SMS: It is a Strategic Weapon

Even before the recent round of price slashes, India’s
mobile voice tariff was one of the lowest in the world. With not-so-high usage
and low tariffs, the average revenue per user (ARPU) for voice services for all
operators has been not so encouraging. And with this round of announcements, the
GSM operators have explicitly conceded that no matter what they do, the maximum
airtime revenue per user that they can get is Rs 1,700 or so. With that kind of
highest yield, it is not impractical to assume that the maximum ARPU that they
can hope for is not more than Rs 600—700. And that is postpaid ARPU. Prepaid
would be even lesser.

That
is certainly not a figure that can keep them in business for long. And the
operators are not foolish enough not to know that. Reliance’s entry may have
forced them to go for these ‘rock-bottom’ airtime plans, but what has
probably given them the courage to do so is a hope–a hope about the future. A
hope that they will be compensated for the revenues lost in voice by new
revenues from data services. And any differentiation that would happen in data
services–one hope that they are sharing with all their big brothers in Europe.
Only the level of expectation is different.

Almost all major Indian GSM operators have launched their
GPRS services. With just one real application, multimedia messaging services
(MMS), some of them are going out of their way to create hype about it. While
Idea has been marketing the peer-to-peer multimedia messaging aggressively,
Hutch has promised its GPRS customers action video clips from cricket matches
during the ongoing World Cup Cricket tournament in South Africa. When we talked
to different operators for this story on SMS, many of them were more keen on
showcasing (even to a specialized business magazine like Voice&Data) the
fancier aspects of MMS. The thought obviously is while SMS is doing well and
will grow, what will really take up their margins is newer services built on
GPRS. MMS is just the first in the line–the first step towards a distant
oasis.

Or Mirage?

They could be committing a big mistake. Unlike other markets like Europe and
parts of Asia-Pacific, Indian GSM operators will not only have to fight against
each other but also have to contend with the challenge of CDMA. They themselves
plead before the policy makers and regulators that CDMA is a big threat and will
eat into their market. And the fear is not entirely unfounded. According to a
survey that VOICE&DATA carried out during September—October 2002 among the
GSM users in India, as many as 22 percent said they might completely shift to
CDMA-based WLL. And a predominant 52 percent said they would seriously consider
shifting to CDMA, though they were not too sure.

A lot has changed since then. Reliance has actually launched
the service and GSM operators have stood up to the challenge by offering lower
tariffs. Also, subsequent changes in tariff regime mean that CDMA would not be
as cheaper. And thanks to changed tariffs, GSM is cheaper than what it used to
be. In terms of price, it is a more even game now. So it may not be compelling
for GSM users to change purely for cost reasons.

That being the case, the battle is more likely to be fought
over the actual offering.

So what should the players do? Of course, offer their best
foot forward.

For CDMA 1x, that best foot could be delivering multimedia
applications over handsets, in which it is not just superior to GPRS but also
widely tested, thanks to the nature of market demand in Korea and Japan. No
wonder, the direct selling agents of Reliance show you scenes from Deewar and
Kabhie Khushie Kabhie Gham (or NDTV news or sports actions, if you like) to draw
the attention, projecting that as the USP of CDMA. Reliance has taken a
conscious decision to project the multimedia capability. And is doing that more
zealously of late, with new tariff regime making the CDMA a little costlier.

And so are the GSM operators–trying to project the
multimedia communication on GPRS. And that’s a dangerous game that they are
playing. Why?

First, GPRS (and even WCDMA) cannot match CDMA 1x in terms of
delivering real video. Many senior technology professionals within the cellular
industry do admit that, albeit privately.

Two, by projecting GPRS based services, they are asking the
users to change their handsets. With cost of service acquisition being so low,
the cost of change for GSM users to CDMA is the cost of handset. By asking them
to change their old handsets for a new GPRS handset, GSM operators are asking
them to make fresh investment anyway. That is a great leveler. If one has to
make that fresh investment in any case, one could well consider changing to CDMA.
While users will have the advantage of keeping the same number if they change to
GPRS, they will get handsets at a cheaper price if they go for CDMA. Reliance
has subsidized the handset, and Tata Indicom is offering financing. The GSM
operators are yet to come out with any concrete subsidy/financing plan for new
handsets.

And finally, GSM operators’ approach to content creation
has, at best, been halfhearted. In the multimedia generation, a large part of
the messaging will be application driven. Without enough content, it may just
fail completely, after some initial fancy. In fact, some of their trusted
content providers for SMS, are now developing multimedia applications for
Reliance and are betting more on that.

In short, by projecting MMS more than they should, GSM
operators are taking the fight to a turf, where they are weaker compared to the
competition.

True, they have put a lot of money in deploying GPRS
infrastructure. True, they need to inform everyone that they too have the
capability to offer video. But that does not justify going all out to promote
multimedia application, which could well result in shifting the entire market
attention to that application. That is what companies like Reliance would love
to see. In other words, GSM operators may end up playing into the hands of the
competition.

And this, despite the fact that GSM operators have a
potential battle-winner that could serve as their best foot. Just that they have
not promoted it the way they should have.

You guessed it... it’s the plain old text messaging, SMS–a
service that has attained a near cult status. So much so that national
newsmagazines have done cover stories on it. According to Merril Lynch, SMS
could bring in as much as $75.6 million of revenues for Indian GSM operators by
the year 2005.

But more important than these facts and figures,
incidentally, is the fact that text messaging is CDMA’s weakest spot. Not only
did SMS start much later in the US, where CDMA originated, the track record of
text messaging in both Korea and the US has not been so good. According to
Jupiter Research, less than 40 percent of the US mobile users use SMS, as
compared to 75 percent in the UK and Norway. What is more, the US users send
less than five SMS per month, as compared to 34 in UK and 56 in Norway. Even in
a newer market like India, more than 70 percent of users do use SMS, according
to a Voice&Data research done in ten major cities across India. Without
exception, the use of text messaging in the GSM world has been much higher than
in the CDMA world.

Statistics and track records apart, there is a compelling
reason for GSM operators to promote SMS. Today, peer-to-peer text messaging
accounts for 90 percent of the total messages that are sent. While that
percentage will fall, as an alternative to voice, peer-to-peer will always
occupy a dominant share of the total messaging pie. And for that, a critical
mass of user base is a must. As incumbents, GSM operators do enjoy that
advantage of having more than 10 million users on their networks. It’s not
easy for CDMA operators to match that number so easily.

In fact, many GSM users among the professionals we spoke to,
have the same question about switching to CDMA–if I cannot send SMS to a GSM
user, what is the point? And that number (and more importantly, their average
bill value) is significant.

And of course, last and least (least, because regulations do
keep changing), the regulator has clearly said that WLL CDMA operators won’t
be allowed to offer text messaging services.

All this means that GSM operators should take SMS much more
seriously than they are doing at present. While MMS may well be the future, SMS
is here to stay. It is simple, popular, proven, and as we will discuss, powerful
too. This bird in hand is certainly much better than many in the bush.

Much of the apathy towards SMS is because of its perceived
positioning so far–as a low-margin, high volume offering. While margins are
still comparable with voice–sometimes even better–beyond a point, SMS cannot
be stretched to provide a significant boost to the ARPU, goes the conventional
thinking.

The traditional mindblock against playing up SMS too much has
its reasons. SMS uses the signaling channel and hence an exponential growth in
SMS usage in a network means that the network will get choked even when the
spectrum is available for voice calls. In other words, a sharp decline in the
perceived network quality. No operator wants that.

As a matter of fact, that is true. SMS has the capability to
‘choke’ the networks. The only problem with this argument against promoting
SMS is that it makes an implicit assumption that the revenue from SMS can be
only a factor of the number of SMS sent on that network.

That probably was true a few years ago. Today, that’s a
fallacy.

The operators’ revenue strategy built around SMS should try
to strike a balance between the volume of SMS and the average yield per SMS.
Operators who have a higher yield per SMS are the ones who can make SMS a
winning formula.

Over to Applications

Theoretically, there are two ways to increase the average yield per SMS.

First is simple–increase SMS tariff. The only problem, it
will not work in a competitive and price-sensitive market like India.

The second is enhancing the value of an SMS–beyond just
messaging. In other words, it means consciously trying to change the mix of SMS
pie to include more application driven messaging for which an operator can earn
a premium.

If you thought that’s unachievable, here is some good news
from Merril Lynch. According to the investment and research company, by the end
of 2003, close to 700 billion application-driven SMS would be sent from mobile
phones, which would be almost half of the total SMS traffic. During 2000—2003,
while peer-to-peer messaging has been growing at a CAGR of 46 percent, the
application-driven SMS traffic has been growing by a whopping 204 percent during
the same period. Of late, the trend has been visible in India too. According to
Escotel, whose territory does not include any of the big cities, as much as 25—30
percent of the total SMS sent on its network is application driven. Idea in
Delhi claims a similar figure. These figures, however, vary from month to month,
with the cricket season, for example, taking the average up.

Needed: A More Proactive Approach

Offering applications on SMS is not rocket science. It requires a
two-pronged strategy–building a robust portfolio of applications (services)
and marketing them aggressively.

Building a portfolio of services requires solid content
partnerships. In markets like Japan, where operators like NTT DoCoMo primarily
make their money from data transferred, the operator keeps a small share of the
total money that a user pays for content. In SMS, that model cannot hold good in
India beyond a point, because of two reasons. The operators cannot increase the
SMS traffic in the network profitably beyond a point, and two, they themselves
have been making losses and struggling. While the exact share of revenue is a
sensitive issue and saw a lot of debate in one of the discussion forums that
VOICE&DATA had organized, it would probably suffice to say that building a
market for good content is the onus of operators, not just for today’s needs,
but also for tomorrow’s, when content would, as the much repeated cliche goes,
be King. And they can do so by distinguishing between good content and average
content and deciding the revenue share based on that, rather than being dictated
by the negotiating power of the content provider.

Some of the operators have done a good job of building a good
content offering. But none of them–with the exception of Escotel in one of its
circles, UP (West)–has marketed the services. Advertising for mobile services
in India is still targeted at hooking up subscribers. It is high time the SMS-based
value-added services were marketed aggressively by GSM operators.

Will Users Pay?

Building services and marketing them will certainly help in some way. But
will the users pay? That is the question.

And a tough one at that to answer.

The answer from industry experts is mixed. The user response to the ringtone
and picture downloads offered by Hutch, Escotel and some others in association
with Yahoo!, has been encouraging. However, the interest level is already
declining, despite continuous update of new ringtones of latest Bollywood
movies. The services have also become costlier. Today, it costs Rs 7 (including
SMS charge) to download a ringtone from Yahoo!, while AirTel offers it for free
to its subscribers (charging only for the SMS). However, the choice and quality
of ringtones is better in Yahoo! Some users are still paying the premium for
that extra value. Also, useful but low-volume services like Railways enquiry,
and ticket booking at movie theaters can be put in the premium category and be
charged at higher rates.

But there is a limit to that. Beyond a point, users won’t
pay more.

For the operators, the solution lies in a two-step
exploration of solution to that problem.

The first is: will someone else pay for those services to
users?

The second: is there an alternate source of revenues?

These questions have been answered by some of the markets in
Europe.

So far, in most of the markets, the revenue models for
premium services have been direct–users pay for what they use. However, in
markets like UK and Germany, operators are discovering that the age-old revenue
model on which the print medium exists–the indirect revenue or advertising–is
also a good revenue model, though again, the revenue is divided among a set of
stakeholders, the operator being just one of them.

There have been major debates on whether users would like to
receive advertisements on a very personal device like the mobile phones. The
market, while still exploring the answer, has found that some of the marketing
campaigns based on permission from users–permission marketing or opt-ins–have
been quite successful, especially when marketing to the youth, and especially
for entertainment and lifestyle products. SkyGo, a mobile marketing agency,
conducted a study in the US, most sensitive place as far as individual privacy
is concerned, in January 2001 to measure the effectiveness of mobile phone as an
ad delivery medium and found encouraging results. Though this was done on WAP,
since then, many including Cadbury’s, Smash Hits magazine, Nestle, and Sony
Pictures have created successful marketing campaigns. UK has at lease a dozen of
pure-play mobile marketing agencies and all of them have done considerable work.

Once this model gets established, many of the marketing
campaigns can be bundled with valuable content to the user where the advertiser
pays for the service. For example, the alert-based services for cricket score or
election results can be paid for by an advertiser, whose ad is bundled with that
content. Escotel has launched such a scheme for the ongoing world cup. For other
opt-in kind of campaigns, Star TV and some movie banners have tried them, with
encouraging results.

The answer to the second question is more direct. Is there an
alternative source of revenues? The simple answer is–the enterprises. In other
words, the B2B model. Unlike marketing campaigns, this is not a debatable issue.
The productivity gains for many companies is very tangible. And quite a few
companies are already doing that.

Typically, it involves the mobile operator getting its money
from an enterprise, whose employees/channel partners/customers are the
subscribers of the operator. These could be sales force automation, customer
interaction, or supply chain applications that can be accessed by the mobile
workforce/customers from their cellphones.

For GSM operators, whose users are already used to this
simple yet powerful service, the job is cut out. Build a bouquet of service on
SMS, market and incentivise application driven usage, and look for alternate
sources and innovations.

While GPRS will take some time to be popular, thanks to the
handset barrier, SMS is already here and earning good revenues for operators.
And that also is CDMA’s weakest link. Isn’t good marketing all about showing
your best face and exposing the opponent’s weakest spot?

Shyamanuja Das