Cell Phone Economics and Policy

So there was an editorial in last week's The Economist (best magazine ever) about the cell phone industry in Africa and how enterprise could be stimulated if regulations were relaxed. In my experience, the most restrictive such regulation had to be the E50 (roughly US$7) monthly access fee charged by the Swazi government when i was there. In many parts of Africa (specifically South Africa, Mozambique, and Zambia) i was able to acquire a SIM card for free or virtually free with purchase of the prepaid airtime i loaded onto the card. In these countries, one's phone number would remain active so long as airtime was loaded onto the SIM card sufficiently frequently (my South African number is still active over a year after i last loaded airtime). i have no doubt that the fee imposed in Swaziland but not elsewhere has something to do with why cell phone use appeared to me less prevalent there than elsewhere. Of course, there was also the relatively high cost of airtime and the fact that there was only one cell provider in the country, but these could both probably be traced back to government restrictions..

Reading that article, though, reminded me of a conversation i had with The Lindsay last summer about mobile telephony costs. In America, mobile phones are often given away free when a purchaser initiates service (as evidenced by the fact that you don't get much of a discount, if any, if you bring your own phone to the table), but the acquisition of a phone number and initiation of service cost are significant costs. In Africa, phones are fairly pricy but acquiring a SIM card and service is a negligible expense (my R29 Cell C card in Cape Town would have cost the same with or without the SIM card). The Lindsay and i discussed what underlying circumstances incentivize phone theft and what can be done to minimize it. In America, what's the point in stealing someone's phone? They call the service provider and have the SIM card deactivated, and the phone is no good to you unless you buy a new service plan that you could have gotten a free phone with anyway. The key here is that someone (the service provider in this case) has a record of the owner and a means to cut off access to the limiting commodity (in this case the phone service) at the owner's request..

In Africa, things are a little different. i certainly feel that the system in place in Africa is a boon to the industry there as compared to the American system, as a one-time hardware purchase provides virtually unlimited opportunity to purchase phone service as often or as infrequently as the customer wishes, as well as the opportunity to change plans and providers with little or no thought. In addition, this one-time purchase replaces any need for credit checks and lengthy commitments and allows users at the fringe of the economy to tailor their usage patterns precisely to their needs and means. (This is further enhanced by the fact that in most cases all incoming communication is free and, at the time i left South Africa, Vodacom had just begun issuing airtime in increments as small as R12 or about US$2.) However, this convenience comes at a price when we consider the issue of theft. If you acquire a stolen phone in Africa, it is a negligible expense to replace the SIM card and have a fully-functioning phone. Thus it would be no use to have a system that would allow a customer to have a SIM card deactivated. The limiting commodity in this case is the phone, so that's what needs to be targeted..

As it happens, South Africa has a national phone registry to accomplish just this. The nation's three cellular providers have an agreement that if you report the serial number of your stolen phone, they will blacklist the phone, rendering it unusable thenceforth. This action, if performed, essentially strips all economic benefit from the theft of a cell phone. However, report rates are low enough that the risk of getting an unusable phone is not a sufficient deterrent to would-be phone thiefs. Why are not more stolen phones reported?

Let's consider the endpoint first. What is the incentive for a victim to call and report the stolen phone? In most cases i assume anger at being a victim of theft would be sufficient to prompt some people to call; even though they will receive no further benefit either way, they will get the satisfaction of knowing the perpetrator will not profit from the crime. If this incentive is strong enough, the low report rate could imply that victims are somehow unable to report the crime or are still unmotivated to do so. As it turns out, when i was in Africa owners of stolen phones were required to give the serial number in order for the phone to be blacklisted. Most cell phone users do not have a record of this information, because no one expects to need it. Obviously phone owners would be able to report more thefts if they had the numbers recorded, but what is the incentive for a given phone user to record this information? It takes effort to record the serial number and effort to call to report a stolen phone, and again doing so confers no economic benefit on the cell customer. So how can this behavior be incentivized?

i came across an article today that described a proposal of criminal penalties for consumers who fail to report stolen phones. Of course, there are plenty of civil rights problems with such a proposal, not to mention the fact that a penalty that triggers only subsequent to an unexpected event still may not stir to action those for whom the prospect of cell phone theft is so remote as to cause them not to record the serial number in the first place..

Of course, the cell phone manufacturers themselves could incentivize recording the serial numbers by offering to keep a record on the customer's behalf, providing this service at the point of sale, and/or providing a financial incentive in the form of raising the price R100 and then offering a R100 discount or simply refusing to sell to customers who do not register their phone's serial numbers. What is the incentive for retailers to offer this service though? It seems phone retailers would in fact have a counterincentive, considering phone theft will typically prompt a replacement purchase. And yet phone retailers in South Africa do in fact offer such a service. i don't think the government is subsidizing or mandating the program, so what could be driving this practice? Some sort of intangible quality like positive public relations, or perhaps collateral marketing benefit from promoting the program?