By Paul Leishman, GSMA Mobile Money for the Unbanked
In my last post I began to describe MTN Ugandas MobileMoney, a service that has turned an exciting corner into cash-flow positive territory. But the CFO of any mobile network operator (MNO) knows that simply getting out of the red on a month-to-month basis is not enough; his alternative investment options are usually very attractive, so he needs to know just how much is required to scale a mobile money service and whether future income will justify the spend.
Unfortunately, theres no generic amount that an MNO in any market, operating with any business model can assume they need to invest before turning a profit. Until now, Safaricoms M-PESA has provided the industrys only reference point; and the best estimates reckon that Safaricom and Vodafone have spent to the tune of US$30 million scaling the service so far. Our teams recent analysis of MTN Ugandas MobileMoney indicates that theyve spent somewhat less, roughly $10.5 million in total costs and investments to date, driving the service into cash-flow positive territory on a month-to-month basis. It does merit note, however, that in its first 16 months M-PESA grew twice as fast as MobileMoney in terms of customer registration as a percent of mobile subscribers (roughly 31% vs. 17% by month 16).
Alas, in the absence of context, top-line investment figures like these are of limited applicability. For starters, Kenyas population is 36 million so the country is a bad comparable for practitioners in Fiji (population 844,000), India (population 1,100,000,000), and most countries in between. Moreover, for better or worse, MNOs in other countries have not replicated the M-PESA model: in some cases theyve promoted different services, and in others struck different bank partnerships and each of these factors impacts profitability. Finally, and perhaps most important, a successful mobile money services financing requirement will ultimately be driven by variable and step rather than fixed costs; in other words, its difficult to spend like Safaricom unless customers are adopting and using the service.
So instead of asking how much must I invest?, the more relevant question practitioners have begun asking is what costs will drive my financing requirement?. To answer this question, lets again examine the case of MTN Ugandas MobileMoney.
In Exhibit 5, we see that so far, 55% of Mobile Moneys financing requirement stems from variable and step costs, and 45% from fixed costs thus, more than half of their financing requirement has come, in part, from customer adoption and use.(And as the service grows, the model will be predicated even more on variable and step costs). We also see that in their first year of operation, they incur an initial flurry of fixed costs, including investment in the m-Wallet platform, upgrades to their SIM access gateway, spending on above-the-line marketing, and opting to embed their application on all new SIM cards. These fixed costs were not insignificant yet as the service grew, they were quickly overtaken by variable costs, including customer registration commissions, agent commissions, and per-customer technology licensing fees. In the second year of operations, variable and step costs like these account for fully 66% of the total costs in the business.
Its clear, then, that the financing requirement for a successful mobile money service is driven largely by variable and step costs but is all the spending even worthwhile? That is, can mobile money services generate a sufficient net present value (NPV)? For MTN Ugandas MobileMoney, the signs are promising: if we assume that the service continues to grow roughly at Ugandas rate of inflation and then include the terminal value in our calculation, the NPV for MobileMoney is positive. Its difficult to say exactly when the cumulative net cash-flow curve in Exhibit 2 will become positive, particularly since MTN is planning to launch additional services that will surely generate incremental revenue; still, simply based on the foundation theyve laid with their domestic money transfer and mobile top-up offerings, its only a matter of time before MTN recoups its investment.
So how has MTN achieved these results? This is a question well answer in forthcoming posts on this blog. Well detail some of the key decisions MTN has made, and take a closer look at the revenues and costs that have driven their financing requirement.