Vodacom Community Phone Shops
Case Study Interview


Digital Dividends interviewed Jennifer Reck, a student at UNC's Kenan-Flagler Business School and one of the members of the research team that wrote the Digital Dividends case study on Vodacom Community Phone Shops in South Africa.

DD: What kinds of services does Vodacom Community Services provide?

JR: Vodacom's goal is to provide all South Africans with access to mobile communications. For citizens with sufficient income, Vodacom sells individually-owned handsets and traditional mobile phone service plans. However, the company is also committed to promoting widespread affordability, accessibility, and usability of mobile communications services within disadvantaged areas of South Africa. As such, Vodacom Community Services provides pay-as-you-go telephone access to people in disadvantaged communities. Since the launch of Vodacom Community Services, many people have been able to make their first phone call ever.

At any Community Services phone shop in the country, a consumer can make a phone call for a tariffed rate of R .85 (USD .10) per minute. IAt some shops, fax and copy services are also provided. Vodacom Community Services are delivered via phone shop franchises, which are owned and operated by local entrepreneurs from within disadvantaged communities. These franchises, commonly called "phone shops," usually operate from converted, Vodacom-supplied and -maintained shipping containers that provide secure and affordable facilities.

DD: What is unique about the Vodacom Community Services model that allows them to serve bottom of the pyramid markets?

JR: Vodacom's development of an entrepreneur-owned and operated phone shops business model has both provided affordable communication services to millions of South Africans and empowered thousands of previously disadvantaged individuals with lasting business skills and income generating opportunities. Vodacom works with communities and owners to solicit ongoing feedback in order to ensure that Community Services achieves its empowerment goals and continues to address the needs of the communities it serves.

The physical structure of the phone shop is a key distinction that allows Vodacom to be able to effectively serve bottom of the pyramid markets. When Vodacom first launched its Community Services program, the company knew that it needed to facilitate owners' access to retail structures in order to address the central, high-traffic locations within the community. Vodacom's use of retired and modified shipping containers allows the company to address the unique requirements of the phone shop and the communities in which they operate.

DD: When did Vodacom begin setting up phone shops? What drove them to develop the Community Services model?

JR: In 1993, as cellular telecommunications services began expanding worldwide, Vodacom was granted one of two GSM network licenses within South Africa. However, in 1994 the new post-apartheid government led by Nelson Mandela threatened to revoke the license unless certain services mandates could be met. The Community Services program began under this mandate with the goal of providing mobile telecommunications services in under-serviced, disadvantaged communities. Specifically, Vodacom was required to have 22,000 lines in operation within five years (by the end of 1999) or face licensing penalties.

From the beginning, however, Vodacom was confident that it could not only meet its government obligations, but exceed them. The company hired a team that reflected a diversity of backgrounds, and enabled the group to quickly engage with the communities it intended to serve in order to determine how Vodacom could best address their needs. This approach helped the company to meet its target of 22,000 active Community Service lines in operation in September 1999, three months before its specified target deadline. Vodacom was the only cellular company to meet its Community Service goals.

DD: What kind of cellular phone technology does Vodacom use in its phone shops?

JR: The technology used by Vodacom Community Services is an example of "appropriate technology"; simple technology that is designed to suit the needs of the communities in which they operate. As part of the phone shop setup, owners are obligated to buy at minimum five cellular phone units for the shop. The units resemble traditional landline phones, but hook into a cellular antenna. These units transmit across Vodacom's national GSM network just like any personal cellular phone. The phones contain a simple handset, which enables users to dial the desired number. A small device with a screen display tracks the amount of time users have left for their call. Wires connect each phone to machines at the attendant's service counter, where the shop owner programs in the amount of money collected for each call. Wires then run from the monitoring units behind the service counter up the wall of the container to small antennas, which facilitate transmission for each phone. Owners pre-pay for phone time through Vodacom and program the phones with the purchased time.

DD: How many phone shops are currently in operation, and where are they typically located?

JR: The Community Services program now provides over 23,000 cellular phone lines throughout South Africa. The program has enlisted 1,800 owners at over 4,400 sites throughout South Africa. Meeting the requirements of the original government mandate, all Community Services phone lines are located within rural and urban disadvantaged areas or townships throughout South Africa. Each owner is empowered to assess the needs of their own communities and to propose phone shop locations. While some phone shops are located in retail space within shopping centers, most are located in modified shipping containers within high-traffic areas of a community. Vodacom works with owners to evaluate appropriate phone locations because encroachment on another phone shop can lead to poor business results or retributions against owners.


DD: Are the phone shops profitable? How is profit distributed between Vodacom and the local phone shop owner?

JR: The phone shop model is quite profitable for owners. Community Services profit models are fixed, with owners able to earn 33% of the R .85 tariff charged users per minute. Despite the low per capita income in the rural and disadvantaged townships in South Africa, aggregate buying power of the community provides sufficient revenue to support the operating costs of Vodacom and the owner, who is able to maintain a relatively high cash flow. A phone shop located in a central location within a township can generate average revenues of approximately R 9000 (USD 1125) per month for the owner.

The remaining 66% of the tariff rate covers the range of Vodacom's costs involved with providing the services. Vodacom currently makes no profit directly from Community Services. In fact, the company never intended the program to make a profit. That said, the program is not losing money either. With the recent rate increase from R .75 to R .85 per minute, Vodacom is now able to cover all of its costs to support the program.

DD: The phone shops use a pay-as-you-go model, why is this important?

JR: Perhaps the most important factor of Community Services' affordability is its pay-as-you-go services, which allow users to purchase precisely the amount of call time that they want or can afford. Even with the prospect of cellular communications being extended to millions of South Africans, cost is still a tremendous inhibitor. Most South Africans simply cannot afford a mobile phone. The pay-as-you-go method is far preferred over calling services that require the purchase of a calling card, such as with the country's national public phones, because it prevents consumers from having to come up with the initial calling card investment and eliminates the risk of card theft.

DD: What effect has this model had in developing a competitive edge for the Vodacom Group in the telecom market?

JR: While Vodacom's main focus is to provide cellular services to middle and top market segments, the company is committed to serving the 70% of South Africa's population currently living in low-income communities. As such, the company has allocated significant resources to its Community Services program to ensure that Vodacom is helping to truly "democratize telecommunications in South Africa." Currently, the Vodacom Group is the largest cellular operator in South Africa, serving just over 8 million subscribers and employing 4,300 people. The Vodacom brand, which is displayed on the sides of its container-based phone shops and through traditional advertising, is one of the most widely recognized brands in South Africa. This recognition, coupled with a continued commitment to providing widespread mobile services for all citizens, should help the company to maintain its leadership position with South Africa's telecom market.

DD: Vodacom was mandated to develop this service model; have they found a business case for the model in addition to its value as a social service enterprise?

JR: Vodacom has indeed found a business case for its Community Services model. Vodacom ultimately is investing in its future customer base as it provides subsidized services to disadvantaged communities. Current Community Services customers are familiar with the Vodacom brand and they trust its reliable services. As customers progress economically and determine that they are in a favorable position to buy a traditional cellular phone, they are most likely to purchase their plan from a trusted source, Vodacom.

DD: Does Vodacom have any plans for expansion of services or additional locations?

JR: While Vodacom has achieved the goals outlined in the original government agreement, the company continues to invest in its Community Services program. They continue to develop regional Community Services growth goals and to evaluate needs within rural and disadvantaged communities. With the increase in competitive phone shops in many communities, identification of viable shop or container locations has become more challenging. However, the fact that there are many areas across South Africa that still do not have access to affordable and consistent communications services promises to keep Vodacom Community Services in business for many years to come.

DD: What kind of user feedback has Vodacom received about the phone shops?

JR: The presence of phone shops within many of South Africa's disadvantaged communities has become commonplace. Individuals view the phone shops as a necessary service within their communities. As such, Vodacom has received much positive feedback from community members as new phone shops open in convenient locations. Similarly, owner feedback is extremely positive. Owners describe a broad range of opportunities that the Community Services program has made possible for them.

Negative feedback takes several forms. Some feedback comes from consumers who encounter poor cellular reception in rural areas or on overcrowded urban networks. Similarly, a few communities are impatiently waiting for the expansion of Vodacom's infrastructure before they can take advantage of Community Services. Finally, many prospective Community Services owners have been unable to take advantage of the franchise opportunities due to the program's popularity and an overabundance of qualified owners.


DD: Do you have any good anecdotes you can share with us from your interviews with Vodacom customers or phone shop owners?

JR: I was struck by the sense of esteem that had developed in individuals who were involved with the Community Services program. South Africa's unemployment rate is close to 50%, and that coupled with a widespread lack of access to education means that most people have few opportunities to develop professional skills or career aspirations. However, virtually all Community Services professionals--from owners and middle managers to phone shop staff--were able to articulate what skills they had developed and ways in which they hoped to apply those skills in the future. Career aspirations varied from hoping to own their own phone shops to wanting to own a restaurant. This optimism is significant within South Africa, because it ultimately leads to broad development benefits. Community productivity is increased, entrepreneurial ventures are encouraged, and new sources of income are infused into rural and disadvantaged communities.