Altimo Index 3

Altimo Mobile Development Index

Issue 3 (H2, 2007)

Project Contributors:

London Business School
 
Cambridge University
 
New Economic School (Moscow)
 
Altimo Team
 

London, 15 April 2008

 

Executive Summary

Altimo is proud to release the Third edition of the Altimo Mobile Development Index (Altimo Index) computed on the basis of the mobile industry data from Q3 2007 to Q4 2007.

Altimo Index was first launched in March 2007. The project combined the efforts of professionals in economics from the three leading institutions of the world: Cambridge University, London Business School, and New Economic School (Moscow). The objective we had was to produce a handy and practical measurement for world mobile telecoms markets according to their investment attractiveness. The Index is updated every 6 months, which allows to build trends of development and to make reliable forecasts for the future of mobile industry in 80 markets all over the planet.

 

In Altimo Index H2 2007 key results are:

1.  Three latest issues of Altimo Index (H2 2006, H1 2007, H2 2007) explicitly demonstrated that South Eastern Asian mobile markets remain investor favorites due to continuing dynamic growth in client base and mobile spending driven by strong macroeconomic performance. Indonesia, Philippines, and Vietnam from South East Asia occupy three of four top spots according to the Altimo Index due to rising penetration, increasing mobile spending and impressive profit margins. The most attractive investment opportunities would remain from 2008 to 2010.

Domestic growth momentum in regional leaders – China and India - and their neighbors should be sufficient to overcome the effects of the global turmoil in financial markets and economic slowdown in the US. China, ranked third, is slowly accelerating penetration and is expected to further profit from rising mobile spending. India, Sri Lanka, and Bangladesh from South Asia are in top ten, attracting investors by huge potential in client base and large capital expenditures. However, the total rating of Southern Asia is becoming flatter due to high competition on the Indian market.

 

2.  The CIS region remains an attractive target for investments in the mobile industry in the medium-term perspective. Even though the largest markets in Russia and Ukraine are approaching saturation and competition intensifies, operators are expected to profit from the growth in value-added services. Mild growth in penetration and mobile spending help operators to sustain high profit margins, especially in Russia with high oil revenues. However, mobile markets in Kazakhstan and Uzbekistan continue to grow their client base rapidly and will profit even more from oil and gas exports.

 

3.  Most developed countries in North America, Europe, and Asia (e.g., Japan and South Korea) have saturated mobile markets with penetration above 90%. These markets need to rely on new mobile products to magnify otherwise stable income streams. The growth outlook is aggravated by the economic slowdown in the US and general financial instability, which may cut mobile spending.

 

4.  Most African mobile markets have poor to mild short-term investment outlook. The benefits from rising commodity prices are outweighed by weak institutions and the risk of political instability. However, the oil exporting and based on strong economical developments countries such as Algeria, Mozambique, Egypt and Angola show impressive growth in output and private spending, which spurs penetration, revenues and profit margins of mobile operators. The mobile boom in other African markets, which currently have an extremely low penetration, may take several years and remains very sensitive to internal and external factors.

 

5.  Latin America offers mild investment perspectives in the mobile industry. Most countries show slow growth in penetration, declining ARPU, strong competition, and profit margins below industry averages. Exogenous shocks may further decrease mobile revenues, even though sustained growth in Latin America over the last four years has strengthened the macroeconomic fundamentals. The regional leaders are Mexico, Colombia, Peru, and Argentina, where strong investments and economic growth contribute to rising private consumption. The most attractive mobile market is in Mexico, where high oil prices help to further increase mobile revenues and profit margins.

 

Altimo Index 2007

Table 1. Altimo Index H2 2007 by country*

  ARPC
res		 ARPC
res		 EBITDAm GDP per cap CAPEX
/ Rev		 Popula-
tion		 Penn
Growth		 Altimo Index H2 2007
1 Indonesia -0,46 0,57 8,24 0,55 19,33 0,03 1,06
2 Philippines -0,51 0,61 8,52 0,23 18,32 0,03 1,02
3 China -0,82 0,49 8,94 0,23 21,00 0,02 0,99
4 Viet Nam -0,79 0,55 8,04 0,40 18,26 0,01 0,96
5 Iran -1,06 0,40 9,09 0,00 18,05 0,06 0,94
6 Sri Lanka -1,02 0,49 8,43 0,00 16,83 0,03 0,92
7 India -0,92 0,37 8,22 0,57 20,82 0,02 0,92
8 Kazakhstan -0,16 0,53 9,12 0,31 16,54 0,07 0,90
9 Egypt -0,76 0,46 8,34 0,26 18,19 0,04 0,87
10 Bangladesh -0,95 0,31 7,70 0,94 18,82 0,02 0,84
11 Algeria -0,03 0,57 8,95 0,19 17,32 0,05 0,82
12 Uzbekistan -0,40 0,60 7,60 0,09 17,13 0,02 0,81
13 Ukraine -0,15 0,46 8,94 0,46 17,65 0,05 0,80
14 Russian Federation -0,15 0,51 9,40 0,15 18,78 0,03 0,79
15 Taiwan -0,41 0,52 10,28 0,11 16,96 0,01 0,77
16 Mozambique -1,25 0,00 7,31 0,31 16,80 0,01 0,75
17 Pakistan -0,49 0,32 7,86 0,68 18,94 0,04 0,71
18 Angola 0,09 0,61 8,37 0,00 16,35 0,02 0,71
19 Italy 0,23 0,50 10,30 0,00 17,88 0,04 0,69
20 Mexico -0,13 0,46 9,27 0,15 18,50 0,03 0,67
21 Turkey -0,32 0,41 9,09   18,08 0,02 0,64
22 Thailand -0,46 0,35 9,12 0,15 17,98 0,04 0,63
23 Germany -0,28 0,37 10,35 0,13 18,23 0,03 0,63
24 Malaysia 0,01 0,47 9,45 0,16 17,02 0,03 0,61
25 United States of America -0,27 0,33 10,68 0,20 19,52 0,02 0,60
26 Tunisia 0,02 0,49 9,06 0,28 16,14 0,02 0,59
27 Cambodia -0,39 0,44 7,86 0,32 16,46 0,01 0,59
28 Bulgaria 0,36 0,51 9,25 0,13 15,81 0,06 0,58
29 Canada -0,27 0,40 10,47 0,13 17,32 0,01 0,58
30 Colombia -0,39 0,39 9,04 0,12 17,60 0,02 0,57
31 Albania 0,84 0,63 8,63 0,00 15,09 0,05 0,56
32 Hong Kong -0,69 0,33 10,51 0,09 15,76 0,01 0,53
33 Slovakia 0,27 0,45 9,78 0,16 15,51 0,04 0,50
34 Georgia 0,12 0,50 8,24 0,00 15,35 0,02 0,50
35 Belgium 0,18 0,45 10,37 0,11 16,16 0,02 0,49
36 Armenia 0,35 0,50 8,59 0,00 14,91 0,04 0,48
37 Peru -0,39 0,28 8,76 0,22 17,17 0,04 0,48
38 Singapore 0,28 0,39 10,34 0,08 15,33 0,06 0,47
39 Switzerland 0,32 0,47 10,42 0,09 15,84 0,02 0,47
40 Czech Republic 0,25 0,46 9,98 0,10 16,14 0,02 0,47
41 Cameroon 0,23 0,50 7,78 0,00 16,70 0,02 0,46
42 Macedonia 0,34 0,49 9,01 0,10 14,53 0,04 0,46
43 Argentina -0,31 0,26 9,62 0,10 17,51 0,05 0,46
44 Greece 0,65 0,40 10,06 0,14 16,19 0,08 0,46
45 Netherlands 0,21 0,35 10,36 0,13 16,62 0,05 0,45
46 Morocco 0,39 0,44 8,39 0,00 17,33 0,04 0,45
47 South Africa 0,03 0,34 9,47 0,17 17,60 0,03 0,42
48 Australia 0,02 0,35 10,40 0,00 16,83 0,01 0,42
49 France 0,10 0,34 10,31 0,00 17,93 0,01 0,40
50 Hungary 0,26 0,42 9,76 0,09 16,11 0,02 0,40
51 Poland 0,16 0,34 9,55 0,12 17,47 0,03 0,39
52 Spain 0,47 0,41 10,20 0,09 17,51 0,02 0,38
53 Kuwait 0,87 0,54 9,98 0,00 14,72 0,02 0,37
54 Chile -0,01 0,32 9,44 0,23 16,60 0,02 0,36
55 Japan 0,06 0,29 10,41 0,15 18,66 0,01 0,36
56 Venezuela 0,55 0,44 8,84 0,12 17,07 0,03 0,36
57 Croatia 0,63 0,44 9,49 0,12 15,32 0,04 0,35
58 Norway 0,02 0,37 10,77 0,07 15,35 0,00 0,34
59 Austria 0,13 0,34 10,44 0,11 15,92 0,02 0,33
60 Sweden -0,03 0,33 10,36 0,11 16,02 0,01 0,32
61 Portugal 0,48 0,38 9,86 0,16 16,18 0,03 0,32
62 Romania 0,30 0,27 9,08 0,00 16,92 0,06 0,31
63 Brazil -0,01 0,23 9,06 0,14 19,06 0,03 0,28
64 Ecuador 0,38 0,36 8,41 0,00 16,43 0,03 0,27
65 Slovenia 0,11 0,33 10,04 0,16 14,51 0,02 0,27
66 Finland 0,21 0,32 10,40 0,09 15,47 0,02 0,26
67 Israel 0,31 0,33 10,17 0,00 15,67 0,02 0,26
68 Korea, South 0,29 0,28 10,09 0,16 17,71 0,02 0,26
69 Denmark 0,13 0,23 10,52 0,13 15,51 0,04 0,23
70 New Zealand -0,02 0,25 10,17 0,00 15,23 0,02 0,23
71 Ireland 0,34 0,30 10,68 0,00 15,22 0,02 0,23
72 Jordan 1,08 0,50 8,50 0,00 15,60 0,02 0,22
73 Zambia 0,83 0,47 6,91 0,00 16,27 0,02 0,19
74 United Kingdom 0,34 0,26 10,35 0,10 17,92 0,01 0,19
75 Estonia 0,49 0,36 9,88 0,08 14,09 0,02 0,15
76 Nigeria 1,17 0,39 7,24 0,31 18,71 0,02 0,13
77 Tanzania 0,69 0,32 6,68 0,36 17,45 0,02 0,09
78 Congo (Kinshasa) 0,40 0,31 6,55 0,24 0,00 0,01 0,07
79 Uganda -0,32 0,12 7,50 0,00 17,17 0,01 0,06
80 Iraq 1,14 0,35 7,55 0,09 17,12 0,05 0,06
 

* Normalised values (See Technical description of the Altimo Index below)  

 

Graph 1. Altimo Index H2 2007 by country

Graph 1. Altimo Index H2 2007 by country

 

Graph 2. Altimo Index 2002-2007 trends by region

Graph 2. Altimo Index 2002-2007 trends by region

 

General Trends

 

Penetration Level

In the end of 2007, the world’s mobile industry has reached 50% penetration level, which means that over 3.3 billion people now own a mobile phone. However, as many people are still lacking mobile connection and this implies that many growth opportunities are still left on the table.

Subscriber Base

The global subscriber base grows by about 5% per quarter. Most of this growth can be attributed to rising penetration among poor people in China, India, and other emerging markets in Asia. This may explain why ARPU has been steadily declining and is currently $23.2, down 16% from $27.8 two years ago. However, this did not diminish the profitability, as the EBITDA margin on the contrary has risen from 35% 2 years ago to 37%.

Effect of Global Economy Slowdown

The current slowdown in the US and other rich countries is cushioned by robust growth in developing economies led by China, India, and Russia. This reinforces our previous predictions that emerging markets provide most attractive opportunities for investments in mobile industry. Continuing real income growth should reduce poverty in developing countries and drive up both penetration and spending on mobile communications.

According to World Bank,1 per capita income growth of 3.4 p.a. would reduce the number of people living on less than a dollar a day from 970 million in 2004 to 624 million in 2015. However, the developments in individual countries are going to be very diverse, depending on the sensitivity to internal factors, such as bureaucratic constraints and macroeconomic management, and external factors, most notably the danger of an American recession and rising financial volatility.

Developing countries with strong domestic demand (e.g., China and India) and high revenues from exporting oil (Iran, Kazakhstan, Russia) will produce strong revenues and high profit margins in the nearest perspective. Mobile markets with low penetration may have better investment potential, but are more sensitive to risks.

 
1 World Bank, Global Economic Prospects 2008, published in January 2008.
 
 
 
 

Regional trends:

 

Asia
• Growing economies resilient to exogenous shocks
• Rising penetration
• Growth in mobile spending
• The most attractive investment opportunities in 2008 to 2010

CIS
• Highest growth and profit margins in the largest Central Asian markets
• Growth in mobile revenue driven by value-added services

Africa
• Poor short-term outlook
• Investment potential may be realized in the next few years
• Best opportunities in oil exporting countries

North America and Europe
• Modest growth potential
• Growth opportunities emerge from new technologies
• Mobile spending may be sensitive to global slowdown

Latin America
• Reasonably poor short and mid-term outlook
• Strong industry competition
• ARPU growth may be slower because of the outside shocks

 
 

Technical description of the Altimo Index

The index aggregates six country-specific factors (see Table 1) that determine the future profitability of a mobile company.

 

Table 1. Determinants of the Altimo Index

Variable Description Index weight
ARPCgrowth Difference between the predicted and actual log ARPC (average mobile spending per capita) 0.3
EBITDAm Earnings before interest, taxes, depreciation and amortization relative to revenue 0.3
PENgrowth Growth in the penetration rate over the last four quarters 0.1
CAPEX/REV Capital expenditures relative to revenue 0.1
POPULATION Population 0.1
GDP GDP per capita adjusted for the purchasing power parity 0.1
 

The average revenue per capita (ARPC) is measured as the total spending on mobile communication divided by the country’s population. Alternatively, it can be computed as the product of ARPU and penetration rate. ARPCgrowth is derived from the cross-country regression of log ARPC on log GDP, which is re-estimated every time using the latest annual data. For example, in 2006, this regression is as follows2:

(1)

where ei is the regression residual, which by construction has zero expectation and is orthogonal to log GDP. ARPCgrowth is the difference between the predicted value of log ARPC and its actual value (i.e., the negative of the residual in (1)).

 
2 Estimation is done using ordinary least squares (OLS) method. If t-statistics (below the coefficients) are in absolute value above 1.96, this implies that the respective coefficient is significant at 5% level. R2 is the percentage of the dependent variable’s variance explained by the independent variables.
 
 

The six variables that define a market’s attractiveness are then combined into a single index using user-defined weights. The aggregate index is computed as a simple linear combination of the standardized variables taken in logs (marked by underlining) using the weights described in the last column of Table 1:

Indexi = 0.3*ARPCgrowthi + 0.3*EBITDAmi + 0.1*PENgrowthi + 0.1*CAPEX/REVi + 0.1*POPULATIONi + 0.1*GDPi (3)

The variables (in logs) are standardized by substracting the sample average and dividing by the sample standard deviation, e.g.:

GDPi = [log(GDPi) – mean(log(GDP))] / std(log(GDP)) (4)

By construction, the standardized variables are on average zero and have unit standard deviation.

This implies that each standardized variable and the aggregate index may be negative. Therefore, to make sure that the mobile development index takes only positive values, we compute Altimo Index as a linear function of Index:

Altimo Indexi = 0.5*(1 + Indexi) (5)

The quarterly data on mobile companies are provided by Wireless Intelligence (https://www.wirelessintelligence.com/) and mobile companies’ websites. The annual measures are calculated as the average over the last four quarters with available data. The country-specific mobile industry measures such as ARPC and EBITDA margin are computed as weighted averages of the corresponding company data, with weights proportional to the company’s number of SIM-cards. The annual data on the country’s GDP per capita and population are taken from the World Bank (http://www.worldbank.org/).

The index is computed for countries that have no missing data on the five factors. If the country has no data on CAPEX/REV in the current year, we substitute the last-year value. In addition, we winsorized the most extreme values of CAPEX/REV and EBITDAm. If the observed CAPEX/REV was below 0 (above 0.8), it was replaced with 0 (0.8). Similarly, if the observed EBITDAm was negative, it was replaced with 0.

The index is calculated for eleven geographical regions: Africa, CIS, Eastern Europe, Eastern Asia, Latin America, Mideast, North America, Oceania, South Asia, South-Eastern Asia, and Western Europe (see Table 2 for the composition of the regions). The regional index is computed as a weighted average of the respective country indices, with weights proportional to the number of SIM-cards in a given country.

 

Table 2. Composition of the regions

Region Countries
Africa Algeria, Angola, Cameroon, Morocco, Nigeria, South Africa, Tanzania, Tunisia, Uganda, Zambia
CIS Armenia, Georgia, Kazakhstan, Russian Federation, Ukraine, Uzbekistan
Eastern Asia China, Hong Kong, Japan, South Korea, Taiwan
Eastern Europe Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Macedonia, Poland, Romania, Slovakia, Slovenia
Latin America Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Venezuela
Mideast Egypt, Iraq, Israel, Jordan, Kuwait, Turkey
North America Canada, United States of America
Oceania Australia, New Zealand
South Asia Bangladesh, India, Pakistan, Sri Lanka
South-Eastern Asia Cambodia, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam
Western Europe Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom

The annual values of the index are available for individual countries as well as regions from 2004.