operators have successfully managed to maintain high marginsfrom 30 to 35 percent. Valuations of mobile operators in India remain extremely robust. This has been accomplished in part through the sustained growth of the market and the implementation of business model innovations such as network sharing and outsourcing. Mobile subscriber growth across selected emerging economies (1998 2008)

0%

50%

100%

Brazil China India Russia World

35.2% 38.8% 76.3% 73.8% 28.9%

Source: Mobile subscription statistics from ICT Statistics Database for the years 1998 and 2008 of the International Telecommunications Union.

Page 16

Mobile teledensity across select states in India

Jammu & Kashmir Rural - 8.61 Urban - 66.69 Punjab Rural - 24.85 Urban - 89.11 Haryana Rural - 21.77 Urban - 73.95 Rajasthan Rural - 14.02 Urban - 64.59 Gujrat Rural - 18.00 Urban - 64.60 Madhya Pradesh & Chattisgarh Rural - 4.47 Urban - 55.55 Maharashtra Rural - 12.05 Urban - 67.52 Kamataka Rural - 12.94 Urban - 79.05 Kerela Rural - 27.94 Urban - 107.45 Orissa Rural - 7.84 Urban - 60.85 Andhra Pradesh Rural - 11.53 Urban - 80.52 Himachal Pradesh Rural - 31.37 Urban - 137.57 Delhi Urban - 82.41

Uttar Pradesh & Uttaranchal Rural - 6.94 Urban - 57.84 Assam Rural - 5.10 Urban - 82. 09 Bihar & Jharkhand Rural - 3.18 Urban - 66.66 West Bengal Rural - 9.63 Urban - 63.61

Tamil Nadu Rural - 17.33 Urban - 73.12

Source: Telecommunications Regulatory Authority of India (TRAI)

However, maintaining such profitable growth will be challenging, for several reasons. Mobile competition is becoming increasingly fierce. Tariffs have fallen almost 95 percent since the start of the decadefrom about 14.5 rupees per minute in 1998 to about 0.72 rupees per minute today. This falloff has intensified the need to drive innovation and new revenue sources, and to reduce costs. New operator licenses have been granted in India which will result in several new entrants coming into the marketplace, as well as new mobile virtual network operators (MVNOs). The latter are expected to siphon off existing profitable customers from urban markets. Accenture analysis shows that churn rates in India continue to exceed 40 percent annuallya statistic driven in part by the fact that about 90 percent of customers are prepaid users, making it relatively easy to switch providers.

These are unusual numbers in the global mobile marketplace, and rightfully leave many mobile network operators in India feeling that their viability is balanced on the edge of a very thin knife. Expansion by mobile network operators into rural regions of India therefore represents a critical business strategy. Such expansion is also important to the general economic growth of India. Rapid penetration of mobile telephony services in India, especially in states and regions with lower current levels of subscribers, can enhance the ability of these regions to progress, thereby contributing positively to the overall national objective of sustained and inclusive growth.

A recent study conducted by the Indian Council for Research on International Economic Relations (ICRIER) has found a quantitative relationship between mobile penetration and economic growth. According to this research, Indian states with ten percent higher mobile phone penetration will enjoy 1.2 percent higher annual average growth rate than those with a lower penetration. The study found, further, that a critical threshold is mobile penetration of 25 percent or more, at which point greater economic benefits begin to accrue. Many primarily rural states in India have not yet reached that threshold.2

2 "An Econometric Analysis of the Impact of Mobile carried out by ICRIER in the publication India, the Impact of Mobile Phones, The Policy Paper Series, Number 9, January 2009, Vodafone Public Policy Series.

Page 17

Contact us:
For more information about how Accenture can help you create a strategy for penetrating rural mobile markets in pursuit of high performance, please contact: Kumar Ranjan Executive Partner, India Lead Communications & High Tech Operating Group email: kumar.ranjan@accenture.com

Raghav Narsalay leads the Accenture Institute for High Performance in India, which creates strategic insights into key management issues through critical research and analysis. Mr. Narsalay specializes in services regulation and competition issues. He is a member of the Consultative Committee on Labour and Employment issues at the Planning Commission of India. Dan OBrien leads Accenture Research for the companys global Communications Industry Group. He has extensive experience both advising and working with global operators in both the wireline and wireless industries. His work has included the development of corporate strategy, mergers and acquisitions, product portfolio planning, and organizational capabilities. Rajesh Sennik leads the Strategy practice within the Accenture Management Consulting and Integrated Markets Group in India. He has worked

with leading mobile operators across the world on key issues including growth strategy, product/value-added services strategy, mergers and acquisitions and operational strategy.

About the Accenture Institute for High Performance

The Accenture Institute for High Performance develops and publishes practical insights into critical management issues and global economic trends. Its worldwide team of researchers connects with Accentures consulting, technology and outsourcing leaders to demonstrate how organizations become and remain high performers through original, rigorous research and analysis.

Contributors
Svenja Falk leads Accenture Research for India and the Asia Pacific region. Dr. Falk holds an adjunct professorship for communication and management at the International University in Bruchsal, Germany. She is also on the board of the Accenture Foundation in Germany, a spokeswoman for a group on political consulting in the German Association for Political Science and the editor of the Magazine of Political Consulting & Policy Advice.

Copyright 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

Disclaimer:
This research report has been published for information and illustrative purposes only and is not intended to serve as advice of any nature whatsoever. The information contained and the references made in this research report are in good faith. Neither Accenture nor any its directors, agents or employees give any warranty of accuracy nor accepts any liability as a result of reliance upon the information, advice, statements or opinions contained in this research report. This research report also contains certain information available in the public domain, created and maintained by private and public organizations. Accenture does not control or guarantee the accuracy, relevance, timeliness or completeness of such information. This research report is indicative in nature and subject to other extraneous factors. This research report constitutes a view as on the date of publication and is subject to change. Accenture does not warrant or solicit any kind of act or omission based on this research report.

About Accenture
Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.