POLLANEN et al: DEMOGRAPHIC ANALYSIS FOR CONSUMER SPEND IN COMMUNICATIONS

Demographic

Analysis for Consumer Spend in

Communications
Ossi Pollanen and Lauri Eloranta

Abstract- Dominant demographic factors in mobile network investment analysis are: population density, income, mobile penetration and mobile activity. On a global scale income variations and population densities are very large. Higher income is available in cities while rural incomes remain very small. In a low income market people tend to think that a call is an investment creating instant benefit. This leads to an assumption that the consumer spend behavior is a zero sum game where the money used for communications is not available to other consumption. It was assumed that these trends would be visible in macro economical studies of spend patterns in different countries and demographic environments. This paper first creates a global view to consumer spending and analyses how much income is spend to communications in different demographic conditions. In second part of the paper demographic analysis is focused on South Africa where understanding of demographic conditions is a necessity for successful investments especially in rural area.

spend, ARPU

Index Terms-demography, income distribution, consumer

I. INTRODUCTION

mobile penetration in the past few years, therefore mobile revenues have increased steadily as penetration has grown and ARPU (Average revenue per user) has declined. Declined ARPU does not necessarily mean declined revenues and it should not affect on operators' pricing decisions. Operators can make right investment decisions by knowing the demographic conditions of their market. This study gives a comprehensive view to global spend and demographic conditions as well as describes the specific conditions in South Africa.
II. SETUP OF THE STUDY

M\/[ANY countries have experienced large growth in

of the GDP and it may give somewhat wrong results if large volume of services or industry is produced in rural areas. However, it is not very common that large service network or industrial concentration is located in countries' periphery. This assumption helps to estimate consumption and income distribution between urban and rural areas. It is assumed that rural people live in arable land. This assumption gives somewhat more precise results compared to assumption that population is distributed evenly throughout the rural districts. In addition, this assumption is very useful in network business cases because net site covers only limited land area thus the previous assumption gives suggestive results about the potential amount of subscribers in populated districts. Another assumption relates to SMS revenues. It is assumed that 9000 of data revenue comes from SMS revenue. In more saturated markets the proportion is lower and it's getting lower all the time but in most growth markets this assumption is probably quite good. It is also assumed that all mobile revenues are part of private consumption and mobile spend is expanding from top to the bottom of the pyramid meaning mobile spend is expanding from the richest to the poorest people within a country.
B. Problem definition The scope of the study is to find out how New Growth market (NGM) consumers spend their money. -by country

A. Assumptions In this study country areas are divided into two different areas, rural and urban. It is assumed that 80% of rural GDP consists of agriculture and, naturally, urban GDP includes no agriculture. One might argue that this is a rough distribution
Manuscript received March 31, 2007, revised at May 15, 2007 and presented at June 14-15, 2007. 0. Pollanen is with Nokia Siemens Networks, Linnoitustie 6, 02600, Espoo, Finland (+358-50-555-3355; fax: +358-7180-30205; e-mail: ossi.pollanenA nsn.com). L. Eloranta, is with Nokia Siemens Networks, Linnoitustie 6, 02600, Espoo, Finland (e-mail: laurij.elorantaAhelsinki.fi).

1-4244-1233-1/07/$25.00 C 2007 IEEE.

-by industry -by demographic -by income Understanding these attributes help operators plan network deployment in NGM countries and lower the risks of investments. C. Methods In this study methods are fundamentally simple. First of all, mobile spending or mobile revenues are compared to private consumption. Private consumption is one of the basic parts of GDP together with government spending and investments. Usually more than half of the GDP is consisted of consumer expenditure. In economics it means that instead of comparing mobile spending to GDP i.e. C+G+I (C= consumer spend, G=government spend, I=investment) it is compared to C meaning that calculations ignore investments i.e. savings and government spending i.e. taxes. Therefore mobile spending can easily be compared to other consumption bundles such as health, food and housing as well. Calculations are very straightforward trying to keep them as simple as possible, however, not forgetting the precision of the calculations. Multiple researches and data banks are used as information sources.

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2
III.

Proc. 6h CONF. TELECOMM TECHNO-ECONOMICS, VOL. 1, 14-15 JUNE 2007

GLOBAL VIEW
100%
*

A. Global spend Consumer expenditure structures vary between countries depending on standards of living as well as cultural, geographical, demographical and etc. factors. It is obvious that lower income people have to spend greater share of their income on necessities as food and housing. When people have satisfied basic needs they can use their remaining income to improve the quality of life as well as economical and social status. Every consumer has her own individual preferences and resources but by dividing the consumers into the certain categories it is possible to find some correlations and particularities which help to understand these individual consumers. The world can be divided into five categories depending on GDP per capita. Countries which have the highest GDP per capita rate are included in the category "first billion" meaning that approximately the richest billion people are in that category. The next richest countries are included in the "second billion" and so on. The category "rest" means countries which have lower GDP per person than in China and somewhat lower or higher GDP per person than in India. In that category the information to consumption distribution apart from mobile spend includes Ukraine, Indonesia, Egypt, Philippines, Nigeria, Pakistan and Vietnam meaning nearly 850 million people. The data for mobile spend is calculated also from the smaller countries. The Fig. 1 shows how consumption in the world is distributed today when using defined grouping. The share of food, beverages and tobacco out of all consumer expenditure is greater in poor than in rich countries. While this result is presumed it is interesting to notice that the relative mobile spend is greater in poor countries. That would imply that mobile spend or communication is also one of necessities. 35% of consumption consists of combined food, beverages and tobacco spend and housing & household fuels spend or "basic necessities" in developed countries. The same share in developing countries is approximately 65%. New Growth Market includes countries from "second billion" category to "rest" category. The share of these basic necessities varies between 45-65% of all consumption in NGM leaving nearly half of the consumption to other goods. The smaller consumption share of basic necessities in developed countries means also that disposable money grows faster than GDP. When people have more money to spend they spend smaller share of the additional money to necessities.

90% 80% 70% 60% 50% 40% 30% 20% 10%

* *

Hotels & resta ura nts

Leisure & educations

Health Household goods & service
aothing &

footwear Housing & household fuels Food, beverages & tobacco

*

Transport & comm unications

Mobile

0%

1st billion 2nd billion

China

ndia

rest

Fig. 1. Distribution of global spends by industry, [1].

The absolute values of consumption are plotted in Fig 2. Consumer expenditure per person is nearly 50 times higher in "first billion" than in India. If basic necessities are ignored the disposable money per person is nearly 70 times higher in developed countries than in India and nearly 50 times higher than in China. Consumers spend about 200 US$ per person on food beverages & tobacco in China and India annually. The share of transport & communication spend, including mobile spend, is quite large in India, 16.5% of all consumption, and in China, 17.8% of all consumption, compared to other developing countries. For example, the same share in Indonesia is only 4.2% and in Philippines 8.7%. The low share of transport & communication spend is affected by the fact that the transportation infrastructure is in many places in developing countries deteriorated or even non existing. Interesting fact is that in Indonesia and Philippines mobile data spend is large. Consumers might try to compensate for difficulty of traveling by sending SMS messages to sustain social contacts.

Fig.2. Annual consumer expenditure per person, [1].

In many NGM countries the share of transport & communication is growing because of mobile spend. This trend can be seen for example in India, Indonesia and Philippines. It is obvious that when mobile penetration is

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POLLANEN et al: DEMOGRAPHIC ANALYSIS FOR CONSUMER SPEND IN COMMUNICATIONS

growing the mobile spend is growing as well. However, when the economy is growing people spend additional income for example on traveling, as stated before, and the share of transport & communication spend should be growing. If the growth in transport & communication spend is a consequence of growing mobile spend then people have used mobile spend as a substitute for traveling. Many news articles have recently told this kind of progress in many NGM countries. When people reduce traveling with increased use of mobile phones, they have more time to other activities and economies operate more efficiently.
B. Rural revenues in NGM Rural areas in NGM countries create a very interesting

turquoise African, blue South American and green East European countries.

investment opportunity for a communications operator. The network deployment investment decision challenge can be illustrated in Fig.3. with two different demographic structures defining the opportunity of the mobile spend. Normally the radio access cost per subscriber is higher the smaller the subscriber density due to high cost of rural base station macro sites. The edge of the green area can be considered as cost curve of an investment as the function of population density.
C')

Fig. 4. Rural GDP per person and rural population density, [1], [2].

C/)C/)
,

on
OCU (U

*-;

r -o(1

U)i
Sjbs/km2
Optimal coverages

The scatter plot shows that the rural communications business opportunity is high in all demographic conditions. Surprisingly high rural population densities can be found in many Asian and African countries. Significant communications cash flow can be anticipated per area though personal incomes are low. On a global scale if population density is low personal incomes are higher and net revenues are not necessary higher than in highly populated countries. Rural GDP per arable land area in Bangladesh is estimated to be around 180000 US$/km2 annually whereas for Argentina it is estimated to be 80000 US$/km2. Though there is a large difference in population density there is not such a large difference in value creation per land area. The scatter plot also illustrates that Asian and African agriculture is more labor oriented than in Eastern Europe and South America. These findings create an optimistic image about the rural communications revenues because there are no NGM countries with low rural GDP and low population density. From this point of view there are no clear barriers to prevent mobile networks to extend to rural regions in most NGM countries.
IV. COUNTRY SPECIFIC DETAILS

Fig.3. Two different structures of mobile spend.

The point where demographic curve meets the radio access curve defines the population density below which the network investment is not economically justified. If demographic conditions vary the optimal coverage point changes as illustrated. Traditionally networks are often deployed to cities and urban environment first and later extended over less populated districts. In these later deployments operator must take into account demographic factors such as population density, income and consumption distribution for economically successful network investments. In following analysis demographic conditions are analyzed country by country. In Bangladesh the estimated rural population per arable land is more than 1300/km2 whereas in Argentina it is as low as 15/km2. Therefore definition for rural area can be very different in different countries. Fig.4. shows the relationship between estimated rural GDP per capita and population density. The bubble size represents the estimated rural GDP. Red balloons represent Asian,
cost

A. South Africa References [5]-[7] describe dimension of the cost of network deployment in terms of technology and cost. Few references [8] correlate the cost of network deployment as a function of population density. Operator's main concern in network investment is the return and payback time of the investment therefore the absolute income and potential spend to communications in certain regions need to be assessed as well. It is obvious that many operators have developed internally methodology to assess investments opportunities but have not published the findings to secure the competitive advantages created with the findings. South Africa is one of the most developed countries in Africa; however, there are large differences in people's incomes. That is one of the key issues to be taken into account when talking about South Africa's economy. Mobile development has been quite rapid and in 2005 mobile penetration exceeded 5000 of population, meaning 42.6

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Proc. 6h CONF. TELECOMM TECHNO-ECONOMICS, VOL. 1, 14-15 JUNE 2007

25.0%

million people. Penetration is estimated to exceed 100% in 2008. In spite of rapid growth of penetration, in 2003 penetration exceeded 3000 and in 2004 400O, ARPU hasn't declined. Actually, ARPU was a little higher level in 2nd quarter 2005, 23.7 US$ per month, than at the same period two years earlier, 22 US$ per month. Down to these facts mobile revenues has grown rapidly. Mobile revenues grew faster than penetration during 2003 and 2004 implying growing ARPU. It means that new subscribers were able to consume even more than the existing subscribers or the existing subscribers started to spend more money to calling and mobile data services. Together with growth in mobile business South Africa's economy has also boomed. GDP at market exchange rates was 240 billion US$ in 2005. GDP is expected to continue growing and exceeding 330 billions US$ in the year 2009. Private consumption is also expected to grow like it has grown in past years. Fig.5 shows the distribution of consumption in South Africa. In 2005 private consumption was 152 billion US$ and the proportion of transport & communication spend was 20.2 of consumption or 30.8 billion US$ and in the same year mobile revenue was 6.5 billions. It means that 21.1% of transport & communication consumption came from mobile spend. If it is assumed that in 2005 mobile penetration, 50.1 0O in 2nd quarter, would have been distributed evenly between the richest citizens in South Africa the subscribers spend on the average 500 of their total consumption to mobile spend. If the other half of the population used the same proportion of their consumption to mobile spend it would mean that the mobile spend grows only by 18 percent, meaning 1.15 billion revenues in 2005. In 2005 that would have meant that ARPU would have been less than 15 US$ per month with penetration 100%. Fig.6. shows the share of the mobile revenue or spend out of transport & communication and total consumption. The mobile spend has overran the huge share out of transport & communication spend. Mobile spend has grown relative to both total consumption and transport & communication spend. The same trend seems to be continuing in 2006. That seems to prove that mobile subscribers have substituted some of the transport & communication expenditure for mobile consumption.
Consumer expenditure development
250

20.0%
.2_
E

t) 15.0% 0

Mobile spend

D5
U)

10.0%

Transport&communication spend without mobile

5.0

0.0%

Year 2003

Year 2004

Year 2005

Year 2006

Fig.6. The share of Transport & communication spend out of total consumption is growing because of mobile spend, [1],[3],[4].
stimated CDPdistribution in South Mrica
14000 12000
10000

' '

8000 6000 4000 2000

s Estimated urban CDP per capfta

St imat ed rural CDP per capfta

Ted

Teda

Teda

TYeda
2006

TYed
2007

y ear

year

2003

2004

2005

2008

2009

Fig.7. Estimated rural and urban GDPs in South Africa, [1],[2].

100
90
80

0~
E

70
60

cn C,,
0
0

50
40 30

m la)

200

* Other o1 Hotels & restaurants

Leisure & education * Transport & communications * Health Household goods & ser\ices Clothing & footwear * Housing & household fuels * Food, beverages & tobacco
*

20
10
0

cn 150

.2_
U) D

10

20

30

40

50

60

70

80

90

100

100

Share of households

50

Fig.8. Cumulative consumption distribution in South Africa, [2].

Year Year Year 2003 2004 2005

Year 2006

Year 2007

year

year

2008

2009

Fig.5. Consumption distribution in South Africa 2003-2009, [1].

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POLLANEN et al: DEMOGRAPHIC ANALYSIS FOR CONSUMER SPEND IN COMMUNICATIONS

year 2006
0 Ca 0~ I,) QU
a) au a) a) -CI)
QL

140

that investment analysis is feasible in other countries facing similar large variations in demographic conditions if these demographic elements were analyzed carefully.
REFERENCES
[1] EIU database: www.eiu.com [2] World Bank's World Development Indicators: http:Hdevdata.worldbank.org/wdi2006/contents/index2.htm [3] Merrill Lynch's Global Wireless Matrix: http://www.cwes0l.com/10323/24789/Interactive_Global_Matrix.xls [4] KPI Tool: Nokia's internal database [5] B. Gavish and S. Sridhar, "Economic aspects of configuring cellular networks", Wireless Networks, Vol. 1, No. 1, Feb. 1995, pp. 115-128 [6] D. Katsianis et al., "The economic perspective of the mobile networks in Europe" IEEE Personal Communications Magazine, Vol. 8, No. 6, pp 58-64, Dec. 2001 [7] D.P. Reed, "The Cost Structure of Personal Communications Services" IEEE Communications Magazine, Vol 7, <no. 2, Apr. 1993, pp. 173-185 [8] K. Johansson, "Relation Between Base Station Characteristics and

120 100
80 60

0 0~ 0

40 20 0 0 20 40 60 population %

80

100

Fig.9. Potential monthly revenue per person in South Africai [1]-[4].

Data revenues have grown fast in South Alfrica. In 2nd quarter 2003 share of data revenues out of mo]bile revenues was 3.1% and in 2006 it's estimated to be as much as 10% meaning that SMS revenues would be nearly ten times higher in 2006 than in 2003. It might be a consequence of rural and less income people's incentives to use SMS rather than voice when communicating. The reason is relative poor countryside and, as mentioned, huge differences in incomes in general. Estimated urban GDP in South Africa is multiple compared to estimated rural GDP. These estimations are plotted in Fig.7. Cumulative consumption distribution, in Fig.8, also implies the huge inequality in South Africa. Highest consuming 20% of people consume more than 60% of all consumption and the richest 10% consumes 32 times more than the poorest 10%. From the mobile business point of view it is important to know how dense the settlement is in rural areas. Population density per arable land is quite large in South Africa, around 120 due to large share of rural people, over 4000 of total population. Therefore it may well be profitable to invest to new network deployment to uncovered areas though the personal income is very small.
V. CONCLUSIONS

October 2004

Cost Structure in Cellular Systems", Proc. IEEE PIMRC 2004,

The share of mobile spend of the consumer spend is bigger in low GDP countries than in high GDP countries. This implies that the mobile communications is a necessity item in consumer's spending similar to food and housing. Once it's a necessity item the risks of investments become much lower than if it were considered a luxury item. Study also finds that the rural areas in many low GDP countries are highly populated and create substantial revenue potential making investment decisions easier in these highly populated rural areas where personal incomes are very low. In South Africa the penetration growth both in rural and urban environment has already taken place. Demographic conditions of South Africa are viewed in detail in this study. South Africa is a good example of a country where the penetration growth has been rapid despite the fact that income distribution and population density variations are very large within the country. Similarly it can be assumed

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