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