Yesterday I wrote about the shortcomings of Prahalad’s book, The Fortune at the Bottom of the Pyramid. We left with the question of whether there was even a market to discuss. Several factors make it difficult to estimate disposable income at the bottom of the pyramid (BOP). Even if it is not a fortune, there is likely much more than a nickel a day of disposable income amongst the world’s 4 billion poor.

Most people in extreme poverty live in rural areas and derive much of their diet from subsistence farming. This means that relatively little of their income is spent of food. In family or tribe-oriented societies, there is also an income smoothing effect. Kinship networks, for example, mean that if one person in a family has a high-paying position in the government, many in the family will benefit. In addition, income such as flows from non-governmental aid, international transfers from foreign nationals living abroad, and the grey economy may be under-reported in GNP figures.

In response to Karnani’s paper, the WRI’s NextBillion.net noted that:

BOP households collectively spend money, lots of it, on a wide variety of goods and services, and are clearly willing to pay for services such as connectivity, clean water, financial services, energy, health care, and education for their children, as well as food, housing, and consumer goods. The BOP is already an economic actor, not just a passive, dependent group, and its collective actions define a market.

So there let’s assume that there is indeed a market of billions at the bottom of the pyramid. Should companies try to reach it? Karnani cautions that viewing the BOP as a vast market of micro-consumers is “potentially a dangerous delusion.” Let’s look more closely at his argument.
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Distribution and Economies of Scale

Concerned about the apparent gullibility of multinational corporations (MNCs), Karnani warns that:

“Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high…. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business.”

Two words: Coke and Guinness. Both have very deep penetration in West Africa. Granted these are not going to improve the health and well-being of the BOP (though Guinness bottles do read, “Guinness is Good for You“). Somehow these MNCs have overcome the challenge of distributing and marketing their products across a large geographic area.

Regardless of infrastructure and marketing costs, the market will help align buyers and sellers if the price is right for each.
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Reducing Prices at the Bottom of the Pyramid

Prahalad’s thesis hinges on the idea that attracting more competition to the BOP will drive down product prices, thus freeing up their disposable income for other purchases. This is basically how Wal-Mart has made low-income Americans feel richer even as real income has stagnated over the last decade. But Karnani takes issue with Prahalad’s assertion that the private sector can deliver high quality goods to the world’s desperately poor at competitive prices:

“There are only three ways to reduce prices: 1) reduce profits, 2) reduce costs without reducing quality, and 3) reduce costs by reducing quality…. the only realistic way to reduce price is to reduce cost. The BOP proposition is adamant that we should not reduce quality in this process.

“Unless all the current producers are grossly inefficient, the only way to reduce cost… without reducing quality will always require a significant improvement in technology. Good examples of this are found in the areas of computers, telecommunications and various electronic products. It is difficult to find examples of such dramatic cost reduction in other product categories. It is not surprising that the BOP proposition repeatedly uses these same examples. We should also note that the ultimate impact on the real income of the poor due to these major price reductions is quite low because the poor spend only a small part of their income on such electronic products. The poor spend over 80% of their income on food, clothing and fuel – products that have not benefited from such dramatic technological changes in a long time.”

Let’s evaluate that last statement and have a look at how technology might help deliver improved food, clothing, fuel, and public health.

Food: There are constant improvements in pest-resistant crops, hybrid seeds, or high volume animal husbandry. Many famers in Africa still till individual family farms by hand. Certainly technology could help them improve efficiency which would lead to lower prices.

And technology improvements in computers and telecommunications do not exist in a vacuum. There are numerous positive spillover effects that affect the BOP as producers. The Washington Post recently reported that cell phones in Congo have enabled farmers and fishermen to “…use text messaging to check market prices, eliminating middlemen and increasing profits — and preventing long trips to the market on days it is canceled.” So a technology unrelated to agriculture has helped farmers saved on input prices (transport to the market on days when it’s canceled) and output prices.

Clothes: Apparel prices have tumbled over the past decade. Much of this is due to reduced quotas on Chinese apparel imports in the U.S. and Europe. Thus, the assertion that “the only way to reduce cost… without reducing quality will always require a significant improvement in technology” is inaccurate. Clothing prices have dropped as a result of trade policy, not an improvement in technology. This does have a trickle-down effect for the world’s poor.

Fuel: Fuel has indeed become more expensive. Women have to scavenge farther for firewood. Oil prices lead Nigerians into the deadly practice of siphoning off crude oil from pipelines running through their villages. But technology can improve access to energy sources. Military applications such as SkyBuilt mobile solar power could find a market at the BOP helping medical centers or providing a short term power source for harvesting and processing crops.

Public Health: As patents expire on novel drugs, cheaper generic drugs will enter these markets. Playpump is an innovative approach to water delivery. LifeStraw promises to exploit economies of scale in order to drive down prices for its personal water filtration device.

Technology: Last week, the Wall Street Journal ran a front-page story about an American entrepreneur, Greg Wyler, who was building an Internet infrastructure in Rwanda. The focus of Terracom is to first focus on market access, then profits. Mr. Wyler might disagree with Karanani’s ideas about providing a quality product at reasonable prices for the poor. He is quoted as saying, “We’re on a mission here to see what happens when we drive prices down and quality up.”

And lest you think that Rwanda is an obvious market for an outside investor, have a look at the graph at the right.

As WRI writes in response to Karnani’s critique:

The pertinent development question is whether the BOP is well served by the present (often informal) markets, and whether there are unmet needs that could be better served by more competitive markets and broader participation by the legitimate private sector.

I believe that private sector innovation help can drive prices lower, maintain or increase quality, and help deliver goods that result in better livelihoods for those at the bottom of the pyramid. But what if multinationals start marketing products that the poor don’t need? Are BOP consumers rational economic actors? Or is Karnani correct when he says that, “The problem is that the poor often make choices that are not in their own self interest.”

More on that soon…

Google Trends is statastic! Not many web sites get the statastic adjective, but it’s no surprise that the Google Labs have pulled it off.

Google Trends is an anonymous snapshot of worldwide Google searches broken down by the geographic origination of the search. My favorite part is that terms are normalized, which basically means that Google takes the search term that you’re interested in as a percentage of all search terms from the geographic area you’ve selected. Google explains here.

The word or words that appears at the top of each section were the search terms that people around the world entered into Google. In all cases except the last one, these are the top results from around the world. The last comparison between Arcade Fire and TV on the Radio was limited to U.S. Google searches.

Now to see what the world has on its mind!
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When Republicans Google themselves?

Top 10 cities around the world searching for the word “corruption.”

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Hope the Romanians are voting in the midterms

Top 4 regions around the world searching for the words “democrat” and “republican.”

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Planning a vacation?

Top 10 countries around the world searching for the words “witchcraft,” compared to their search for “cannibalism,” and “spontaneous combustion.”

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We care a lot. But not as much as you.

Top 10 cities around the world searching for the word “Darfur.”
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When men are in charge

Top 10 countries that searched for the word “sex” compared to the frequency with which they searched for the term “love.”

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Now that’s not funny

Top 10 countries searching for the word “joke.” I don’t get it.

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Time for the Butter Cow!

Top 10 cities around the world that searched for “state fair.”

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“Well they’re both really important issues… the boobs, I mean.”

Top 10 cities around the world that searched for the term “breast implant” versus how often they googled the name of the Iraqi prison “Abu Ghraib.”

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“Jihad” must mean something else in Indonesian. Besides, there are hardly any Muslims there.
Top 10 languages that searched for the word “jihad” versus the frequency with which they searched for the word “terrorism” and “al Qaeda.”

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What exactly are the Indonesians planning for?

Top 10 countries that searched for the term “UFO” versus how likely they were to look up “Elvis.”

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Washington DC just isn’t very hip.

Top 10 U.S. cities that googled “TV on the Radio” compared to how often those same 10 cities searched for “Arcade Fire.”

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In May, 2006 the MIT Media Lab unveiled its first working prototype of the $100 laptop. The non-profit One Laptop per Child (OLPC) was spun out of the Media Lab to manage the design. The result is small, brightly-colored and rugged laptop that may cost as much as $140. Designed to the specifications of the world’s poorest children, they are the great hope for narrowing the global digital divide.

Before they ship the final product in 2007, OLPC will pilot prototypes in the six countries listed in the chart below. The plan is for the governments of developing nations to purchase millions of these laptops and distribute them to children through their schools.

While I applaud the goal of providing an ultra-affordable laptop to the bottom of the pyramid market, I do worry about the re-sale of these high-value items. OLPC has eventual plans to create a secondary market for the sale of $100 laptops in developed world. From the OLPC FAQs:

Will OLPC spin-off a commercial subsidiary?

The idea is that a commercial subsidiary could manufacture and sell a variation of the OLPC in the developed world. These units would be marked up so that there would be a significant profit which can be plowed into providing more units in countries who cannot afford the full cost of one million machines.

The discussions around this have talked about a retail price of 3× the cost price of the units.

$100 in Nigeria is the equal to nearly two months income. To give Americans a sense of how much $100 is to the average Nigerian, imagine sending your 8 year old to school with a $6,000 laptop. Now imagine living in a country with an epidemic of corruption, in a shanty with no electricity or running water. If laptops were selling for $300 in developed nations, it would provide a strong, and unfortunate, incentive for Nigerian parents to sell their children’s laptops.

Leapfrogging technologies is a worthy goal, but OLPC has to make sure that the social institutions in their target markets can support the landing. They must concentrate as hard on issues such as corruption and cyclical poverty as they do on the design of motherboard and screen brightness. We’ve seen before with the example of SCANWATER that good technology will fail without first addressing underlying problems.
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Sources: Statastic research, Wikipedia, IMF

Notes: PPP was not used because the calculation expresses $100 in an approximated nominal US income per capita. The statastic was calculated by dividing the nominal GDP per capita in these 7 countries by $100. That percentage was then multiplied by the nominal GDP per capita of the United States.

Sure English has the most entries in Wikipedia - 1.3 million at last count - but we also have half a billion native speakers around the world. In fact, it takes 250 Internet users to produce a single English entry on Wikipedia.

So which country is the most prolific? A mere 2 million Slovenians have cranked out 32,000 entries, and they only needed an average of 30 Internet users to write each entry.

And 8.8 million Swedes have produced a whopping 177,000 entries. So if anyone ever asks you how many Swedes it takes to screw in a Wikipedia entry on lightbulbs, the answer is 50. The punchline is that it takes 389 English speakers and more than 11,000 Chinese speakers to do the same. This is hardly surprising given that Sweden is one of the most industrious and entrepreneurial countries in the world, home of Ikea, Volvo and the Swedish Chef.

But look out for the Lusophones. The 210 million Brazilians and Portuguese have produced 169,000 Wikipedia entries so far, and while they’re not the most efficient, that’s still an impressive 28% increase in entries since April, 2006.

Here are the top 25 languages used to write Wikipedia entries. The first statastic is a snapshot of which native speakers produce the most entries per capita. The second measure shows how productive the language groups are given their access to the Internet.

Sources: Statastic research, Wikipedia, World Bank, United Nations Millennium Devlopment Goals Indicators

Notes: Chinese speakers count Mandarin and Cantonese.

Internet usage: Wikipedia entries as of August 9, 2006. Internet usage data is from 2004. In cases where a language spans several countries, a weighted average was used to determine estimated Internet usage data for a language group.

How do we know when a media technology is maturing? Look at how well it reflects society. Communications technologies often start with a limited set of users, and often a limited appeal. And there are often contradictory forces at work in media innovation, for example when Monk scribes gave way to Gutenberg’s printing press. Religious elite lost some cache, but the rewards were expanded literacy and increased creativity in literature.

Photography is an early example of a media that could both document life and afford artists a new medium to reflect life. But today there is a major difference: ubiquity. In 1997, it was estimated that there were more than 150 billion photographs existed in the U.S., and that was well before digital cameras. Today almost everyone has access to a still and video camera. Yesterday’s photojournalism is today’s snapshots. And the advent of photo sharing is also blurring the lines between amateur and commercial photography.

Music has been around about as long as Homo sapiens, and perhaps since the Homo neanderthalensis. But the transformative nature of music, its ability to fuel the social activism of the 1960s, for example, could only occur with innovations recording (starting with the phonograph) and distribution (beginning with radio). With the advent of Internet music sharing, there is a new wave of do-it-yourself creativity in music, whether through self-published albums, mashups, or local iPod DJ nights.

Documentary and experimental film is as old as the medium itself. But documentaries of the early 20th century were from the viewpoint of a few documentarians. One side of innovation in film distribution has increased the public’s access to our homes, cars, even stadium seating. The other side is more the surge in production. Just look at the Viewer Created Content on Current TV to understand how everyone from high school students to priests and drug dealers are sharing their point of view. And motion pictures are increasingly activist: The box office now has hits with political editorials, documentaries about global warming or docudramas about genocide.

So what about video games? Where do they fit in? It depends who you ask. Those under 40, probably grew up playing them and understand the appeal. The baby boomers have likely avoided video games, save for the ones that best imitate the card games they grew up with. First person shooter games have often been blamed for increased violence. The Economist magazine would beg to differ (see chart at right). Perhaps violent video games don’t reflect crime patterns perfectly, but they do reflect what’s CBS weeknight programming pretty well.

But do video games reflect more than violence in society? More on that shortly.

Sources & Notes:

DVDs include all DVD video software shipments in North America. Data provided by Digital Entertainment Group
Book sales data: Seattle Times
Movie Tickets: Motion Picture Association of America
CDs sales include only CD albums. No CD singles, LPs or downloaded music was included. Data provided by Record Industry Association of America
Games include computer and videogames. Data provided by the Entertainment Software Association

With crude oil prices hovering around $75 per barrel, big oil companies once again announced record profits yesterday. Congressional inquiries into price fixing went nowhere, primarily because oil companies don’t need to fix prices. They have a U.S. population addicted to driving (never mind what makes the car go), high switching costs, and fuel standards that make China look progressive.

How did this happen? After the record oil prices in the late 1970s - prices that produced the 1981 U.S. historical high of $3.01 per gallon (in 2006 dollars) - Corporate Average Fuel Economy (CAFE) standards were made more stringent. From 1978 to 1981, U.S. car and truck fuel efficiency standards rose by 24%.

Then came the cheap oil of the 1990s and the SUV revolution. As a percentage of income, the average American was able to buy three times more gas in 1998 than they could in 1980. Fuel standards reflected the cheaper oil. CAFE standards in 1983 were 24.8; in 2004 the average was 24.7 miles per gallon (MPG). The U.S. has long lagged behind Europe in fuel efficiency standards, but more surprisingly, even the developing world makes us look bad.

China’s red-hot economy has meant a rapid shift from bicycles to cars, and the government is taking stern measures to increase fuel efficiency. One major difference with the U.S. CAFE standards is that Chinese standards are based on weight rather than class of vehicles. The lightest vehicles in China were required to get 38 MPG in 2005, increasing to 43 MPG by 2008. Contrast that with the U.S. CAFE standard of 27.5 MPG for cars.

The United States fuel efficiency peaked nearly two decades ago, and today the oil companies are posting record profits. But don’t blame the oil companies. They’re just small-brained, carnivorous, profit-making sharks that swim and devour money. It’s the bloated American, SUV-loving consumer that we should blame for willingly wading into these shark-infested waters. Chomp!

Notes & Sources: # Historical Real GDP per capita is in 2006 dollars. 2006 GDP estimated by statastic.com using latest Economist forecasts. Gas prices are the annual average gas price and were adjusted to 2006 dollars.
^CAFE fleet standards for cars and trucks. 2005 and 2006 data unavailable, so 2004 standards of 24.7 MPG were used.

According to a recent paper by Miller McPherson, Lynn Smith-Lovin, and Matthew E. Brashears, the number of Americans saying they have no one with whom they discuss important matters nearly tripled from 1985 to 2004. The study used the same questions from the 1984 survey to determine how social networks have changed over time. The core question was:

“From time to time, most people discuss important matters with other people. Looking back over the last six months—who are the people with whom you discussed matters important to you? Just tell me their first names or initials.”

The study found that the average number of people in our personal networks has decreased from 2.94 in 1985 to 2.08 in 2004. They also found that women’s social networks are more likely to involve non-kin: As women have moved from homemakers to the workforce, they have increased their number of confidants outside the family unit.

The authors offer several caveats for the extraordinary change in less than two decades: a change in the interpretation of the question, a different view of what is “important” in a post-9-11 world, and finally, actual differences in the way we interact.

Indeed, we do work more hours, commute longer distances, and communicate in new ways. All of these are likely contributors to the change. The Internet has made it possible to remain geographically dispersed while finding people with similar interests. Barry Wellman calls this concept “networked individualism.”

Communication via the Internet is also more public: Diaries once under lock and key are now blogs with hundreds of readers. A note once left on a work colleague’s desk is now an email with several other recipients copied. Open communication might make the idea of a confidant a less relevant concept. Asking someone in an Internet chat room for advice on how to deal with a parent with Alzheimer’s certainly qualifies as “discussing an important matter” even the person who responds remains anonymous.

Perhaps a recent paper from the Pew Internet & American Life Project puts it best:

“Instead of disappearing, people’s communities are transforming: The traditional human orientation to neighborhood- and village-based groups is moving towards communities that are oriented around geographically dispersed social networks. People communicate and maneuver in these networks rather than being bound up in one (solitary) community.”

Source: “Social Isolation in America: Changes in Core Discussion Networks over Two Decades.” Miller McPherson Lynn Smith-Lovin, Matthew E. Brashears; American Sociological Review, 2006, VOL. 71 (June:353–375)

The Lerner Group is finalizing the purchase of the Washington Nationals today. To celebrate, they rolled out the red carpet last weekend to re-introduce the team to the nation’s capital.

Attendance is down this year for the Nationals. At 43-56 they’re really not very good. But neither is their stadium. Until 2007, when their new $611 million stadium is completed, they continue to play at RFK.

RFK Stadium is a vastly outmoded relic. The Nationals played their first season there in 2005, and the population of the nation’s capitol was so happy to have a baseball team again that we tolerated the stadium’s shortcomings.

But the 2006 season shows little improvement. In Congo, they can pay bills with cell phones, but at RFK, not a single concession even accepts credit cards. There are a total of 6 ATMs for a stadium that holds 56,000. That’s less than 1 ATM for every 9,000 (potential) fans. A recent survey showed one ATM with 20 people waiting, and the second with more than 30. Let’s hope that PNC Bank won’t be building the bathrooms at the new stadium.

But you can still have a cheap day at the ballpark. The Lerner group introduced $3 outfield tickets. Unfortunately, the efficiency of the Internet still doesn’t apply to the ticketing world. Despite the fact that Major League Baseball acquired Ticketmaster rival Tickets.com in 2005, fees look more like collusion than competition. Once you add the fees to your $3 outfield ticket, the total comes to $9.25. Fees more than tripled the price of the ticket!

Of course, you can save yourself $1.75 not printing the tickets yourself… although MLB wouldn’t recommend it.

Access to potable water remains one of the most enduring problems around the world. Today more than 1 billion people do not have access to improved drinking water sources. This leads to 1.6 million deaths from diarrhea each year, the vast majority occurring in children younger than 5.

Multilateral development agencies have been working for decades to improve this situation. Early water projects were well-intentioned engineering gifts. The SCANWATER project, for example, simply installed gas-powered water towers on the highest hills around Cameroon. Because these projects didn’t develop local capacity to train technicians or to collect money for expensive maintenance, most of these water towers rapidly fell into disrepair.

So the key to sustainability is access, simplicity, good design and minimal maintenance. Two promising products are the Playpump and LifeStraw. As you can probably guess from the compound names, these products combine simple existing concepts with water sanitation development goals.

PlayPump is a water pump powered by children who play on a merry-go-round. The pumps are often located near
primary schools to take advantage of abundant free “labor.” Many primary schools in Sub-Saharan Africa have more than 100 students per class, so classes are taught in shifts. During this downtime, children can play on the merry go round ensuring a regular supply of water.

The PlayPump also takes advantage of the demographics that characterize developing nations, where half the population is under the age of fifteen.

In villages where girls are most often assigned the chore of fetching water, the PlayPump has the potential to reduce the distances walked for clean water, increasing the likelihood that girls can go to school.

Playpumps cost about $5000 each and can produce up to 1400 liters (370 gallons) per hour, enough water for 2,500 people. The water towers also can accomodate up to four billboard advertisements, two of which are normally reserved for public health messages, and two for revenue generation that provides for maintenance expenses. Currently a South African company is installing them with some help from the World Bank.

The second product is LifeStraw, which is produced by the Danish company Vestergaard-Frandsen. The LifeStraw is basically a lightweight handheld filtration device that can be worn around the neck. Any time someone need a sip of water, they can use this device to automatically filter out contaminants. The LifeStraw doesn’t require any spare parts, and it lasts for about one year or 700 liters. They retail in the developing world for $6, or about 1.6 cents per day. The company that produces LifeStraw has ambitious sales goals. The creator, Torben Vestergaard-Frandsen, said that, “We will be disappointed, if we do not sell at least 10 million LifeStraw a year.”

At less than a cent per liter of water filtered, LifeStraw is competitive with other water filtration systems in the developing world. That cost should come down as they ramp up production and realize economies of scale.

And lest you get the idea of ordering a LifeStraw for your homeland security kit or for camping, it’s still being reviewed by the EPA, so it’s not yet available in the U.S. One other caveat: it does not protect against Giardia, a nasty little parasite that Statastico really recommends avoiding.

What other ideas are waiting to be combined into a life-saving innovation? How about an electrical generator powered by soccer players? A playground slide that doubles as solar power? With more than 1 billion people around the world without access to clean water, invention is indeed the mother of necessity.

Sources: Statastic research, WHO, United Nations

The term net neutrality has been the subject of half-page ads in the Washington Post, bumper stickers, even ironic t-shirts. Unfortunately, all of the advertising, partisanship, and hipsters may be obscuring the importance of a difficult debate about the evolution of the Internet. If the father and grandfather of the Internet can’t agree, what can the rest of us do?

Let’s try to understand the term net neutrality. When a consumer wants a good, service or information from the Internet, they surf an almost infinite number of web sites. Here’s the only catch: in order for a consumer to have access, they have to pay for the connection. In return consumers have equal access to all web sites.

But some broadband providers have started complaining that not content is alike. The consumer may be requesting enormous amount of data in a streaming movie, or a few 1s and 0s in an email message. So the broadband providers want to start charging the content producers for their bandwidth usage. Sure, the producers don’t have to pay these tolls, but if they don’t their competitors’ web sites might load faster.

Content providers assert that they are merely responding to consumers by sending the information they request. Broadband providers claim that with these new fees, they can build even bigger, faster networks that consumers will love.

So the producers of content are actively lobbying Congress to push for what they call “net neutrality.” This so-called neutrality is actually regulatory legislation that would prevent broadband providers from a discriminating against particular companies. It would apply common carrier rules to the Internet, ensuring that all Internet traffic is managed on equal terms, protecting startups that might not be able to compete with bigger, faster web sites.
But wait a second, it’s not just Internet giants such as Google that use an enormous amount of bandwidth, so do newcomers such as youtube.

Let’s say I’m at a startup and our business strategy is to stream movies faster than anyone else. We’ve allocated half our budget to pay Comcast cable for broadband priority. And then a pokey competitor sues. How long would it take the courts to determine what’s fair? Would bad network neutrality legislation stifle innovation more than the status quo? (Just ask Ted Stevens.) Many techies are opposed to net neutrality because they’re worried that the government just wouldn’t move fast enough if there were net neutrality violations.

But if broadband carriers start charging content providers for bandwidth, what’s to prevent them from acting more like monopolistic cable companies? Couldn’t they start packaging Internet “channels” based on which company is bidding the most? Maybe, but not for long. Current broadband providers are still under the supervisory eye of Department of Justice (anti-trust), FCC (content) and FTC (consumer protection).

So it seems to come down to the market of broadband providers. If our goal is consumer choice and innovation, then we need more competition between the carriers. How much is there? Only about 50% of Americans have two or more broadband options.

How does the U.S. compare to the rest of the world? Let’s have a look at the statastic. Even though the U.S. is twelfth in the percentage of the population with broadband connectivity, we do have three competing broadband options: cable, DSL, and satellite. As a nation, we have a healthy broadband competition relative to the rest of the world… even if it doesn’t seem that way in your neck of the woods.

Sources: Statastic research, OECD