<incom> Ethan Zuckerman on FlexGo, the repo man on a microchip

[Geert Lovink]

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.