FlexGo: the repo man on a microchip

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.

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4 Responses to FlexGo: the repo man on a microchip

  1. Don Marti says:

    I’m not getting how this story is substantially different from the Netpliance i-Opener story.

    http://en.wikipedia.org/wiki/I-Opener

    Even if the license enforcement chip is effective, the owner of a “remotely repo-ed” PC should be able to sell some or all of the hardware: monitor, case, hard drive, processor, or RAM, to someone building conventional machines. So the store will still have to have conventional repo as a backup.

  2. Ntwiga says:

    A question that are not being asked that I think should be if I may Ethan:

    In the countries where the “very poor” are, one can buy a refurbished (read off-lease or end of life corporate hardware that has undergone “planned obsolescence” (yet another mechanism created by the industry to keep product moving but I digress)) for about $100 to $200 all told. This will typically be a PIII machine with maybe 10GB of disk space, 128MB of RAM and no modem, networking or other “complicated abilities”. Sellers of these machines will typically install a bunch of open source apps ontop of Windows to make them usable. (most these machines come with COA licences for Win 98 or Win 2000 allowing the resellers to install a valid copy of Windows on the machine). There will also be a ton of games to entertain the kids, and maybe a DVD player with some cheap speakers if you are very lucky.

    Why, as a buyer, would I pick the Flex Go machine over this considering that maybe 3-4 months of FlexGo payments would have bought this outright?

    This write up has some more info on this.

    The 2nd component of the CATIA conference held in 2004 specifially dealt with avenues of dealing with this issue. Basically an attempt to create homegrown solutions to the African problem.

    I have been sitting on a blog post on this for while, this might be a good time to get it out.

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