Content Start-Ups: Up the Ladder

The mobile subscriber base is growing at a scorching pace in
India, India is the fifth country in the world to have crossed the 100 mn mark
in subscriber base. In the last two months, India has become the fastest growing
mobile market in the world. But telecom operators are not happy. Reason: ARPU is
on a decline despite the various marketing ploys being used. The seemingly sole
incentive to retain customers is by lowering call tariffs. But a point reduction
in call rates proved ineffective and minutes of use (MoU) have been inelastic in
responding to reduced rates. Mobility operators in India have been faced with
two clear challenges: one, to address customer retention in the high churn
pre-paid market and two, to develop alternative revenue streams as voice becomes
commoditized, and ceases to be a tool for differentiation.

This is when the industry came up with the solution: offer
data-based service or VAS. Operators are facing cut-throat competition, and with
call rates in India being one of the cheapest in the world, margins are very
low. Hence, VAS is being looked at as the next wave for growth. It has become
the flywheel of telecom growth, and a large chunk of revenue for operators is
likely to come from VAS services in the years to come.

The VAS market is big but is characterized by the presence of a
number of small players instead of a few big players. According to
VOICE&DATA estimates, in FY '07, the VAS market stood at around Rs 2,860
crore and grew 29% compared to the previous fiscal. The majority of revenues
came from P2P SMS, which stood at Rs 1,140 crore. The VAS market in India could
be worth nearly a billion dollars (Rs 4,560 crore) in FY '08. Also, VAS is
expected to contribute 20% of revenue by 2008, and 30% by 2010.

What's on Offer

With this stream of revenue opening up, a lot of VAS companies mushroomed
offering contents in various categories like music, sports, infotainment, news,
astrology, games, and platforms for mobile banking, ticket booking, and others.
Air2Web in 2007 has entered into the mobile content business and initiated
innovative marketing campaigns for banks, retail and logistics firms in India.
Customers include HDFC, ICICI, Citibank, ABN Amro, and Tata Motors. Webaroo is
another company which strengthened its VAS base and launched the SMS-based
service, SMS Gupshup, in the beginning of the present fiscal. Soundbuzz also
made its mark in the FY 2006-07 with the introduction of full track audio/video
downloads direct to mobile with Airtel.

Bharti Telesoft focused strongly on USSD as a means of service
discovery, which provides subscribers an easy to use menu that enables them to
discover new services and familiarize themselves. It launched a number of
services including SMS router, voice SMS, SMS chat, and Live TV. Its customers
include Airtel, Grameenphone (Bangladesh), Bangalink (Bangladesh), Nokia, Celtel
and Orange.

Cellebrum, another VAS player, provided music and gaming
enterprise services, and m-commerce solutions. Its clients include Airtel, Idea,
BSNL, Reliance, MTNL, Hutch, MTML Mauritius, Spice, Tata Teleservices, and M1
Singapore. Enterprise consumers are Air India, Air Deccan, Whirlpool, and EPDCL.

Challenges

Over the air (OTA) data access services continue to be the biggest
bottleneck in the content-based business model. Fortunately, technological
advances, coupled with lower price-points are helping accelerate the adoption of
data access services, like GPRS, across both the incumbent subscriber base as
well as with new subscribers. One additional bottleneck has been the revenue
share bias which exists in the Indian market between the telcos and content
providers. "Rationalization of this to a happier medium will result in a
far more sustainable win-win proposition," says Sankalp Saxena, CEO, Moveo
Systems.

If global trends are any indication of what is to come, then the
outlook on this front is very positive. Transparency is a big issue faced by
entities in the mobile VAS value chain. The market is highly unregulated and
there is no transparency in terms of contact payouts and royalties. There are at
least ten entities involved between the customer and content owner (eg, artist),
and the flow of revenue is not transparent. Other entities feel that mobile
operators take a very high share of the overall revenue. This affects the
content development market with lower incentive to the developer to provide
higher quality content. The difference is especially stark when compared to
developed markets where payouts are well defined and more balanced.

"I would say that the single biggest bottleneck is poor
revenue shares that discourage investments in creating unique content, and of
promoting it aggressively," says Raj Singh, CEO, Activemedia. "Simply
put, the margins are so slim that there is no return on investment," he
adds. Taking the case of many European markets, revenue sharing by mobile
operators actually has encouraged hundreds of content companies to directly
market content to consumers. This is turn has created a much bigger pie for all
industry participants.

Despite the promising future, the VAS market still faces a
number of challenges such as lack of infrastructure, absence of 3G, which enable
players to introduce more services such as location-based VAS. Also, there is
minimal focus on VAS as it forms only 8-10% of the operator's sales and
piracy.

"If you look at only the 'content supply' business
model, it is squeezed between copyright holder and platform/telecom
operator," says Vijay Shekhar Sharma, co-founder and CEO, One97
Communication. The power on the telecom operator side is extreme and sometimes
the operator/platform provider tie up directly with copyright owner too. This
leaves very little margin for content companies to operate on. Their task is
limited to creating content in various mobile formats, and that does not remain
a very profitable value creation. Mobile content companies have learnt this and
now are in the content arbitration business where they take exclusive rights by
paying some minimum guarantee amount to content producers (music labels or
movie), who in turn sell these to telecom subscribers. "So it's more or
less like trading with value add of making content available on multi
format/platforms, which in turn has become a commodity business model,"
adds Sharma.

Future Value

There is a huge opportunity for content creators and distributors.
However, the space for aggregators and resellers is not a good place to be in
today. On the technology side, there is always an opportunity for someone who
can create a disruptive new technology. The size of the game has changed and you
now need to be able to invest several million dollars to even start in the
mobile space if you want to play the game. To date, only 10% of telcos'
revenues are indexed to non-voice services.

As such, there is great untapped opportunity which exists for
companies to offer compelling VAS applications to end subscribers. The revenue
share rationalization point from above will further help drive the diversity of
mobile content in the market. Japan, with NTT DoCoMo's iMode offering is one
of the best examples of the realization of the mobile revenue opportunities that
extend well beyond voice. India can be the next big market for similar content
offerings with a subscriber base potential approximately five times that of the
Japanese market!

Gyana Ranjan Swain

gyanas@cybermedia.co.in