Myth 4: There’s a fortune at the bottom of the pyramid.

In which of the following businesses does Google make a profit…?

     a)      Search
     b)      YouTube
     c)      Maps

If you are a typical Internet user, Google Maps and YouTube are probably not far behind Google Search in their value to you. And, if you’re under 20, there’s a good chance YouTube is among the most frequent sites you visit [i]. With all this usage, and so much value to consumers, you’d imagine that Google is raking in the revenue.

But, Google makes almost all of its revenue from Search. They like to say that their revenue is from advertising, which is true, but it’s mostly advertising on Search. Apart from Search, analysts believe that Google is losing money on YouTube [ii], and probably for Maps, as well. (No one but the folks at Google knows for sure, but the financial analysis and circumstantial evidence is compelling [iii].) In any case, Google isn’t trumpeting their profitability.

Why does the Jester care about Google making a profit? Why should international development care? Well, because if Google – sometimes hailed as the world’s smartest company – can’t break even on products that people love, then there’s not a lot of hope for the rest of us to extract revenue from the world’s poorest people for things they’re not even sure they want (see Myth 3).

Unfortunately, another myth – the myth that there is a “fortune at the bottom of the pyramid” – has caught on wildly in development, and for now it shows no signs of subsiding. People have been taken in by the smooth rhetoric of C. K. Prahalad and gangs of me-too business professors, eager to demonstrate their dubious relevance to the problem of poverty. Even non-profits with good successes behind them seem to have swallowed this nonsense, and have begun a hunt for more profit-oriented solutions. Let’s examine this rhetoric, which the Jester calls the “BOP fallacy.” Like Swiss cheese, it’s full of holes.

First, the claim is that non-private organizations – i.e., governments, non-profit s, and multilaterals – haven’t achieved much in development. Now, on the one hand, this might be true, because the record of development itself is bleak, as William Easterly has noted extensively [iv]. But, the alternative without non-private investments in global development would be far worse. In most countries, the vast majority of education and healthcare costs are taken on by governments – and efforts to privatize these industries have had a poor record. Next, whatever you may believe of the eventual value of the Green Revolution in Asia, over two decades, it flipped countries like India from net importers of food to net exporters. Much of the research and implementation of the Green Revolution was funded in great part by large non-profits like the Rockefeller Foundation, by multilaterals like the World Bank, and India’s own government. And, what about smallpox, still the only human disease to have been systematically eradicated? The credit goes to the World Health Organization and national governments all over the world.

Second, the BOP fallacy says that non-private organizations can’t sustain themselves financially. This is another ridiculous claim. Foundations like the Ford Foundation and the Rockefeller Foundation were established a hundred years ago, and not only have their coffers not shrunk, they’ve grown over time, with ups and downs due to investment markets. Organizations like the International Red Cross have been around for even longer, and they subsist largely on private donations. In fact, non-profits are amazingly good at sustaining themselves (in some cases, the Jester would even say, too good – once established, non-profits, like most other organizations, want to preserve themselves; no one wants to be out of a job).  

Third, and based on these first two fallacious points, the BOP storyline concludes that only for-profit initiatives can deliver the world of poverty. But, Prahalad himself struggled to find real exemplars of for-profit initiatives to make his point. His book is full of questionable examples. The e-Choupal village information centers are a cost center for ITC, and while they fan the flames of the PR they get from it, the number of centers has remained at 6500 in the six years that I’ve known of them. (Richa Kumar’s financial sensitivity analysis shows that at best, they are just barely breaking even – and she was being kind[v]. In 2004, when I went to visit an e-Choupal center, the sanchalak proudly showed me a PC gathering dust.) The Jaipur Foot, a $20 prosthesis, is given away free by the non-profit society who developed them in India. The Jester believes it’s a great program, but he’s not sure how that story fits into a book subtitled “Eradicating Poverty through Profits.” ICICI Bank has been one of the most persistent in trying to make inroads into poor, rural markets, but as of 2007, they have quietly, but dramatically, curtailed their activities in this area. Most telling is the transfer of Nachiket Mor, who energetically led ICICI’s rural banking initiatives as an executive, to president of the ICICI Foundation for Inclusive Growth. Why a foundation, if he could have made ICICI a fortune while inclusively providing growth opportunities for the poor? (One of the very few credible cases in Prahalad’s book of a self-sustaining organization doing good is the Aravind Eye Hospital, but it would be wrong to suggest they are making anything resembling a “fortune.” In fact, their social impact could be credited to the fact that they are focused primarily on ending blindness and not at all on making a fortune.)

If anyone is making a fortune with the BOP, it’s Prahalad and self-styled BOP consultants. The Jester guesses that BOP conferences outnumber BOP successes, 100 to 1. They make their money by charging gullible companies and serial entrepreneurs the corporate rate. It turns out you can make a fortune off of clueless corporations.

The reality is that it costs a tremendous amount to do business with very poor communities. Poor people live in communities that are harder to reach – they’re less likely to be on a paved road; they often don’t have fixed addresses; in rural areas, they’re more geographically dispersed. Systems that are well-greased for capitalism in rich societies are absent or full of friction in poor communities – identification, bank accounts, credit reports, and so on. And, often, human capital and institutional support is lacking. It’s not trivial to remove these frictions one at a time just with a tweaked business model. As most formal banks in India will tell you, the poverty premium is very real. The last thing you want is to have to set up a branch in every village, with a human teller, so that poor village residents can line up to take 15 minutes each making deposits and withdrawals of $2-3 dollars. Prahalad acknowledges this as the “poverty premium,” but as a stalwart business-school buccaneer, he claims that this difficulty is a huge opportunity. He’s wrong. The poverty premium exists for systematic reasons that are inextricable from poverty. Any business that is really “for profit” will quickly swim upstream where there is less market friction and more disposable income. And any businesses really in it to help, will quickly run into Tracy Kidder’s “mountains beyond mountains” [vi]. In fact, the Jester recommends a change of title for Prahalad, who could have gotten it right with one of two slight tweaks:

  • The Fortune at the Bottom of the Pyramid: Eradicating Poverty and Discovering that Compassion is a Greater Treasure than Profits, or perhaps,
  • The Fortune at the Middle of the Pyramid: Eradicating Middle-Class Disposable Income Through Profits.

Combine Myth 3 and Myth 4, and the conclusion you come to is that it is very, very difficult to devise a workable for-profit business model, especially if it’s poor people who are expected to pick up the bill for things that outsiders believe they “need.”

Having said all of the above, the Jester would like to issue some clarification, because his outlandish statements are prone to misinterpretation.

First, everything’s worth a shot. There are, to be sure, thriving businesses whose products actually benefit poor consumers. Soap for handwashing is one. Mobile phone voice calls are another. Er, maybe that’s it. But, except for mobile voice calls, these opportunities don’t add up to the kind of fortune that would excite the global business community. In fact, the story these days in the Bay Area is that venture capitalists don’t want to touch social enterprises – they’ve discovered there’s no money there.

Second, business as a whole, of course, is undoubtedly a driver of national economic development. If you could convince rich serial entrepreneurs to move to sub-Saharan Africa and start locally relevant businesses there, hiring local people, that would be worthwhile. Or, better yet, they could mentor local entrepreneurs to expand their own businesses. Geek Corps is one effort along these lines. The Jester believes in mentoring and building capacity on site.

So, to conclude, if you find that you’re just short of breaking even in an ICT4D project, especially after three years of tweaking and alongside 20 other smart, determined people who are trying something similar, you might want to consider the hard truth: Sometimes, there’s just no business model.

And, that’s why there are governments and non-profits.

[i] See, for example, Whitney, L. (2009) Kids’ search terms: sex, games, rock ‘n’ roll. CNET News, Aug. 11, 2009., retrieved Apr. 3, 2010. Bausch, S. (2006) YouTube US web traffic grows 75 percent week over week, according to Nielsen/NetRatings. Nielsen/NetRatings, Jul. 21, 2006., retrieved Apr. 3, 2010.
[ii]Analysts appear to agree that Google isn’t making money on YouTube. For a summary, see… Silversmith, D. (2009) Google losing up to $1.65m a day on YouTube. Internet Evolution, Apr. 14, 2009., retrieved Apr. 3, 2010.
[iii]Analysis similar to those for YouTube don’t seem to have occurred for Google Maps, but there is a lot of circumstantial evidence that Google is struggling to earn revenue there, too: Lenssen, P. (2009) Which Google apps make money? Google Blogoscoped, Jan. 7, 2009., retrieved Apr. 3, 2010. Darlin, D. (2005) A journey to a thousand maps begins with an open code. The New York Times, Oct. 20, 2005., retrieved Apr. 3, 2010.
[iv] See, for example: Easterly, W. (2001) The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. MIT Press.
[v] Kumar, R. 2004. eChoupals: A Study on the Financial Sustainability of Village Internet Centers in Rural Madhya Pradesh. Inf. Technol. Int. Dev. 2, 1 (Sep. 2004), 45-74., retreived Apr. 8, 2010.
[vi] Kidder, T. (2003). Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, A Man Who Would Cure the World, New York: Random House.

4 Responses to “Myth 4: There’s a fortune at the bottom of the pyramid.”

  1. Kevin Donovan Says:

    I share your skepticism for Prahalad’s thesis, but I don’t think he would argue some of the points you suggest.

    Most notably, the foundational research for the Green Revolution and the eradication of small pox are classic market failures – basic research and an orphan technology. Few would argue for-profit firms will address those.

    That said, commerce is, as you note in your first tweaked title, almost certainly part of the answer. Remember, like Rockefeller and Ford, Monsanto and its ilk have been leaders in increasing agricultural productivity (even if it means farmer dependence and mono-cropping).

  2. J the Teleporter Says:

    I really liked this post. I also think that we need more non-private orgs, not less — and in fact, smarter ones that really understand how they better empower their local-community orgs to do the work they’re doing in a better way. If these are our best chance at making things better, then we need to figure out how to make this process better, rather than motivate ourselves through a fairy-tale fortune waiting for us at the bottom of the pyramid.

    Here’s a thought — non profits are doing thankless work, with most of their staff underpaid and overworked. Of course, there’s a ‘save the world’ premium you get when you work with them, but the hard work associated with that life may make it unsustainable for anyone other than the most motivated. The pay is not great, the hours are tough, and the travel is a killer — and the living arrangements during travel aren’t very appealing for most people.

    Why is it like this? Well, their donors try to maximize the bang-per-buck, and so they favor cost-effective plans that minimize wasteful expenditure. But we know from the for-profit world that you have to really take care of your employees, and pay them lots, and make their job as comfortable as possible, if you want to get the best output from them. James Davis (UC Santa Cruz) made an awesome related comment about how non-profits love showing off how little of their budget goes towards administrative overhead (the closer to 0 that number is, the more awesome the non profit), although we know from the for-profit world that the best way of organizing institutions isn’t to minimize administrative overhead — that’s just an outcome of the crappy way in which donors judge nonprofits to donate to.

    I’m not saying that nonprofits should be run like forprofits. I’m just saying that a happy employee is a more productive employee, and there’s no place where it says that if you want to work in a community-based public health nonprofit, your work life has to be difficult. If anything, such people should be paid above market (the ‘poor premium’) to do the work they do. How will any of this happen? If donors dare to try to be different, and spend a little more on the non profit projects they fund, in an attempt to make the work more attractive to the people that will end up doing the really hard work that’s required.

    BTW this is based off of my experience working with two community based organizations in Pakistan — and visiting a number of other orgs in Bangladesh and Tanzania. I really believe that a happier NGO is a more productive NGO, and that more $$$ can make people happy — not just by raised salaries, but through comfortable travel arrangements (an air conditioned bus with good shock absorbers would be a welcome luxury — right now, both had buses that broke down one out of 10 trips, one actually caught fire while I was in it), flexible work time (NGO staff travels to the field site so often and has so much work piled up, they’re not able to take care of their own health issues — one staff member had a worsening chronic back condition that she couldn’t take the time out to get checked up), and I’m sure there are a host of other things that could be made better — but each of these items costs money, and in their quest to minimize the dollar spend per person “saved”, these aren’t ever made high priorities.

    Just throwing that idea out there, hoping to start a discussion. Any takers?

  3. BOP神話について « ICT for Development.JP Says:

    [...] BOP神話について 先日、外山健太郎氏というICT4D研究者のお話を聞く機会があった。外山氏の話で興味深かった点は、最近話題のBOPビジネスについては誤解が蔓延っているというもの。外山氏のブログにも、同様のことが書いてある。その話を自分なりに咀嚼してICT4Dに関連させて考えると以下のとおり。 [...]

  4. Anand Manikutty Says:

    Many people have voiced reservations about the Bottom of the Pyramid paradigm, and perhaps it is not very academically rigorous. However, there is value in the approach as I will try to argue below. But before that, think about the following propositions.

    A. Companies develop capabilities. e.g. Tata/Annapurna develops the capability to manufacture salt.
    B. These capabilities are not limited or constricted in some fashion that they cannot be applied to solve social problems. e.g. Annapurna Salt used its technological capabilities to manufature iodized salt which solves the problem of iodine deficiency in many countries.
    C. Since it is the choice of decision-makers within companies as to what to do with the capabilities, corporate decison-makers can *choose* to impact the lives of the poor rather than only chase profits.

    C follows from A and B.

    The book “The Fortune at the Bottom of the Pyramid” is not an academic work. It was never really intended to be really rigorous. It is really a set of case studies intended to illustrate the paradigm. It is true that it was not clearly defined in the book what the “Bottom of the Pyramid” really is. And this has not escaped the attention of academics. Rakesh Khurana at HBS once engaged us in a conversation where he pointed out some of these flaws. In particular, he pointed out the problem of definition. There are multiple definitions within the books, and the definitions contradict each other. However, the multiple definitions serve to loosely identify the target market. There is often a lot of uncertainty in marketing research in any case. There are always biases (self-selection bias, et cetera) that murky the picture in any case. Always, always there is bounded rationality on the part of the decision-makers. So the lack of a precise definition may not dramatically alter the picture.

    In order for you to say that the Bottom of the Pyramid approach is not valid, you would have to show that :
    0. Not all companies will do social good. Some of them will simply fleece people (e.g. middle-class consumers)
    1. companies are so constrained in their operations that they are unable to utilize their capabilities to promote social good.
    2. companies are so organized that it is impossible for them to change their internal mechanisms to align their objectives towards greater corporate social responsibility.

    Showing 0. is trivial. In order to argue against the Bottom of the Pyramid, however, you have to show 1. and 2. But you have not been able to show 1. and 2. Those would be the propositions where you ought to guide your counter-arguments.

    Think about the Annapurna salt case as a reference point. That sufficiently proves Prahalad’s point.

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