With most of the larger service providers on a relatively equal footing in terms of service offerings, the battle to acquire and retain customers has been keen and cut-throat. Customers, of course, have benefited enormously, getting lower prices, value additions and improved customer support. And the good times seem set to last. In the next few years, service providers are likely to increase their focus on value-added services (VAS) as telecom competition intensifies.
Mobile VAS constitutes a range of voice, messaging and data applications which utilise a telecom network operator’s infrastructure to provide enhanced services to wireless consumers. They can be standalone applications that provide a specific convenience or service, or can be combined with content to create a separate service for wireless consumption. VAS is offered on multiple platforms such as text (or SMS), voice and WAP enabled.
Drivers for VAS
From a telecom operator’s point of view, the key reason for the keen interest in VAS is the augmentation of revenues from customers. In the face of stiff competition and stagnating average revenues per user (ARPUs), the greatest challenge for operators lies in adopting new revenue generation models that will help them to increase ARPUs while maintaining the same operational expenditure.
Given the rising mobile penetration levels in India, one of the biggest threats for carriers today is customer churn. VAS enables the company to effectively differentiate itself vis-? -vis the competition, and position itself as a richer service provider or perhaps even as an aspirational brand. This, in turn, creates a mental and an emotional stickiness resulting in customer retention.
The availability of GPRS, EDGE, 3G, etc. has provided operators with the technological muscle to do more. The availability of a variety of handheld devices at affordable prices has also contributed to the sector’s growth. Improved bandwidth, especially in the data service area, has enabled ease of content download. All these factors have given rise to opportunities for service creation that did not exist in the pre-GPRS era.
Current scenario
The opportunity for mobile VAS in India is huge as the mobile customer base has grown from 8 million users in 2004 to over 190 million users in 2007. There is now a critical mass of experienced users in the Indian mobile market, and they are the ones who have led the first phase of growth in VAS. These users will continue to drive the market, resulting in the evolution of more advanced applications. At the same time, basic VAS applications will continue to appeal to new mobile users.According to a survey conducted by the Internet and Mobile Association of India and the eTechnology Group of IMRB, the mobile VAS industry in India was worth Rs 28.5 billion at the end of 2006, and is estimated to grow at 60 per cent to reach Rs 45.6 billion by end-2007.According to Ovum, VAS accounted for 13 per cent of the total operators’ revenues of $13 billion in India in 2006, and is estimated to account for 14 per cent of total projected mobile operator revenues of $33 billion in 2010.
The VAS space is currently dominated by entertainment services, and comprises P2P SMS, ringback tones (RBTs), games, data, and other services such as MMS.SMS still contributes a significant part of non-voice service revenues, with 57 billion SMSs accounting for 70 per cent of the total VAS revenue in 2006. (In fact, the business has seen so much growth that many operators have separated SMS from the VAS account.) The remaining 30 per cent was derived from services such as games, ringtones, mobile entertainment and multimedia messaging.
Next to SMS, music is the biggest moneyspinner under VAS. According to Amit Dey, head, sales and marketing, OnMobile Asia-Pacific, RBTs are a popular and fast growing VAS, and have achieved about 20-25 per cent penetration with over 10 million active users today.Caller RBTs for instance, have a 15-25 per cent share of the VAS segment, followed by ringtones which have 15-20 per cent market share. The increase in subscriber base and the availability of music-compatible handsets are the major reasons for the increase in digital music sales.
Clearly, 2006 has been a year of unprecedented VAS growth. The indu try has seen a spurt of activity on the content development front. For instance, aggregators have teamed up with handset manufacturers to provide pre-embedded applications like Yahoo! Go on all N-series phones. OnMobile has finished the backend integration for IMAX and Adlabs to sell movie tickets via handhelds like cellphones and PDAs. Airline and railway ticketing through mobiles is another service which is growing at a rapid pace.
According to analysts and industry experts, this trend is likely to continue with some very strong players emerging on the content side. Users are also looking to explore a greater variety of content.”Given the focus of carriers, the vendor community and media companies, and the evolving customer demand for enhanced services, VAS contributions have the potential to move into the 16-18 per cent range, which translates into a growth of over 25 per cent in revenue terms for the industry this year,” says Abraham Punnoose, director, marketing and business development, Roamware.
On the operator side, all companies including Airtel, Vodafone-Essar, Idea Cellular and BPL have got onto the VAS bandwagon for market growth. For instance, Bharti Airtel has formed a partnership with Google through which Airtel mobile users can use Google’s search engine. Aside from interactive radio service, downloadable songs and ringtones, Airtel offers a Song Catcher feature, which allows mobile users to download songs by placing their handsets close to the music source for 30 seconds.
Other operators too have begun banking on VAS. The state-owned Bharat Sanchar Nigam Limited recently awarded two contracts to Swedish equipment major Ericsson to host a mobile content download portal and an RBT service.Reliance Communications has entered into a tie-up with a TV18 group firm, commoditiescontrol.com, to offer a commodity quotes service on mobile phones.Tata Teleservices Maharashtra has launched a toll-free service which enables subscribers to access companies that are listed under 1-800 services, including firms in the banking, insurance, airlines and hospitality sectors.
Of late, the mobile VAS space has also attracted a lot of interest from venture capital firms. However, their interest has been primarily on firms that create SMS and data VAS, and have revenues of $5 million to $15 million. There are currently at least 10 to 12 venture capital firms active in the VAS space. Investments are expected to double to $500 million in 2007-08 from $250 million in 2006-07.Growth will be fuelled by firms like Canaan Partners, a global investor which has committed $50 million.
While pure entertainment services will continue to appeal to younger consumers, the overall focus for mobile VAS will shift to utility-based services such as location information and mobile transactions.Moreover, as the mobile market penetrates deeper into non-urban belts where English has very limited penetration, the locallanguage VAS market will experience dramatic growth, and language-independent access will become a key differentiator.
Challenges
Despite the increased focus on VAS, voice still accounts for over 80 per cent of operators’ revenues. VAS is yet to add significantly to their balance sheets. For instance, Bharti’s share of revenue from non-voice services is just above 10 per cent, of which SMS accounts for slightly over 6 per cent.
The challenges emanate from several issues that need to be addressed. First, revenue sharing between operators and content development companies in India is currently unfavourable to content developers, unlike other countries such as Japan and China where mobile VAS is a popular service. A more equitable revenue share in the long term would lead to lower costs for end-consumers. Second, most companies operating in this space are relatively small. Therefore, issues related to commonly agreed MIS and reconciliation processes delay payments from the operators to mobile VAS companies. A more timely system of payment would enable a greater number of small companies to enter this space. Third, GPRS connectivity is still inadequate.
There are issues pertaining to both handset capability and operator-side constraints. There are also many users who do not know how to access GPRS.The problems are further compounded by the fact that most of the data-enabled handsets that can leverage VAS are expensive, and are targeted at high-end users. This prevents a large user base from accessing the different types of VAS.Another key issue that needs to be addressed is the absence of a retail distribution channel. VAS revenues accrue only to the operator, so even though the operators might be interested in pushing VAS, the retailer will remain focused on selling connections.
Since the rural areas are going to drive the next level of growth, low literacy levels in these areas will be a major impediment in the widespread adoption of VAS. Hence, pricing and packaging for the non-metro and rural markets, as well as stable, long-term policies by the government are important. While operators are launching multiple VAS offerings every quarter and incurring major expenditure on their promotion, many of the services are not successful on an ongoing basis. Operators need to identify a model that minimises the risk in launching new services. For instance, they could opt for an ad-supported model.
The VAS industry is still in its infancy, and the rules of the game are still evolving. But with operators continuing to increase their focus on generating and marketing VAS, higher number of handsets becoming data enabled, wireless broadband becoming available via 3G, and awareness among users increasing, industry experts are expecting the mobile content and applications markets to pick up pace.
