Plummeting ARPU: VAS gaining momentum

Date:   Friday , February 29, 2008

Now, to watch the gorgeous Aishwarya and macho Hrithik sizzling in the movie Jodhaa Akbar one need not waste precious weekend time running behind its tickets. Thanks to mobile value added services (VAS), all that one needs to do to book one’s choice of seats is to send an SMS to the theater that screens the movie and block them. All this is through your petite mobile. The confirmation of the booking is sent back to the phone in text form. Mobile Box Office is the same kind of service launched by Tagit, a Singapore based M-commerce Company, in all cinema halls of AdLabs. This is how VAS is changing the way we live.

Don’t be stunned if the voice-based service in your mobile will be a freebie in the next few years and you will be paying only for VAS, such as SMS, MMS, Internet, Email, games, TV, and ticket booking over your mobile. In India, despite an explosive growth of the subscriber base, the mounting competition is purging a large chunk of profit margin from the mobile operators, making them to look beyond the voice-based service. Whether it is a landline or mobile, VAS, which includes a bundle of non-voice based data services, act as enablers that boost the plummeting Average Revenue per User (ARPU) of operators. The ARPU, which was Rs.1, 000 plus per month in the year 2000, had plunged to about Rs. 250 in June 2007.

Further, the advent of new networks, high bandwidth availability, transition from circuit-switched to packet networks, and upgrades in handset standards and technologies that support new formats (3G, SIP) that are happening on a global scale are increasingly creating more space to exploit VAS as an important commercial opportunity. People now widely use their handsets to play games, download ring tones, read news alerts, access the Internet, listen to music, access information from banks, check exam results, book tickets for movies, trains, and flights, participate in contests, and view one touch ads, amongst others.

The telecom sector contributes to just one percent of India’s GDP. Out of India’s 1.1 billion population, 220 million are mobile subscribers and this base is growing by
7 million a month and is expected to reach a staggering 500 million by 2011. According to the Associated Chambers of Commerce and Industry of India (Assocham), the total size of the mobile VAS market is estimated to be about $1.2 billion (Rs. 4,950 crore) and is growing by 50-65 percent every year. SMS contributes to 55 percent of VAS, though it has started slumping now. Hence the telecom companies are betting big on music, the principal money-spinner after SMS. Caller ring back tones (CRBTs) have a 15-25 percent market share, followed by ring tones that have a share of 15-20 percent, while the remaining portion of revenues can be attributed to full song downloads. But, currently, VAS contributes only 10 percent of the mobile operator’s revenues and is expected to increase to approximately 20 percent by 2009.

A roam around the VAS market
Imagine the audio file of an advertisement, which is sent as an SMS, can be listened just by a click! Mobile advertising will be a huge opportunity as it reaches the individual directly. “It may subsidize the spending for advertisements as it may improve adoption,” says Pratapa Bernada, Head - Marketing and Products, OnMobile. However, since mobile advertisements are different from Internet and Mass media advertising, a novel means of interaction is imperative. “Also, personalization of the ad content is the key advantage,” explains Bernada.

Along with that, simplified content discovery methods are creating opportunities to increase the VAS revenue. Now, one touch RBT (ring back tone) has become the quickest way to get one’s preferred content. For instance, after this technology was introduced, OnMobile registered an increase of 47 percent in song selection per month. RBT net additions per month grew from 9.6 percent to 26.7 percent.

“Local language content is hot prospect for VAS,” notes Bernada. Onmobile got an overwhelming response to its vernacular WAP (Wireless Application Protocol) and registered an average of two downloads per minute.

Nowadays a mobile can be your CD, TV, newspaper, watch, camera, and gaming device, all rolled into one. It is expected that every fourth subscriber will have email facility in his mobile by 2009. Mobile game is another segment in the Indian VAS market whose growth defies imagination. According to estimates by NASSCOM and the U.S. research firm InStat/MDR, India’s wireless-game market will generate annual revenue of $336 million (Rs. 1,344 crore) by 2009.

In rural areas local content on VAS would be key to growth. For example, a farmer would be interested to know the mandi price in his area, rather than quotes from remote cities. Also, he can get answers for his farm related queries via SMS from experts from an institute which provides such services. Plus, Interactive Voice Response (IVR) will also see large scale adoption in this area. The challenge for an operator is to aggregate content that is as locally relevant as possible. Yet, rural VAS is not only just about commodity prices. Interactive media programs receive excellent responses from non-urban locations.

SMS interactivity is now becoming an integral part of most of the TV shows in India. Leading broadcasters of the country such as STAR, Sony, and others have formed separate divisions to exploit the Mobile-media convergence. Newspapers and TV news shows are already leveraging this through their opinion polls. It’s also grown into a significant source of revenue for TV channels. It is hard to believe, the last two episodes of Indian Idol, a popular song-based show on Sony TV, received SMSs worth Rs. 30 crores and Sony is said to have made more than Rs. 8 crores out of this and the remaining major chunk was retained by mobile operators.

Apparently, there is a huge scope for innovation in VAS. Location based services, car pooling, GPS, TV serial updates, SMS for public services, mobile dating, remotely controlled applications, voice morphing services targeting children, and mobile-search are really some of the hot prospects under VAS.

Dents for growth
When it comes to mobile and media convergence, the issue of revenue sharing between the content providers, content aggregators (who modify content exclusively, to suit it for mobiles), and the mobile operators gains importance. Currently, mobile phone operators have an upper hand because of the strong media they own. Operators retain 75 percent of the revenue and content providers receive 10-15 percent, whereas the aggregators are getting a mere 10 percent of the revenue, thus discouraging the innovation and creativity in generating new varieties of content.

So, why are the operators reluctant to share more revenue with others? Says Swaminathan Krishnan, Senior VP, Global Business Operations, Sasken, “Operators tend to justify their claim of a lion’s share of the revenue due to the cost associated with network, billing, marketing, subscriber acquisition, and a declining ARPU and AMPU (Average Margin Per User). The operators spend billions in creating the infrastructure and don’t want the aggregators and content generators who spend just a few millions to take a bigger pie of the revenue.”

So what about the future of these key players? Will the aggregators and content providers go out of the fray? Opines Krishnan, “All will coexist and new efforts for sharing revenues will continue.”

Also, operators are not doing enough to create user awareness about the ease of use, transparency, and flexible tariff structures to promote the various VAS offerings. Added to that, the major portion of the Indian customer base is prepaid customers. Low balance or no balance is the way of life. Less than five percent of the subscribers have more than Rs.100 balance, while 33 percent of them use lifetime plans. Most people prefer chota recharge! Hence, leveraging on the boom is possible only when pricing and payment models fit the customers’ wallet. Furthermore, operators cannot promote everything. So, gaining attention of the customers for new services will be a challenge. The user interface and familiarity with the medium of access such as GPRS and IVR are going to be tough for the end user.

Another key dent for growth of VAS is the cost and standards of a handset. In India, feature-rich GPRS enabled handsets are still sold at around Rs. 3,000. And all mobiles cannot be compliant with all the VAS offerings. Pre-loading of applications by handset OEMs (Original Equipment Manufacturers) is still in a nascent stage.

In addition, though local content may prove to be a boost for growth, existence of many languages still remains a hurdle in this regard, leading to availability of only a limited volume of local web content. Moreover, WAP versions of local web content are still not available.

M-commerce is a huge space to enhance the revenue of VAS. However, are users ready for that? To book train and air tickets and for other such similar activities one needs to divulge credit card details. But users still don’t like giving credit or debit card details over the mobile due to security concerns. Besides, there were only 23 million credit card holders as compared to the large base of 165.11 million mobile subscribers as of March 2007. Interestingly, the industry is now looking into the possibilities of using ‘mobile currency (talk time)’ as a means for transaction of money.

With regard to mobile advertisements, it is hard to convince the advertisers to adopt the mobile platform, as it’s difficult to measure the ROI. Electronic advertising is still at an embryonic stage in India where the advertisers are not familiar with the methods used to evaluate rates and outcomes, and thus tend to incorrectly compare it with TV and print media.

“The foremost challenge will be political, like the ongoing rift over spectrum allocation between the regulators, policy makers, CDMA players, and GSM players,” says Krishnan. This has not only resulted in no policy regarding additional 2G and 3G spectrums but also delaying 3G roll-out, substantially limiting high-end VAS take-off.

VCs perspective
According to the research firm Venture Intelligence, mobile VAS and online services have emerged as the favorite sectors among the venture capitalists (VCs), accounting for about 50 percent of total VC investments in these sectors.

“Many startups are coming up with VAS ideas now. The trend is promising,” says Dinesh Tiwari, partner, Alcazar Capital Partners.

Of a clutch of 40 VC firms, at least 10 to 12 are active in the Internet and mobile VAS space, and the total VC investment is projected to double to $500 million (Rs. 2,000 crore) in 2007-08 from $250 million (Rs. 1,000 crore) in 2006-07. In the mobile VAS, VC interest is focused on firms creating SMS and data VAS with revenues of $5 million (Rs. 20 crores) to $15 million (Rs. 60 crores) annually. VC valuations in these firms are typically four to five times the revenue, as demonstrated growth is 100 percent year-on-year.

Says Ritesh Bagnani, Senior Investment Advisor, IDG Ventures India,“The downside is that in India only 35 percent of users have phone and Internet capability, of which 5 percent have access to the Internet. These factors are actually limiting the growth.”
Well, the field is open and opportunities galore. However it seems that the basic plinth is not yet full-grown. Obviously this is an impending challenge for entrepreneurs who wish to rock the space. In addition, issues like sharing of revenues between the operator-content provider-aggregators, spectrum allocation, and other issues need to be addressed to build a niche VAS ecosystem to promote innovation leading to fast growth, opine most VCs.

Key VAS players
Air2Web India
Founder: Jay Chaudhry
Founded: 2000 Web site:
Headquarters: Atlanta, USA; India office: Chennai
Area of operation: mobile messaging and marketing apps for enterprises and carriers.
Investors: CDP Sofinov, BellSouth, Nextel Ventures, VeriSign Inc, Mitsubishi
CEO and Co-founder: Arvind Rao
Founded: 2000 Web site:
Headquarters: Bangalore
Area of operation: Contests, Infotainment, Interactive Media, Mcommerce, Missed Call Alert, Multimedia Service, Mobile Marketing, Msearch, Music, On Device Portal, Phone Back-up, RBT, Voice Portal Voice, SMS.
Investors: Incubated at Infosys. Recently listed in BSE and NSE.
CEO and MD: Rajat Jain
Founded: 1998 Web site:
Headquarters: Mumbai
Area of operation: mobile content and mobile VAS. Games, contesting and promotion service, distribution, mobile marketing. Investors: Norwest Venture Partners, Nexus India Capital Advisors, Softbank China Venture Capital (SBCVC), SVB India Capital
Partners Fund
Chairman, CEO and Founder- A.R. Vishwanath
Founded: 1999 Web site:
Headquarters: Hyderabad
Area of operation: content and value-added services
Investors: Spark Ventures Plc, Pequot Ventures,
President and CEO: Bobby Srinivasan
Founded: 2002 Web site:
Headquarters: San Jose, CA; India office: Mumbai
Area of operation: mobile roaming solutions and media-centric applications
Investors: Accretive Technology Partners, BEA Systems Inc, DCM — Doll Capital Management, Shelter Capital Partners and TIBCO Software, Inc..
Cellnext Solutions
CEO: A D Mehtha
Founded: 2000 Web site:
Headquarters: New Delhi
Area of operation: wireless VAS and applications service
A subsidiary of the Escorts Group
Bharthi Telesoft
Owned by: Bharti Enterprises
Chairman: Sunil MIttal
Founded: 1999 Web site:
Headquarters: New Delhi
Area of operation: mEntertainment, mCommerce, and value added applications
Investors: Sequoia Capital and Cisco, and Bharti Telesoft employees.
Founder and CEO: Sanjay
Founded: 2000 Web site:
Headquarters: Noida
Area of operation: mobile value added services, mobile communities, instant messaging, carrier agnostic connectivity, billing and content aggregation.
Investors: Naspers/MIH Group, Inter-Asia Venture Management.
Mauj Telecom
Founder: Anupam Mittal
Founded: 1997 Web site:
Headquarters: Mumbai
Area of operation: Mobile Content & Applications, Mobile Software & Services, and
Mobile Media Solutions
Investors: Intel, Sequoia, Westbridge capital.
Founder, Chairman and CEO: Inderpal Singh Murnick
Founded: 2001 Website:
Headquarters: New Providence, NJ, U.S.; India Offices: New Delhi, Bangalore(R&D)
Area of operation: value added mobile services
Investors: Innovacom venture partners, Nexus India capitol, Helion venture partners, Eastven technology venture, Erasmic venture fund