Affordable devices for all: innovative financing solutions and policy options to bridge global digital divides
Nearly2.7 billion people globally are still offline and not using the internet.
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The majority(94percent)of unconnected individuals live in low-and middle-income countries, where the cost of internet-enabled mobile devices remains a key connectivity barrier.
This report aims to guide the efforts of policy makers and international financial institutions (IFIs) in promoting affordable mobile device ownership and increase adoption and usage of broadband services, with a focus on the lowest-income individuals in developing countries often overlooked by previous research.
The report examines the key themes and drivers of costs in supply and demand for internet-enabled mobile devices.
This identifies determinants of device pricing and factors that impact users’ ability to pay, willingness to pay and access to credit.
Various financing schemes and opportunities for private capital mobilization are assessed to identify those that could increase low-income individuals’ ability to access a device.
This analysis leads to a series of policy recommendations to provide governments and IFIs involved in designing financing programs for entry-level device ownership with tools to incorporate and apply the findings of this report.
Global scope, with a focus on four target markets Upon establishing a framework of supply and demand drivers and indicators, these drivers are then closely explored in four countries, occasionally referred to as ‘target countries’ in this report: Rwanda, Nigeria, Colombia, and Pakistan.
These countries were intentionally selected based on a variety of factors, including level of economic development, mobile device ownership and usage, local manufacturing markets, and diversity in taxation and regulatory policies in their telecommunications sectors.
These countries have characteristics that are similar to other countries and can be considered in this context; at the same time, every country and telecommunications market has unique features, and so supply and demand assessments ought be carried out anywhere mobile device financing solutions are being explored, emulating the approach in application for the four aforementioned countries in Africa, South America and Asia.
Types of devices covered by this report For purposes of this report entry-level internet-enabled devices are understood as low-cost handsets, below the US$50 retail price9 threshold, that allow a user to obtain internet access and downloadable apps from a universal app store. Based on interviews conducted and global market developments and trends reviewed, two types of devices meet this definition at this time: (i) smart feature phones, and (ii) low-cost smartphones.
These devices are referred to in this report as “entry-level devices,” and they respond to basic requirements and the ability to pay of low-income individuals in low- and middle-income countries.
Mobile handsets are complex devices with hundreds of components, multiple technical characteristics, and diversified, multinational value chains that impact different models’ cost structures.
To facilitate comparison across countries, for the purpose of the supply-side cost assessment undertaken in this report, reference entry-level devices have been defined based on a set of technical specifications obtained from the research.
We recognize that these specifications may not be consistent with consumer preferences and market requirements across all countries at a particular point in time.
Instead, they are meant to describe entrylevel smart feature phones and smartphones that support a minimum desired functionality to achieve mobile broadband internet access and user experiences over the near term.
Entry-level devices will require different functionality and specifications across countries, and these will be dynamic, increasing as markets and consumer needs evolve.
Therefore, close cooperation between government and private sector stakeholders will be essential to identify baseline specifications for entry-level devices to guide interventions to achieve handset affordability targets and other policy goals on a country-specific basis.
Moreover, private sector stakeholders and mobile operators are also expected to continue playing key roles in transitioning users from entry-level to more advanced handsets capable of supporting enhanced user digital experiences.
It is also worth noting that research undertaken for this report suggests that consumers may perceive smart feature phones to be closer to a basic feature phone than a low-cost smartphone.12 In such cases, the retail price of basic feature phones exert downward pressure on the retail price of smart feature phones.
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While this will impact how smart feature phones may be commercialized, due to their lower cost structure, the research suggests that these devices will continue to be a cost-effective option to bridge affordability gaps going forward for certain market segments, particularly in low income countries.
Supply-Side Assessment
This chapter presents a supply-side assessment for entry-level mobile devices.
The objective is to map the value chain and cost structure estimations for reference entry-level devices to identify opportunities for cost reductions that can inform policy actions and programs.
Similarly, this chapter discusses initiatives aimed at promoting the local manufacturing and assembly of mobile devices and their potential use to promote affordable entry-level devices.
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Recent trends in the sale of pre-owned devices, and specifically refurbished devices, are also discussed to assess their potential as supply-side alternatives to lower entry-level device prices and promote increased adoption of internet services.
Supply-side assessment of new entry-level devices
This Section assesses supply-side cost structures and current trends for new entry-level devices in low- and middle-income markets in general, with a particular focus on four countries: Colombia, Nigeria, Pakistan, and Rwanda (the “target countries”).
The goal is to map value chains and current market dynamics of new entry-level devices to identify potential opportunities for optimization and cost reductions to improve the affordability.
These opportunities will then inform specific policy recommendations and actions aimed at policy makers and international financial institutions (IFIs) described in Chapter 6 to make such devices more affordable to low-income consumers in low- and middle-income markets.
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New entry-level device value chain and cost structure Mapping the value chain and cost structure of new entry-level devices can help identify opportunities to target cost-reduction policies and strategies.
This analysis is undertaken by grouping the cost components of new entry-level devices into four key categories: (i) materials and manufacturing; (ii) development, operation, and profit margin; (iii) taxes and import duties; and (iv) distribution and sales.
As further discussed below, (i) taxation and import duties, and (ii) distribution and sales represent the largest opportunities for cost reductions for entry-level devices in many countries.
High tax burdens on mobile devices, including entry-level devices, are imposed in numerous countries.
Reducing such burdens is often the single largest potential opportunity for policy makers to lower the total cost of new entry-level devices.
Depending on the country and the magnitude of tax reductions, this could decrease total device cost by as much as 30–40 percent, subject to the magnitude of the tax exemptions or reductions on import duties, value added tax (VAT), and so forth.
Optimization of distribution and sales channels—by reducing both margins and the number of intermediaries within the distribution chain–can also significantly lower total costs.
Taking account of country-specific conditions, stakeholders within the value chain have been able to implement actions and strategies to reduce distribution and sales costs by about 40 percent.
Beyond these two components, more limited opportunities exist to lower development, operation, and profit margins of lead firms, as those are often already low.
Lastly, interviews conducted for this report suggest that, while materials and manufacturing costs of new entry-level devices represent the highest cost component in the value chain, they have been significantly reduced over the last decade, leaving little margin for significant reductions in the near term, even with market forces driving them further down.
Notwithstanding this, potential global initiatives aimed at forging partnerships between government and private sector stakeholders within the value chain could be used to identify additional opportunities to further optimize costs of materials and manufacturing, as well as distribution and sales going forward.
Value chain of new entry-level devices
The value chain of new mobile devices is complex, involving multiple key players or categories of players active in every link across multiple countries.
These include owners of essential patents; semiconductor foundries and suppliers of other materials and components; manufacturers that assemble devices; vendors and designers; and importers, distributors, and retailers.
Each supplier in the chain buys inputs and then adds value, which then become inputs and part of the cost structure of the next stage of production.
The sum of these values equals the cost of the entry-level devices, which in turn impacts the retail price ultimately offered to consumers.
Smartphone Affordability Report
Smartphone shipments in Africa during Q1 2022.15 The company has deployed a factory to assemble devices in Ethiopia; works closely with importers and distributors in countries where its devices are sold; and in countries such as Rwanda, is closely involved in the distribution, marketing, and sales of its devices (embedding its own agents and promoters in retail outlets).
Similarly, mobile network operators (MNOs) such as MTN in Nigeria and Rwanda, Jazz in Pakistan, or Vodacom in South Africa, among many others, often commercialize their own branded devices to target customers in their home markets, directly procuring devices from original design manufacturers (ODMs).
In many countries, like in Colombia, MNOs also import, distribute, and sell (via their own online or offline stores) a significant proportion of mobile devices. Vertical integration also occurs between the component supplier and OEM.
For example, Huawei, a Chinese-based technology company that manufactures smartphones, among other telecommunications equipment, is vertically integrated into the fabless microchip market via its wholly owned subsidiary HiSilicon.
As discussed below, these vertical integration strategies are aimed at optimizing cost structures, promoting compatibility and improved functionality of devices, and improving the affordability of devices, among others. 2.2.1.2.
Key costing terminology for new entry-level devices
The supply chains of new entry-level internet-enabled devices are complex and multinational in scope.
Mapping their cost structures requires using a set of key costing terms that apply at various points during the manufacturing, shipping, distribution, and sales process of these devices.
The terms defined in Box 2.2 are used throughout this chapter to aid the reader in identifying the distinct cost components that drive the total cost of entry-level devices.