System D or how informal economy profits the mobile market

MTN in NigeriaThe website How We Made it in Africa is a must read if you want to keep tracks of tech and other interesting news that are happening in Africa and would otherwise fly under the radar. In a recent article title “How MTN is profiting from Nigeria’s informal economy“, correspondant Robert Neuwirth examines how African Mobile giant MTN is using an informal economical system well known in most developing countries under different names, but as Systeme D from the French “Debrouille” word, which really now that I am well comfortable in English stands for “Hustle”, basically any semi-legal untaxed way of making a dollar out of 15 cents.

System D or any other name it is known by worldwide stands at a staggering $10 trillion mind you. No small change if you ask me, but back to more mobile related matters, Nigeria is one of Africa’s largest economies, with a growing mobile market that many are already setting themselves up to get a piece of.  How did MTN try to enter this market in 2001?

“We wanted all dealers to be registered. They had to get a licence from the Nigeria Corporate Affairs Commission. They had to have a business name, to be a registered company.” MTN determined that it would sell airtime in three denominations: fifteen hundred naira, three thousand naira, and six thousand naira – $10, $20, and $40 – which would be sold only through stores that had the MTN brand.

The result: the plan crashed and burned. Goodluck put it in gentler terms: “It became very glaring that such a ‘Rolls-Royce’ type of distribution network would not be feasible.”

No surprise here, you have to adapt your business model to the realities on the ground, ergo:

[…]MTN came back with a new plan based on umbrella stands. Almost all of its products would be sold by hawkers and street vendors. The cheapest airtime would be offered at a bargain basement price – a hundred naira, or less than $1 – and it would be available all over town. The company dropped its vision of selling phones with the MTN label. It dropped the price of SIM cards to less than $3. And it has ridden this low-priced model to a better than 40 per cent share of the Nigerian mobile phone market.[…]

And they are milking that cow to the tune of $8.78 billion annual revenue in 2007, with Nigeria contributing “one-quarter of MTN’s one hundred million customers and 28 per cent of the company’s cash – or about $2.4 billion per year”. Almost all of that Nigerian revenue comes from System D mainly through a system of distributors, dealers and sub-dealers all the way down to “Ade” selling recharge cards under his umbrella stand.

These street level distributors also have access to heavily discounted calling plans which they also put to use by allowing customers to make phone calls from their stands for a fee. In French speaking Africa, they are called “cabines telephoniques” after actual public phones except the similarity is in functionality only. In Senegal for example, they are known as “Telecentres” (telecenters) and from their initial phone centric activities they have mostly evolved and escaped irrelevance by morphing into cybercafes due to the spread of cheap mobile phone access.The value is providing these services is obvious;

[…]Most umbrella stand operators have several phones with SIM cards from different mobile services, so you can save money by making your call on the network the person you are calling uses. Many people who have their own mobiles nonetheless use the umbrella stands to make calls – because the cost per minute is cheaper.[…]

These are micro enterprise with very low entry costs. In the article,  Neuwirth gives the example of a woman’s operation set up costing about $50, recouping her investment in her first month and within six months, bringing in profits of $270, five times the government minimum wages. Your first thought could be “Regulate! This is untaxed money!” but what seems clear at this point is that “The system works well as it is.” as Goodluck, MTN’s corporate services executive puts it.

[…]he suggested, the steady profits that street hawkers make from the airtime biz have encouraged people to shift from criminality to card selling, including a number of people who had been dealing drugs. “Even beggars are selling recharge cards,” he said. MTN says it is putting together a database of the sellers and their locations. But there is one thing MTN does not contemplate doing. The company refuses to invest in these merchants who are retailing its recharge cards. “It works nicely as it is,” said Goodluck, who has since been named MTN’s corporate services executive. “It would not be advisable for us to go out on the street and offer them loans and credit. It’s a very informal business. It would not be a safe investment.”[…]

The system works well as it is, indeed, for the foreseeable future it probably will continue to do so, but one might wonder when and what will come to break down this symbiotic relationship.

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