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June 19, 2006

FlexGo: the repo man on a microchip
By Ethan Zuckerman

http://www.ethanzuckerman.com/blog/?p=848
One of the revolutionary ideas of the last few years in the technology
industry is that the poor are a market. C.K. Prahalad’s "The Fortune at
the Bottom of the Pyramid" has helped businesspeople realize that
people in poor nations have both disposeable income and investment
income. People will buy goods that will better their lives, if the
right goods and the right business models are made available.
Of course, there have always been businesses that sell to the poor.
Short-term lenders, pawnbrokers and check cashers have found a highly
profitable business in providing services to the poor, usually
balancing the (presumed) increased risk of dealing with poor people by
charging extortionate interest rates. Prahalad’s hope is that there’s
money to be made assisting the poor - there’s no doubt that there’s
money being made exploiting the poor.
Which brings us to Microsoft’s recent announcement of FlexGo(TM) "pay
as you go computing". While FlexGo is endorsed by Prahalad in
Microsoft’s press release, it appears to me that it’s far more likely
to be an exploitative than a liberating technology for most users.
Readers of this blog are no doubt aware that I’m interested in
different models for low-cost computing: the One Laptop Per Child
effort, AMD’s 50×15 Personal Internet Communicator, the Simputer, as
well as the adoption of multifunction mobile phones in developing
nations. (Caslon Analytics has a useful article on some paths being
explored - and some abandoned - in the search for an inexpensive
device.) In analyzing the economics of these devices, rather than the
technology behind them, I find it’s useful to think in terms of
analogies. For example, the key insight Iqbal Qadir had in founding
Grameen Phone was the realization that "a phone could be a cow". In
other words, a woman could purchase a phone and generate income from
it, selling phonecalls to her neighbors, using the proceeds to pay the
loan used to buy the phone, and eventually to create a better life for
her children.
Microsoft’s new initiative offers an analogy to explain itself: it’s
like a mobile phone. In the US, we tend to buy mobile phones for a
steep discount off retail price, often paying less than what it costs
to manufacture the handset. But we sign onto two year service
contracts, which have strong penalties for cancellation. Our network
operator is able to offer us a discount on the phone because they’re
guaranteed revenue from the monthly contract.
FlexGo promises the same model with a desktop computer. Purchase the
computer for one half to one third of what it would cost at retail.
You’ll agree either to a subscription agreement with an internet
service provider - after n years of service made via a monthly payment,
you own the machine outright and can change service providers. Or the
machine can be set up to run for a certain number of hours, after which
you must visit a kiosk and purchase a scratch card which buys you more
hours of usage on the computer you (allegedly) own. Purchase 800 hours
worth of usage time and the machine is unlocked.
There’s a reason Microsoft is drawing analogies with mobile phones -
the devices have had a revolutionary, positive effect in the developing
world. Many economists hold up the mobile as evidence that free market
solutions may have a more positive effect than development
interventions in the telecommunications sector. If Microsoft could make
computers affordable through a financial model analagous to that of
mobile phones, surely this is a good thing for the world’s poor?
But Microsoft’s analogy is a dishonest one. Mobiles work very
differently in many developing nations than they do in the US. My
friends in Ghana have bought inexpensive handsets - sometimes a
low-priced new unit, often a used unit imported from Europe - and paid
modest activation fees to buy a SIM card, which gives them a phone
number. When they’ve got disposable income, they purchase minutes,
which let them call out. When they don’t, the phone still accepts
incoming calls. Should they wish to switch operators, they can pay for
another SIM card - some friends keep several SIM cards around so they
can do phone arbitrage, using the right SIM to call a friend who’s on a
particular network at a lower cost than calling across operators.
In other words, a market in used mobiles lets poor people purchase an
asset, something which has resale value as well as utility, then make
micropayments to support usage of the network that supports the device.
Because the device has utility independent of the payments (you can
still recieve calls even if you can’t buy minutes), it is well suited
for poor users… helping explain the fact that 100 million Africans have
obtained mobiles over the past decade.
Here’s a better analogy for FlexGo: rent to own furniture businesses.
In my corner of Massachusetts, which features several pockets of rural
poverty, Rent-A-Center does a thriving business. (There are three
Rent-A-Centers within 30 minutes drive from me. In contrast, there are
two McDonalds and one Starbucks.) If I want a new desktop computer, but
I can’t afford one, Rent-A-Center will take a credit history from me,
verify my identity and location and rent me a computer for a few dozen
dollars a month. If I make payments for n years, I’ll own the machine.
Miss a payment or two and a pair of big guys with a van will show up at
my house and reclaim the machine.
The technical innovation of FlexGo? Microsoft has put the repo man on a
microchip.
If you stop making payments on your FlexGo computer, the machine will
stop performing basic functions, eventually refusing to do anything
until you go purchase more minutes of usage time. (The machines
evidently have a "spare tank" of minutes, so you can save that Excel
spreadsheet before running down to the kiosk.) This "feature" is
apparently baked into the hardware as well as the software - the
information on the site suggests that the machines "include hardware
security technologies that make it inconvenient or costly for an
individual to tamper with the components that meter computer usage." In
other words, it’s probably not as simple as loading Linux on these
suckers and turning off the taxi meter.
Rent-to-own isn’t inherently an exploitative business model. It just
gets practiced that way. Howard Karger’s "Shortchanged" suggests that
rent-to-own stores routinely price furniture and electronics at twice
their retail price. Add in exploitative financing charges, and rent to
own is an extremely bad deal for the consumer. A tell-tale line in the
FlexGo FAQ indicates that Microsoft is aware of this economic history.
In answer to the question, "Under a "pay-as-you-go" computing model,
would a PC cost more than if a customer bought it outright?", the FAQ
author answers:
As with conventional financing, the total cost of a computer bought
under the pay-as-you-go computing model is higher than the cost of a
computer purchased outright. Compared to conventional financing,
pay-as-you-go provides more flexibility since the customer pays for the
PC as he or she uses it, rather than on a fixed payment schedule
determined by the lender. Furthermore, Microsoft® FlexGo™ technology
turns an unsecured asset into a secured asset, permitting lower
interest rates.
What’s really worth noting is the fact that there are no guarantees on
how the revenue model will work. An operator could choose to permit
lower interest rates… or could choose to balance the risk of lots of
folks buying computers and using up the prepaid minutes by making usage
charges so high that a computer ends up being multiple times as
expensive as purchasing a machine outright. But hey, this is just a
hardware and software solution - the business model is up to you, the
operator…
Microsoft has done trials of FlexGo in Brazil and has decided to launch
the product based on success there. The choice of market is hardly a
surprise. FlexGo is not a technology designed for the very poor, like
the One Laptop or Simputer - it’s designed for "BRIC" countries:
Brazil, Russia, India and China. Of these four, Brazil is especially
troublesome to Microsoft, as the government has invested heavily in
Linux and is promoting low cost computing efforts through e-government,
education and culture.
The announcement of FlexGo helps contextualize Bill Gates’s derisive
comments about the One Laptop Per Child initiative. Suggesting that the
poor should "get a decent computer", rather than one designed for use
off the grid by children, Gates may have been signaling his intentions
- poor people should by conventional computers running Microsoft
software… they should just pay for them differently.
My distaste for FlexGo doesn’t mean I think the product is doomed to
failure. I can imagine ISPs finding the technology very attractive in
that it allows them to provide devices to their users much like cable
companies provide receivers to their customers. Personally, I’d never
buy a machine that could be disabled by a third party - the potential
for hacking is unbelievably tempting, and I believe in the Make
principles that encourage people to customize and hack their hardware,
which is the diametric opposite of what technologies like this permit.
No, what pisses me off is the way this is the way Microsoft is
portraying this effort as a major step forward for developing world
computing. They’ve got quotes from several people I respect in the ICT
for development field, as well as from development heavyweights like
the IFC vice-president. But the only technological development here is
a system of hardware and software crippleware, linked to a business
model that has a track record of screwing over the poor. If Microsoft
gave a damn about building affordable machines for the developing
world, they might consider building a less bloated, more stable
operating system, and working on microfinancing initiatives to make
conventional PCs more affordable. FlexGo reads as the development
equivalent of "greenwashing" to me - an initiative guaranteed to grab
headlines, but surprisingly unfriendly to the goals it seeks to
achieve.
Then again, several people much smarter than me seem to think it’s the
cat’s meow. I’m very interested to ask Ashok Jhunjhunwala whether his
enthusiasm for this project means he’ll start working on ways to
low-cost telecommunications products designed for the Indian market
turn themselves off if the villagers who use them can’t make the
payments. Somehow I’m guessing that’s not the top problem to solve on
his research agenda.