Free at last?

A few months ago I commented on Vodacom's ambitious quest for leadership in the Internet access stakes. Yebo!Net aimed to attain this position by growing the entire market. This would be achieved through innovative service offerings, including prepaid access (with no fixed monthly service charge) and highly subsidised hardware.

The intention is to win over the remaining unconnected, the great unwashed.

Until now, at least in SA, such "give-away" hardware has been limited to modems. Internationally, companies are offering far more, the extreme being PCs given away free, coupled with highly targeted advertising. The latest is PCs included in a not-to-own lease agreement, which in turn includes Internet access. Or is it the other way round? Either way, Joe Bloggs does not care. He pays his $40 a month, and gets the PC and access. The intention is to win over the remaining unconnected, the great unwashed.

What does this translate into in the South African context? Well, at the current exchange rate of just over R6 to the US dollar, this would be about R250 a month. Quite a lot for most people, but then again, not much more than the price of a monthly cell-phone contract (excluding call charges). More, however, than prepaid cellular users would be currently paying.

Let's do some arithmetic to see if this could take off in SA. Let's start by giving the service a handle. How about "Mahala!Net". You get the PC and the Internet access for R250. Now, let's assume the average full-contract cell-phone subscriber would be willing to pay R250 a month for Mahala!Net. To make this assumption more credible, let's imagine that for an extra R100 a month, you get a cell-phone contract as well. This makes a total of R350 a month, only R100 more than Janet Bloggs previously paid for cell-phone access alone. And R100 a month is not much more than she would have paid for a dial-up Internet access subscriber account. So effectively the PC is for "free". This special deal is possible because Mahala!Net is linked to Gogga!Net, a hypothetical cellular service provider - one that also has an ambition to be a leading player in the Internet access market.

OK, now that we have a scenario, let's do the arithmetic. There are nearly 2.5 million cellular subscribers, about 1.5 million of whom are full-service contract holders, paying about R250 a month for basic cell-phone access. This means they are prime candidates for our R350 a month Mahala!Net service.

Let's assume 20% take up this offer in the first year after launch. This makes 300 000 subscribers. The catch is that Mahala!Net has to supply 300 000 PCs. Forget about laying out R1.5 billion in cash up front (assuming an average cost of R5 000 each) - Mahala!Net finances the PCs at 20% a year, ie paying interest charges of just over R300 million in the first year. But the incremental revenue from Mahala!Net is R360 million (an extra R100 a month for 12 months from 300 000 cell-phone subscribers). We have not yet factored all the costs into the equation, but let's keep this simple (it's already getting hard to follow all the calculations, right?).

So by our really basic reckoning, Mahala!Net has made R360 million in additional income. And the PCs cost R300 million in interest charges in the first year. So it has R60 million to play with, which it needs to invest in providing the Internet access service, and contributing towards the infrastructure for 300 000 additional subscribers. This uses up the R60 million, so essentially Mahala!Net has not made any real money yet. But hey, it has 300 000 Internet subscribers, which is nearly as many as the total number of dial-up accounts as at the end of 1998 (BMI-T counted 370 000).

All this does is prove it could be possible. By the way, this excludes non-PC access devices, such as cell-phones themselves, and Web TV sets. These will also stimulate new Internet users into the market.

Gogga!Net also derived some additional benefits from converting some of its competitors to its cell-phone network. And after a while it also found a way of making a bit of a profit selling advertising on its Web portal, which obviously took off quite rapidly after the introduction of Mahala!Net.

There are probably many catches I have not yet thought of - mostly dealing with all the other costs, not yet factored into our model. The obvious one that springs to mind is the cost of providing support for all the 300 000 PCs. Is this factored into the monthly lease? And will novices be able to install the PCs themselves?

By the way, 300 000 new PCs in the first year would equate to more than half the entire PC market in SA currently, including those sold into all homes and offices. So as a test of sanity, I somehow think: "Not likely."

But the simple economics still seem to make it appear feasible, and this is what intrigues me. Of the international scheme, this is what IDC has to say, as reported in Wired News (http://www.wired.com/news/news/business/story/17998.html).

"The plan seems feasible," said Schelley Olhava, a consumer-PC analyst at IDC Research. "In the last few months, computer prices have finally dropped low enough to make the business model click. The whole industry is really talking about this model quite a bit," said Olhava. "The buzz is definitely there."

I would be interested to hear what you have to say. Drop me a line at brian@bmi-t.co.za and share whether you think either the Mahala!Net concept or the "free" (subsidised) PC concept would work in SA.