Cover Story

Value-added services boom

Telcos are resorting to value-additions to push up sagging ARPU figures. 2006 was a watershed year for this trend and it is expected to sustain and grow in 2007. By Dominic K

It was on August 23, 1995, that mobile telephones started ringing in one of the most unexpected place in India, namely, Calcutta as it was known then and Kolkata today. A decade and a bit later, India is one of the leading markets when it comes to mobile phone usage. It is ironic when we take into account the fact that in the first 20 months after the introduction of cellular telephony, Indian telcos could not add 200,000 customers. In those days the average rate of cellular airtime was about Rs 16.40 per minute and the mobile to landline rate double that at Rs 32.80. Mobile phone handsets used to set you back by upwards of Rs 20,000 at that time. Today, India is adding thousands of customers every day. The average rate is Rs 0.40; there are handsets available for Rs 1,100, though many taxi and auto drivers in Mumbai buy camera-fitted phones that cost about Rs 6,000.

Mobile phones have moved beyond their fundamental role of communications and have graduated to become an extension of the persona of the user. It is heartening to observe a fruit seller talking on a cell phone while riding on a bullock cart. This simply goes to show the level of mobile phone penetration in India. The trend has shifted and users buy mobile phones not just to be in touch, but to express themselves, their attitude, feelings, interests and personality. Customers continuously want more from their phone.

Cellular phones are more than communication devices. They are now widely used to play games, read news headlines, surf the Internet, keep a tab on astrology, and listen and compose music, make others listen to your music collection, or check your bank balance.

There exists a vast world beyond voice that needs to be explored and tapped by the cellular industry. Spoilt by choice and options, mobile phone subscribers are in many ways beginning to choose their operators on the basis of the Value Added Services (VAS) that they offer. The increased importance of VAS has also made content developers burn midnight oil to come up with better and newer concepts and services.

All about VAS

Mobile VAS constitutes a range of voice, messaging and data applications which utilise the infrastructure of a telecom network operator to provide enhanced services to wireless consumers. These could be standalone applications that provide a specific convenience or service, or could be combined with content to create another product or service for wireless consumption. VAS is offered on multiple platforms such as text or SMS, voice and WAP enabled.

Amit Zaveri, COO, EnableM cites two specific reasons such as, the high penetration of mobiles in India, its near omnipresence especially in cities and growing numbers in smaller cities, and the possibility of offering different genres of content such as news, entertainment, sports, movies, utility applications on multiple media.

From a telecom operator’s point of view the key reasons for a significant interest in VAS include factors such as augmentation of revenues from customers. In most markets globally the Average revenue Per User (ARPU) is moving south and it is imperative from a profitability perspective that carriers introduce VAS to drive their top line and bottom line.

Given the high penetration levels in most markets, one of the biggest threats for carriers today is customer churn. As carriers compete in their respective markets to retain existing customers, they offer a combination of attractive pricing and services. VAS enables the operator to effectively differentiate itself vis-à-vis the competition and position itself as a richer service or perhaps even as an aspirational brand. This in turn creates a mental and an emotional stickiness resulting in customer retention.

Finally the technology evolution as Abraham Punnoose, Director - Marketing & Business Development, Roamware informs, “The availability of GPRS, Edge, 3G, etc provide operators a much richer infrastructure empowering them with the technology muscle to do more. Improved bandwidth especially in the data service area has enabled significant ease of content download. This has given way to opportunities for service creation to operators, which did not exist in the pre-GPRS era.”

The mobile VAS industry

According to survey conducted by IAMAI and the eTechnology Group of IMRB, the mobile VAS industry in India was worth Rs. 2,850 crore at the end of 2006 and is estimated to grow at 60 percent to touch Rs. 4,560 crores by end 2007.

This space is currently dominated by entertainment services and comprises of P2P SMS at Rs 1,140 crore, ringtones at Rs. 1,026 crore, P2P & A2P at Rs 428 crore; Games & Data at Rs. 171 crore and Others (MMS etc) at Rs 86 crore. Thus the Mobile VAS industry in India (excluding the telco’s share) is currently 24 percent of a Rs. 2,850 crore market (Rs. 684 crore).

2006 was clearly a year when the VAS space experienced a significant surge, and today VAS revenues are estimated to be in the range of 12 to 13 percent of carrier revenues. A simple service such as the ring back tone (play the music of your choice for callers) is generating a top line of over 80 to 90 million dollars. Given the viral impact of VAS, a critical mass of users for a particular VAS service has a positive cascading impact on those users who aren’t using the service yet.

Zaveri, says, “We saw some interesting action in 2006 where aggregators collaborated with handset manufacturers to provide pre-embedded applications like Yahoo Go on all N-series phones.” He adds “This year we are expecting a huge surge in numbers, primarily fuelled by the factors mentioned above. We are also expecting greater consolidation in the telecom segment—Vodafone stepping into the market is just the first step. Also some very strong players are emerging on the content side and users are also willing to explore a greater variety of content. That makes the market a lot more interesting, but highly competitive as well.”

“Given the focus of the carriers, vendor community, media companies and the evolving customer demand for enhanced services, VAS contributions have the potential to move into the 16 to 18 percent range which translates to a growth of over 25 percent in revenue terms for the industry this year,” adds Punnoose

Hurdles and hiccups

The challenges emanate from the fact that this industry for all intents and purposes is not more than three to four years old and the rules of the game are still evolving. Secondly, most companies operating in this space are relatively small. Some specific issues that stare you in the face include revenue sharing between the operators and Mobile VAS companies. Currently it is unfavourable to the latter unlike in other economies where mobile VAS is popular such as Japan, China and Europe. A more equitable revenue share in the long term would lead to lower costs for end consumers Dr Subho Ray, President, Internet and Mobile Association of India informs, “There are also the issues relating to commonly agreed MIS and reconciliation process that delay payments from the operators to mobile VAS companies. Most VAS companies are small. A more timely system of payments would mean that many more smaller new companies would come to this space with more innovative ideas. Intellectual property rights or IPR hold another key issue that needs serious amendments from the law and enforcement agencies.”

Some of the other challenges include parameters such as the type of handsets that people use and literacy levels in the new areas of mobile penetration. Since rural areas are going to drive the next round of growth, pricing and packaging for non-metro and rural markets and long term and stable policies by the government are important.

Punnoose feels that, “Data not being offered as a default service is certainly one of the biggest challenges in the adoption of VAS. In most markets, GPRS is offered as a default service with transaction and event based charges as is the case with voice minutes. Effective and successful marketing of a service is always among the top challenges for an operator.”

He adds, “Operators are launching multiple VAS every quarter and promotion of these requires marketing dollars. Given that many of these services are not successful on an ongoing basis, a barrier is created for the launch of new services. Operators need to identify a model that minimises the risk in launching new services. One of the key strategies in doing that could be an ad-supported model.”

It is true that VAS often requires integration with core networks and messaging infrastructure which entails significant costs, resources and risks for carriers. Working with strategic application providers who provide an integrated platform with an application layer enables carriers to shorten deployment cycles, provides simplistic network integration and helps in the overall reduction of effort and costs in VAS deployment will definitely pay dividends to players in this niche market segment.

Zaveri adds, “GPRS connectivity is still poor.  There are issues pertaining to both the handset capability as well as operator side constraints. Also many users don’t know how to access GPRS. The other key issue that’s needs to be addressed urgently is the absence of a retail distribution channel. VAS revenues accrue only to the operator, so while the operator is interested in pushing VAS, the retailer is more focused on selling connections.”

Making that change

The key drivers are not limited to telecom operators. India has maintained its position as the second-fastest growing major economy after China, as rising consumer and government spending taking place. Consumption and infrastructure spending are driving the growth. This booming economy has created job opportunities and increased the spending power of an average Indian. This has resulted in higher disposable incomes and faster acceptance of new technologies with a willingness to spend for them.

There is now a critical mass of users in the Indian mobile telephony market who are experienced mobile users. These users are comfortable in using their phones and want to exercise the option of doing more on them beyond basic voice applications. The first phase of growth for VAS has come in from these converts; and these users will continue to drive the market and evolve into more advanced applications. At the same time, basic VAS applications will also continue to appeal to the new mobility category initiates.

Unlocking the potential

India is a market with unique challenges for carriers and vendors. As the market expands the pressure on ARPU will only become more severe. The VAS survey report informs that while the mobile VAS space is set to grow rapidly, all the stakeholders will have to work together and create a self-sustaining ecosystem for this growth to sustain. Similarly it will take a joint effort of all concerned to address significant roadblocks and thus unlock the true potential of Mobile VAS in India.

“The future of VAS in India is quite bright,” says Zaveri. “The customer is also realising that the mobile phone can be used as a tool for a lot of tasks. Also, operators are now focusing in a big way on generating and marketing VAS. On the other hand, the falling price of hi-tech handsets is clearly aiding further growth.”

Greater rationality in revenue sharing between telcos and content developers is an area to be worked on; ensuring copyright protection, developing quality content which goes beyond Bollywood and cricket and having a focused WAP strategy are all things that need to be done. While pure entertainment service would continue to appeal to the younger consumers, the overall focus for mobile VAS will shift to utility-based services such as location information and mobile transactions. Once security concerns are addressed mobile transactions will slowly but surely have a good potential in India.

States Punnoose, “We believe that an ad-supported model will provide the perfect solution for a market like India enabling operators and vendors to provide a host of services without the challenge of achieving success and profitability for every service.”

The ad supported model works on the impression model, so the natural advantage of services being available to a larger segment means more eyeballs or impressions for the marketer and more revenues for the carriers and vendors.

In addition, given the compelling pricing of such a model it becomes an advantage for the end customer and quickly creates a critical mass of end users which has a positive cascading effect on the user base at large. Effective integration of adverts into wireless services would means enhanced quality of services at lower costs supported by an alternate revenue model providing a win-win scenario for the customers and the industry at large.