VAS in India: yet t0 ev0lve

A host of issues from the business model, too many entrants and lack of innovation have prevented the value added services segment from evolving beyond vanilla SMS and ring tones. By Venkatesh Ganesh

SMS-based services, wallpapers and ring tones continue to hog the lion's share of a VAS provider’s revenues seven years after these services were launched. Logically, in other markets, these services progress to advanced services such as the ones based on information (trading in the markets), commerce (mobile banking), social mobile, productivity-based apps, entertainment (Video on Demand) and location-based services.

According to IAMAI, revenues accruing from VAS have been growing and this market is estimated to be worth Rs. 11,680 crores in 2010. Traditional VAS services such as P2P SMS and Caller Ring Back Tones (CRBT) continue to contribute substantially to these numbers. “Till date VAS has meant ABC (Astrology, Bollywood and Cricket) in India,” said Romal Shetty, Head of Telecom, KPMG in India.

These basic services are large contributors. Traditionally entertainment related VAS has been the growth driver in India, which centered around Bollywood and cricket. However, the stakeholders, are unable to garner higher revenues from VAS due to limitations in technological platform, like inadequate spectrum.

3G's likely impact

As telcos start rolling out 3G on a mass scale across the country, VAS players will see better days. Once 3G becomes a mainstream technology, there will be faster access to content over the Internet on the phone.

“3G is likely to give a significant push to the overall VAS business. As customers get comfortable accessing the mobile Internet through their feature phones, smartphones and tablet devices (iPad from Apple or Galaxy Tab from Samsung), the VAS industry is likely to grow significantly,” said Badri Sanjeevi, COO, Mauj Mobile.

Agreed Nitish Mittersain, CEO of Nazara Technologies, “With 3G, there would be a huge thrust by telecom companies to grow their slice of the data services pie. To put it in perspective, mobile Internet traffic in India was growing at a rate of nearly 300-400% annually in India prior to the 3G launch.”

“Mobile data services consumption in India has increased to 4% of the total Internet usage. The number of subscribers using the mobile Internet has increased by 104% in 2009,” according to Abhishek Chauhan, Senior Consultant, ICT Practice, Frost and Sullivan, South Asia and Middle East.

According to Albert Almeida, COO, Hungama Consumer Business, the majority of the population today is using basic handsets and is consuming this content on text and voice-based services. With 3G there is an area of opportunity with applications, full length videos and better quality gaming for the mobile, which is a vibrant and growing industry.

As more bandwidth becomes available, data services are bound to pick up, reasoned Vishwanath Alluri, Chairman, CEO and founder of IMImobile.

“3G is expected to boost revenues in the short term and, as Mauj is a mobile Internet-focused player, we expect to benefit significantly,” said Sanjeevi.

Chauhan cautioned that the growth of VAS revenue from 3G may not be high, since operators might use a part of the 3G spectrum allotted to decongest existing voice networks. Other analysts shared a similar point of view. “VAS uptake after 3G will be a slow burn,” said Kedar Sohoni, President, Informate Mobile Intelligence. According to Shiv Putcha, Principal Analyst with Ovum's emerging markets practice, VAS services won't have a massive pickup initially but it depends on the operators. “Telcos, after fine tuning their strategy in terms of pricing and content relevance, would see a pick up,” reasoned Kishan Bhat, Manager-Consulting, Zinnov Management Consulting, an advisory firm. With 3G roll outs, the focus on heavy content like video-based and other forms of interactive media on portals should increase.

VAS providers themselves are cautiously optimistic about the way that 3G would play out. Alluri pointed out that, in a price sensitive market like India, 3G might initially need to take the corporate route. Even post 3G rollouts, 2/ 2.5 G applications are going to be important in the short term as over 80% of the subscriber base would still be on 2/2.5 G, pointed out Chauhan.

Business model

In the past, a VAS company would tie up with a telco or a Bollywood production company to offer either SMS of the telcos different offerings or songs and other kinds of downloads. Essentially, the revenue was shared with other stakeholders. Other companies tied up with handset makers like Nokia to develop and port games onto the handset manufacturer’s mobile platform. For every handset sold, which had these games built into it, the company that developed or ported the game received a share of the revenues. Companies like Indiagames and Nazara followed this strategy. “We recently tied up with the mobile gaming division of Electronic Arts to distribute its mobile games in India,” said Mittersain.

In August, Mauj acquired UK-based Mobango, an independent mobile app and user generated content store. “This application store focuses on creating a large distribution platform for free mobile applications to users,” said Sanjeevi. According to him, Mobango has 200,000 downloads a day in India and it is likely to increase significantly with the launch of 3G services. Mobango makes money through its pay per deal business model wherein it creates a platform that users can download from.

Similarly, IMImobile, is powering the 3G experience zone of Aircel built on its DaVinci platform and shares this revenue with the telco. “We pioneered the managed services model over ten years ago,” said Alluri. He went on to add that IMImobile had created a revenue share model, which aligned incentives for revenue growth whilst mitigating risks by minimizing upfront capital expenditure and that this had helped the company to cut a deal with telcos such as MTN, Airtel, Vodafone, Virgin Mobile, Reliance and others. OnMobile, one of the early players in this segment had gone beyond mobile and launched services around music radio in the Asia-Pacific region. In Europe, the company has launched a speech recognition engine with Orange for a retail company. It has 49 million RBT users every month, 35 million phone backup downloads and 10 million on-device portal downloads.

Traditionally, SMS has been the most used VAS in India. By IAMAI's estimates, it contributes approximately 77% of the mobile subscribers and 60% of revenues.

Despite these efforts, the growth in the 2009-2010 was in single digits for the big VAS companies. Revenues of OnMobile grew 8% as compared to 2008-09. IMImobile's topline is $100 million and 60-70% of its revenues come from Europe. Mauj gets the majority of its revenues from exports but Sanjeevi feels that, as 3G penetration in India is expected to increase significantly, the company expects its Indian revenues to increase to 30% overall.

“Indian VAS companies need to innovate and they have to look at additional revenue models apart from the existing one where the operator plays a huge role,” said Bhat. Currently, most of them provide services through telecom companies be it in India or abroad. Companies like Comviva, IMImobile and OnMobile offer the same RBTs, wallpapers, music downloads and other services to countries in Latin America, Europe and parts of Africa.

Analysts question the content that VAS companies provide. “With 3G, the content has to be relevant and compelling,” said Bhat. He added that it should not be an extension of 2G and applications such as healthcare and financial inclusion can further drive the adoption of VAS in India.

According to Putcha, content aggregators have done a decent job so far but they have to keep investing continuously in their platforms and thereby drive usage.

As the VAS industry matures it could see consolidation and companies in a specific domain would become more influential. “Some VAS providers would focus only on gaming, some would focus on RBTs and Bollywood, while newer ones could focus on financial services, healthcare etc.,” said Sohoni. Bhat pointed out that companies have to figure out the number of people in India who will buy content through their credit cards from their kirana stores—content like prepaid cards for Bollywood songs, games etc. Already some baby steps are being taken by Hungama. The company has tied up with Sify to sell prepaid music coupons in Sify cyber cafes.

Revenue sharing

The biggest issue that confronts VAS providers in India is with respect to revenue sharing with the telco. Indian telcos keep 70% of the revenues arising from VAS services. This leaves VAS providers with a small share, albeit of a growing pie. “The revenue share of VAS companies in India has improved marginally during the last couple of years, but it could be better when you consider that telcos in the US sometimes share 70% of the revenues arising from VAS,” said Mittersain. Others like Alluri were not perturbed by the revenue sharing issue. “We have to work with the operators in the final scheme of things and it is in our best interest to do so,” he said.

Moreover, the distribution of VAS services needs to be looked at differently if VAS players have to break the telecom service provider stranglehold. At present, all the content gets routed through the telco but with the RBI's recent directive on financial inclusion that is pushing banks and other financial institutions to provide services like mobile wallet, the scales could be tilted towards the VAS companies. “Once 3G is attractive for the consumer, a handset maker like Nokia with its Ovi store can put these VAS on its app store and that allows a consumer to bypass the telco,” said Bhat.

How it could pan out

Industry watchers opined that there wouldn't be an immediate spike in the uptake of 3G services. They cited operator pricing and lack of compelling content as two factors hampering usage. “It entirely depends on operator pricing; whether they want to have mass adoption or a gradual increase in the subscriber base,” said Bhat. Putcha reasoned that, initially, 3G services would be popular in urban areas due to the cost control being exercised by telecom companies.

However, at the same time, new entrants like Uninor are building their infrastructure for 3G and faster networking technologies. “Telecom companies have one eye on the future in addition to the existing technologies that are in use,” said Stefan Dyckerhoff, Executive Vice President and General Manager, Infrastructure Products, Juniper Networks.

Another thing that is playing out is where the telecom company incorporates VAS as a part of its own business as it becomes lucrative. “What happens to the VAS companies and the software development ecosystem if operators start owning VAS themselves?” asked Putcha. VAS companies are putting on a brave face but as Alluri said, “Everybody wants to jump onto the bandwagon and it makes sense when the stakes are high.” He pointed out that owning the platform becomes the key to success in such a scenario. Already Bharti has its VAS portal and others like Vodafone and RCom have similar portals. Bharti, even has a subsidiary called Comviva (formerly Bharti Telesoft) that entered into a deal with Bharti Airtel for a managed services deal to roll out VAS solutions for Airtel.

Some VAS players remain unperturbed. “Operator portals till, say, three years ago, were the top destinations for mobile Internet in India. Today, none of the operator portals figure in the top 10 mobile Internet destinations in India,” asserted Sanjeevi. “Operators will need to think deeper when it comes to strategies around their portals in the coming years,” said Bhat.

Sanjeevi added that user behavior had changed dramatically in the last two to three years and, over a period of time, operator portals would no longer be the default homepages for the customers, who may make Google or some other popular Web starting point as their default landing Web site on the mobile.

When it comes to e-commerce, operator portals may still be the single biggest destination category, given that an operator is able to use the customer intelligence (regarding the customer’s past history of buying online, balance in prepaid accounts etc.) and intelligent promotion programs to convert these customers into paying customers. However, even this is likely to be challenged given that off-deck marketing of content by content owners is likely to be significant. In these situations, operators simply play the role of a billing pipe, given that the content, customer acquisition, CRM, marketing etc. is taken care of by the VAS player, according to Sanjeevi.

As m-commerce develops, it could emerge as a knight in shining armor for VAS companies. According to IAMAI data, m-commerce is presently confined to a small number of users in India. It is only for the highly evolved mobile users, and currently is targeted more towards the urban market. “M-commerce could be a game changer, especially since there could be newer payment platforms and services,” said Shetty.

Mobile apps have considerable potential and gradually, conventional entertainment VAS is turning into a commodity in the urban market. To provide services that go beyond entertainment and provide utility for the daily lives of consumers, offerings such as Location-based Services (LBS), m-commerce and mobile apps could open up the market and ensure user adoption.

This brings two other entities to the forefront namely the handset maker and the operating system developer. Handset manufacturers and, in particular, operating systems such as Android can influence customer behavior tremendously, averred Sanjeevi. The mobile Internet today is still the domain of 16-35 year old male customers in India. However, industry watchers say that VAS and usability of services can expand this pool dramatically. A simple example is that of BlackBerry Messenger (BBM), which is turning out to be such a popular messaging platform that large sections of college students in India prefer BBM as their way of communicating with friends,” stated Sanjeevi. Similarly, simple touch screen user interfaces will enable more customers to use mobile Internet services easily and intuitively. “It would be interesting to watch the way that handset manufacturers in conjunction with a strong OS and application providers will drive and define user behavior going ahead,” said Putcha.

IVR is another technology that is expected to be one of the leading platforms in the future, especially for rural VAS users. It is estimated that around 14% of VAS users employ this platform and that it accounts for 25% of VAS revenues, according to IAMAI.

Unstructured Supplementary Services Data (USSD) and SIM Application Toolkit (STK) technologies can be used, which can bypass SMS usage and enable interactive data services. STK consists of a set of specialized commands that are programmed in a SIM and define how it is expected to interact with the services residing on the mobile network. At present, these services are used by around 5% of users and form 6% of VAS revenue, according to IAMAI.

However, this trend won't be as smooth as seen in other geographies. The entry of low-cost handsets and Chinese models has posed a fresh challenge. Many of these handsets have their own operating systems and technology unlike that used by branded players such as Nokia. It becomes difficult to create suitable VAS that will run on the wide variety of handsets, pointed out IAMAI.

Globally, India ranks behind China in the number of mobile subscribers. As users start maturing in their mobile usage behavior, there could be a different trend that could shape this industry. Instead of the stakeholders pushing their content on the users, users could pull services or content according to their needs. According to Chauhan, mobile VAS revenues represented 7.2% of the total mobile services revenues in India in 2009 and are expected to touch $5 billion by 2016.

In the grand scheme of things, operators have to make prices attractive, VAS players need to put out relevant content and handset makers and OS makers need to make these services easy to use.

venkatesh.ganesh@expressindia.com