The Hunt for Globalization That Works Can companies make money while bridging the digital divide? Maybe. But it won't be easy.
By Cait Murphy

(FORTUNE Magazine) – Chickens don't eat in the dark. That is a fact of avian life. It's also an economic opportunity.

If a farmer can light a chicken coop, his fowl will eat into the evening hours, consuming more and thus growing more quickly. "That means more turnover, and the farmer sells more chickens," notes Steve Cunningham, chief financial officer of E+Co, a Bloomfield, N.J., company that makes early-stage investments in renewable-energy projects--like solar-powered chicken coops--in poor countries. Lighting a coop is hardly a dramatic business innovation, but it can make a big difference to the farmer, allowing him to buy more chickens or more years of schooling for his children.

Can cheap Internet access be similarly transforming? The research director of Hewlett-Packard's India laboratory, Srinivasan Ramani, thinks so. Ramani tells the story of going to Nellikuppam, in the southern state of Tamil Nadu, to check out the workings of roadside Internet kiosks--for-profit businesses that connect people to the web for about 25 cents an hour. There he talked to a young woman, typing away. What was she doing? Chatting to her fiance, who was working in Malaysia. "I was touched by that experience," says the soft-voiced scientist, as he lets his coffee cool in a New York City hotel. "When you see how technology can help, such moments are exciting."

So they are. Now more than a few people are beginning to wonder: Can they also be profitable? C.K. Prahalad, who was born in India and is a professor of business at the University of Michigan, is perhaps the most visible proponent of the view that the globe's poor are a huge--and hugely untapped--market.

The argument goes like this: Picture the world population as a pyramid. At the top (Tier 1) are the rich--people who read FORTUNE, drive cars, take vacations, and shop for fun. Below them are the strivers, the global middle class who can meet their basic needs, know who Shakira is, and maybe even own a CD of Laundry Service. But it's Tier 4, consisting of people making less than $2,000 a year, that most interests Prahalad, who figures that something like four billion people reside at the pyramid's chunky base. (Other estimates put the number of people in Tier 4 as low as two billion; in any case, it's a lot of people.)

Individually, the purchasing power of Tier 4 is limited; don't try to pitch $4 lattes in Nellikuppam. But together it adds up to trillions. And while the poor will no doubt have to live without lattes, their general wants and needs are familiar: securing better lives for their children, getting the best price for their labor, staying healthy, and having fun. Tap into that, Prahalad says, and there is a "Fortune at the Bottom of the Pyramid"--the title of an article he co-wrote with Stuart Hart in strategy + business magazine.

Prahalad speaks to the earnings-conscious manager by arguing that bringing goods and services to the masses will also bring wealth to shareholders. Sales in these virgin markets, he says, will make up for slow growth and dying populations in rich ones. (For more about changing populations see the foldout infographic "Love [And Aging] Italian-Style.") Prahalad also speaks to the corporate conscience, saying that such forays will help spur economic development and promote stability in a dangerously fractured world. "There is a tremendous convergence between the interests of the large company and the interests of poor people," Prahalad told fortune's Brainstorm conference in Aspen, Colo.: a slam-dunk "win-win" for everyone, doing good by doing well, the ultimate vindication of globalization, and all that.

Well, sort of. To be blunt, there is no fortune at the bottom of the pyramid; it's more like pocket change. The World Bank figures that people in low-income nations account for less than 4% of global private consumption; triple that figure, and it still doesn't offer much bounce to corporate earnings. Coke has been operating in Africa for almost 60 years, and the entire continent still brings in only 3% to 4% of its profits. Look at China. In the last 20-plus years, companies have piled into that country in the belief that its one billion people--consumer heaven!--would sustain growth for generations. Instead, it's been a money pit--and China is in much better shape than many other countries whose citizens cluster at the bottom of the pyramid. What about India? The arithmetic is sobering: India's economy needs to about double in size to add $500 billion to GNP; by contrast, America can add the same amount in just two years of slightly below-average growth. In short, there is no low-hanging fruit in Tier 4, ripe for profitable plucking.

Still, a number of global trends give Prahalad's thinking a deeper resonance. As free trade and democracy expand, as the number of desperately poor people shrinks (except, notably, in Africa--see chart), as people continue to move to the cities--the conditions for global commerce improve. At the same time, many multinationals, driven by conscience and the desire to get antiglobalization pests off their backs, have signed on to the idea that they have to do more in poor countries than slurp up profits and spit them out back home in the form of dividends. "Corporate social responsibility" is becoming something more than a backwater department useful for stashing the dull nephew of an important shareholder.

The question being asked is not so much whether there's gold in them thar hills but whether the digital economy can be a catalyst to bring the poor in from the economic cold. At first glance, the notion seems silly. After all, only 6% of the world has ever logged on to the Internet; perhaps half has never used a phone. And it's not obvious why, given a chance, that a family making $5 a day would use its limited income to do either.

But step back and think about it. The Internet and the phone are simply networks that amplify the gossip by the village well. All they do, fundamentally, is to communicate information--and information is a powerful source of economic leverage. Think of a villager in a remote area whose only way of knowing what's going on at the nearest market is by taking the day off and walking there. In such a place, middlemen can set prices that farmers and fishermen cannot afford to challenge. But if producers can pick up a phone and call wholesalers and retailers, they can make better deals. By breaching the isolation of the very poor, information and communications technologies can remove one of the biggest (yet least visible) barriers to their emergence.

That is the key idea behind the Simputer. Created by four Indian scientists and scheduled to go on the market in early 2003, the Simputer is a handheld device with a simple touchscreen. It uses icons and can respond aloud in a number of Indian languages, allowing illiterate people access. The Simputer will sell for about $200, far more than most Indians can afford, but users will be able to buy a Smartcard for a dollar or two to rent time. The Simputer is programmed for a variety of basic uses--to consult a physician, compare commodity prices, do banking, check bus schedules, apply for government programs--or e-mail a boyfriend in Malaysia. "If we deliver the solution we hope to deliver, there is a need across the world," says CEO Swami Manohar. In that case, the Simputer could make money for its owners, as well as connect its users to the market.

There are already a few real-world examples of companies bringing technology to the poor and at the same time creating modestly profitable markets where none had existed. What these entrepreneurs have learned (and what consumer products companies learned before them) is that to reach the bottom of the pyramid, business can't do business as usual. A few lessons:

--Think of a product as a cow. This was the insight that Iqbal Quadir, an investment banker, had in mind when he proposed the Village Phone program in his homeland of Bangladesh. Just as a cow produces income for the family that owns it, he mused, why couldn't a cellphone?

Here's how it works: Grameen Bank, which makes small loans to the poor, finds a villager willing and able to take out a loan of about $245 to buy a cellphone. She agrees to pay back the loan over two years (almost all the recipients are women). Grameen Phone charges this village operator the bulk rate; she charges twice that to people who use the phone. Out of the profit, she repays the loan and keeps the difference--about $2 a day on average. It may not sound like much, but according to the UN, three-quarters of Bangladeshis make less than that.

Grameen Phone is a subsidiary of Grameen Telecom, most of whose revenues and profits come from the cities, but the average Village Phone bill, at more than $100 a month, is double the average urban one. The first phone call was made in 1997; there are now 20,000 Village Phones in operation, putting a phone within reach for the first time to perhaps 40 million Bangladeshis. What do they use it for? To check prices, to set up appointments with doctors, to talk to relatives working overseas, as millions do. The company says that the Village Phone system makes money but won't say how much. "We are not doing charity," says Ola Ree, who heads the Bangladesh operations of Telenor, the 51% owner of Grameen Telecom. "It is definitely a commercial success--in fact a star in our portfolio."

--It takes a village, not an individual. Or at least a group of individuals: Poor people, by definition, don't have much money, so you need to get them together to have a hope of making a rupee, peso, dollar, real, or yuan. The key to Citibank's Suvidha accounts in India, which can be opened with as little as $20, is the "bulk sourcing" of customers. Citibank gets most of its Suvidha accounts by offering a banking package for all of a company's employees--from watchman to owner. Suvidha customers are served through ATMs and the phone, cutting overhead costs. In Bangalore, where Citibank first tested the idea in 1998, there are 250,000 customers and only one branch. The Bangalore operation is already paying off, and Delhi and Mumbai are turning in operating profits after just two years.

New York Life is trying a similar strategy. Required under the terms of its license in India to sell policies to the rural and disadvantaged, the company found that it doesn't pay to sell $2-a-year policies (with a payout of about $200) one by one. So it has turned its attention to tapping into India's rich network of self-help and civic groups, selling to institutions like fishermen's co-ops. Eventually it wants to sign up whole villages by selling in bulk to town councils.

--Go local. Avon's system of direct sales--women selling to their neighbors--is a low-cost yet powerful form of market research. Global brands account for 70% of sales, and Avon adapts products to make them affordable by altering the packaging or reducing the size.

--Patience, patience, patience. It's hard to find a place you can't get a Coke, and that's because it won't give up on a market. "We want to be everywhere," sums up Coke's Africa president, Alex Cummings, "and will be there forever." In environments like today's Zimbabwe, where hyperinflation is gutting profits, it is building volume instead. Touted on a Time cover as long ago as 1950 as a world brand, Coke has turned ubiquity into profit by using local inputs and distribution; offering a break on the price of the formula to operations in poor countries; and reducing recurring costs, like packaging (Coke uses returnable glass bottles in most poor markets, for example). Mainly, though, Coke can wring profits out of places like Central Asia because it hangs in there.

--Go small. Hindustan Lever, the Indian consumer goods company 51% owned by Unilever, knew that many Indians could not afford to buy a big bottle of shampoo--a product typically used only on special occasions anyway. So it created single-use packets (in three sizes, according to hair length) that go for a few cents--and now sells 4.5 billion of them a year.

--Solve a problem. Paul Meyer had a solution: Use the phone to spread information. Peru's Ministry of Health had a problem: It didn't have a grip on what was happening out in the boondocks. The Internet was not the answer, since hardly anyone in rural Peru has access to it, but even remote villages had a phone or two to work with. Enter Voxiva, the company Meyer founded in March 2001 to provide voice and data services over the phone.

Doctors use an 800 number to connect to a Voxiva server, hosted by Telefonica, Latin America's biggest phone company. Using a password and account number, they log in; then they can access voicemail, report outbreaks of disease, or give details about a case. That information is stored in a database that is accessible through the Internet to the authorities, who no longer have to wait days or weeks to receive reports of a cholera outbreak. The application worked well enough for Voxiva to provide a similar service to a private-sector bank in Peru. The company has also contracted with U.S. government agencies to collect health information from doctors, school nurses, and blood banks. Meyer, a former Clinton speechwriter, expects Voxiva to turn an operating profit by the end of 2003, and venture capitalists are circling. "We are creating applications that take advantage of the 2.5 billion phones in the world and that drive traffic to operators," he says. "That is a compelling value proposition to carriers."

Voxiva is not alone. Hundreds of projects are being tested as nongovernmental organizations (NGOs), governments, and businesses tinker with ways to bridge what is sometimes called, preciously, the "digital provide." (Check out for examples.) The "NGOs are the proxy experimenters," says Prahalad. The demonstration projects matter because without proof that a concept has been tested, companies seem perfectly willing to leave these markets alone. "If you look at U.S. and European multinationals, yes, they sell things in developing countries," notes Allen Hammond, founder and director of the Digital Dividend project at the World Resources Institute, "but it's still not really the bottom of the pyramid."

The tech company that's come closest to doing so is Hewlett-Packard. The maker of printers and PCs has a business unit, called e-Inclusion, which is devoted to building markets among the poor. At the HP lab in India, for example, 16 researchers are looking into things like speech interfaces for the Internet, solar applications, and cheap devices that can connect with the web. HP made e-Inclusion a business venture rather than a philanthropic one because it believes only systems that can sustain themselves economically can address the scale of the need--and in that scale is a business opportunity.

Right now, this is still a big idea with a small footprint. Two test projects to build a cost-effective IT infrastructure, known as i-Communities, are just getting started--one in Kuppam in the southern Indian state of Andhra Pradesh, the other in Mogalakwena, in South Africa's Limpopo province. Both areas are geographically close to existing HP operations and are home to eager local governments. The idea is to get to know a place intimately and then to use that local knowledge to build a business.

Why bother? Deborah Dunn, HP's senior vice president of e-Inclusion and Community Engagement, sees two kinds of payback. In direct terms, HP wants to develop the kinds of services people need and are willing to pay for; downloading government forms is a big hit in India, for example. If it can figure out what applications work in one place in rural India, it stands a good chance of replicating it in thousands of others, accounting for what she confidently predicts will be "billions" in sales five years from now. Indirectly, it's worth it to build the HP brand, learn the business, and develop relationships. "If you are only looking at the next quarter, you're never going to invest in this stuff," says Dunn, "but we think there is a market out there."

In the end, though, reaching the Tier 4 market requires more than money and good intentions. There has to be something to build on. In the case of Bangladesh, a well-established micro-lending program and the density of the rural population were crucial to Grameen Phone's success. For Voxiva, it was the national phone network. HP was drawn to Mogalakwena in part because a teacher training college--and a lot of unemployed teachers--provided a human foundation. In Brazil e-commerce has bloomed because privatization opened up the telecom sector. India's skilled IT workers and personal freedom provide a means of entry.

All of that raises a big issue. What about countries that lack even such modest endowments as these? The United Nations is enthusiastic about an initiative that links multinationals with the world's poorest countries. Each company in effect adopts a specific country, figuring out a business opportunity it agrees to pursue there. When FORTUNE asked, "Who gets Sierra Leone?" the pause was eloquent. The fact is, truly submerged states like Sierra Leone are so far off the radar screen that just being considered part of the digital divide would be progress. The 49 least-developed countries account for 0.5% of foreign direct investment--and there is good reason for that. Some places don't receive any investment because no rational company could, in good faith to its employees and shareholders, send its money there.

Sam Pitroda has spent most of the past 20 years in the telecom trenches. In the 1980s he was head of telecoms in India; now he is CEO of WorldTel, which was founded in 1996 by a consortium of multinationals as a commercial venture to bring telecom services to the poor. WorldTel has operations in more than a dozen countries, from ones in East Africa to Mexico to Azerbaijan. "I wouldn't say we have had terrific success," says Pitroda, in an unmistakably weary tone. "We could have done a lot more, but it's just very difficult to bring investors and host countries together on the same platform. Too often countries are all hung up on existing rules and processes and procedures."

What that means is that while there is some money to be made at the bottom of the pyramid, it won't happen everywhere. And making a fortune is not a reasonable goal. But that doesn't justify spurning the market either, particularly in an era when the reputation of global business is looking so shabby. If you can make a bit of money and at the same time help a Peruvian doctor stop cholera from spreading, a Bangladeshi woman start a business, or a Chinese farmer light his chicken coop, well, that's a payoff of a different order.