Next Generation Services Now

Up in Arms

Arpita Prem, Voice & Data
August 1, 2008

Mobile VAS players are apprehensive about their revenue sharing ratio with SPs. Also, poor share from SPs is a stumbling block for future innovations

Value added services have matured globally, and, today, form a considerable portion of the total telecom revenue. The focus is now on mobile entertainment and commerce, location-based services, and new and enhanced services in the next generation network (NGN) environment.

Though it is growing at an exciting pace world over, and India is among the top 3 countries for the mobile and Internet VAS industry, the challenge is to retain customers, develop alternate revenue streams, and create a basis for differentiation in a high churn market.

The biggest anomaly in the system is that while the number of companies and the demand for such services is increasing, the revenue model shared between VAS companies and operators leaves a lot to be desired. VAS providers feel that the ratio of revenue share is heavily skewed in favor of telcos, which is not the case in other geographies. The innovation in mobile VAS can only be supported once content providers start getting their share of revenue like in Japan and the UK.

As things stand, mobile VAS or MVAS has emerged as a great opportunity to rescue the industry from declining ARPUs. The future will see service providers shift focus from subscribers base expansion to value added services, as it has more potential.

 

Beyond Subscriber Acquisition

In its infancy, the VAS industry in India lacks proper processes, common benchmarks, and code of practices. Operators, VAS providers, and consumers being the three main stakeholders of this business, need to cooperate and coordinate, to help the industry flourish. However, lack of transparency is becoming a hurdle, as consumers are not aware of the finer points of VAS like pricing, instrument requirements, etc.

People are unaware of VAS because operators are busy with subscriber acquisition and creating a better infrastructure to support growth. They have not focused their efforts so much on VAS. In fact, for some operators, revenue from VAS has decreased.

According to Nitin Patel, VP, Marketing, Telenity, “Telcos' near term outlook seems to be more on acquiring new customers and less on service awareness. The revenue share ratio between telcos and VAS providers in India is 70:30, substantially more skewed in favor of telcos than in other countries.”

But considering the market potential for value added services in the coming years, there is need to harmonize the licensing and regulatory framework for ushering growth in all segments of VAS. Though the demand for VAS is increasing at an exciting pace, it is generally believed that the revenue is not proportionate to the demand.

Debasis Chatterji, director, Operations, Netxcell, says, “The revenue share pattern is very poor so far as VAS players are concerned. Even in a country like Sri Lanka, on an average, VAS companies manage 30-55% revenue share from operators, whereas in India most of the VAS companies get 8-15%.”

It is also believed that operators typically keep the lion's share of revenue for themselves. This is something VAS players consider a stumbling block for future innovations. In countries like China, Thailand, etc more that 80% revenue is shared in favor of VAS providers. But the current level of revenue share restricts the visibility, penetration, and innovations on mobile space in India.

“We need to understand what the real VAS numbers are. Most reports say that it is 10% of operators' revenue. But at the same time, it includes P2P SMS revenue, which is not shared by operators with VAS providers. It also includes some other services like Blackberry, which is not VAS. In that sense VAS may not be that big, and revenue is proportionate,” says Vijay Shekhar Sharma, MD, One97 communications.
“Telcos' near term outlook seems to be more on acquiring new customers and less on service awareness. The revenue share ratio between telcos and VAS providers in India is 70:30, substantially more skewed in favor of telcos than in other countries.”

Revenue sharing with operators depends on the type of VAS offered. Some VAS players are of the opinion that revenue should be market driven, where each player in the value chain gets his share of the pie, based on what value he brings to the table.

Rajesh Jain, MD and founder, Netcore, says, “Mobile operators along with subscribers are at the center of the mobile ecosystem. Mobile operators can only determine revenue share. For the service where subscribers pay, mobile operators have the full prerogative to determine the revenue share. There are opportunities to create new services where revenue is generated from entities other than subscribers, which increases the pie for everyone.”

Keeping this in mind, Trai recently issued a consultation paper on the growth of value added services and regulatory issues. The key issue raised in the consultation paper is the need to bring uniformity or clarity in the licensing conditions of mobile telecom operators/access service providers with regard to provision of value added services. The consultation paper also emphasized the revenue share model in mobile value added services value chain and its transparency.

Over a period of time operators have accepted the role content has and will play in driving the growth of VAS in India.

 

Revenue Strains

The past couple of years have seen numerous players entering the VAS segment, and this has helped existing players to carve a niche for themselves. Presence of more players in the VAS domain has helped to expand the market.

According to prominent leaders in this space, the impact of multitude of new players shows positive signs. And VAS has very positively contributed to their businesses. Entry of new players helps the existing leaders, and ultimately the consumers.

“The entry of new players has not affected our business because we always factor the threats from the new entrants. That is why we are constantly developing new and cutting edge applications to beat competition on one hand, and on the other hand, we are focusing on new markets to increase our top line,” says Debasis Chatterji, director, Operations, NetXcell.

Currently industry estimates suggest that the VAS market will grow at a CAGR of 45% over the next three years, and there is a great demand for content on the mobile platform.

Sharma of One97 Communications agrees that both market and opportunities are large. “The true potential of this business will come to the force once operators' new subscriber acquiring spree nears a plateau, and the focus is on the subscriber who is ready to do more with his device than just calling,” he adds.

With the present spectrum infrastructure in India, operators are facing difficulty in getting proper bandwidth to make services a success. There are numerous challenges in India concerning the rollout of 3G. Also, gaining loyalty from existing subscribers becomes a challenge as the market matures. However, to retain the market share and maintain their position in the market along with new players would be the biggest challenge for existing leader in the wake of increased competition.

Phoneytunes' CEO Taron Mohan says, “With our base built in India over the last 6-7 years in understanding the telco networks and experience of handling these networks from the network interconnect perspective, we do have an edge over most companies coming in. Additionally, we do have a cost advantage over these new entrants with the overall understanding of networks and devices.”

The entry of new players in VAS is not looked upon as a threat by existing leaders, but more as an opportunity to collaborate and form partnership in creating innovative services and value added offerings. Mitra of Canvas M says that they are fully aware of the transient nature of VAS and believes that change is essential for growth.

 

The New & the Established

According to Milind Pathak, co-founder, Buongiorno, “It happens in any industry. As the number of players increase, the market becomes cost competitive. It is the signal of growing from niche product to mass product, and the VAS domain is still evolving in its form.” He adds, “Further, more than undercutting rates, competition is packaging content in different forms for consumers.”

According to Nitin Patel of Telenity, “Increased competition for operators will undercut rates. Telcos will reduce prices to retain customers, bundled services will be major focus, and more user segmented VAS will be provided alongwith better quality of service to the end users.”

While Mohan of Phoneytunes believes that increased competition is leading to undercutting of rates, which is going to hurt everyone, Sharma of One97 communications, thinks that increased competition ideally will not result in decrease of rates, as most of the services will still hold via the operators. “Rate cutting is more prevalent in case of direct to consumer selling where we have seen limited transactions as of now,” says Sharma. But he does add that more competition has in some ways created pressures on VAS providers because some of them have decided to work on lower a revenue share to get a foothold.

Rajesh Jain of Netcore says, “In the existing VAS arena, this is happening because service providers are offering primarily commoditized content, doing arbitrage and trading, with a very limited focus on innovative offerings. The industry needs to evolve because the subscribers now expect much more.”

On the other hand, according to Rahul Pandey, head, Mobile 18, “If we look at the growth of mobile telephony and the surge it has witnessed since the reduction in prices, we can say that VAS will also follow the same path and business will grow exponentially at a lesser price point.”

 

Market Dynamics

Acceptance of VAS by operators has led to a huge shift in operator's focus, and they are working toward increasing the current VAS revenue contribution from 7% to 15-18% over the next three years. Technology would play a crucial role in introducing new applications and innovations in the market. Ad serving, m-commerce, and social networking on mobile are likely to see innovations in the coming days.

Pandey of Mobile 18 says that with the 3G license, there will be major transformations; there will be an array of content on the mobile platform, and dependence on astro, Bollywood, and cricket would decrease, as infotainment content will be in demand. “With new phones coming in and with improving bandwidth, the data market will grow faster,” adds Pandey.

Operators will focus on introducing new services based on user segmentation, retaining customers, and measures to grow revenue. Hopefully, spectrum constraint and delay in 3G roll out would be taken care of in the near future. Voice and data VAS is going to play a very important part, especially after the introduction of 3G. Regional voice content will be the next-gen killer application. Hosted voice exchange will play a big role as far as corporate communication is concerned.

According to Salil Bhargava, CEO, Jump Games, “Gaming is one of the most important evolving trends in India, and the future is very bright. The consumer is getting smarter day-by-day so the content needs to match up. There will be more demand for simple, slick, and easy to play gaming content. Social networking on games and applications will also climb popularity charts. Another interesting trend will be advergaming, with more and more brands taking on to games.”

With the present spectrum infrastructure in India, operators are facing difficulty in getting proper bandwidth to provide their services. Manoranjan Mahapatra, CEO, Bharti Telesoft says, “To offer services like IPTV and other video-based applications, one needs a much higher bandwidth. There are numerous challenges in India concerning the 3G rollout and we should be prepared to tackle them. However, the 3G rollout will definitely help us offer rich content. Also gaining loyalty from existing subscribers becomes a tough challenge as the market matures. With the number of first time mobile users shrinking and the likelihood of them being low ARPU subscribers, we constantly needed to reinvent ourselves and connect with the existing higher value subscribers.”

 

Future Calling

The future for value added services in India looks bright, and the growth being witnessed now is just the beginning. VAS will grow manifold in the coming years, as operators will pay more attention to it to enhance their bottom line.

It is also expected that in the coming two or three years, prices will drop significantly across VAS, leading to exponential rise in usage. The future will witness a focus shif toward the rural market as well.

Next generation VAS will also change the VAS landscape dramatically, widening the revenue ecosystem for the industry. Consolidation and acquisitions by larger players will also be a noticeable trend. Not to mention, India would continue to be a content-centric market.