AML - IAMAI Report on Evolution of Mobile VAS in India 2011-07


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This summary report document is a word document format of the much larger report that Analysys Mason and IAMAI have prepared. The detailed report is available for purchase on IAMAI’s website – and is an
in-depth guide to each of the specific sub-segments within the mobile value added services ecosystem.

Dr. Subho Ray, President IAMAI stated, " This is the first ever study in India which charts the evolution of the mobile value added services industry, maps the future growth potential and makes practical suggestions on what needs to be done by various stakeholders set this industry on a ‘take off’ mode. We are confident that this will become the industry's guide for the next 10 years"

This report has focused on the following:
• The Indian Mobile VAS Opportunity
• Policy and Market Enablers
• Key Trends in the Mobile VAS industry in India
• Key Growth Areas in Services and Applications
• Mobile VAS Industry Growth Forecasts

Profiles of the report sponsors are also included at the end of the report, along with profiles of 40 leading players in the Mobile VAS value chain.
The key findings of the report are as follows:
• Carriers are increasingly focusing on non-voice services to drive revenue growth as voice services become commoditized. During the next five years, VAS ARPU will increase by 48%, which will compensate for the 14% decline in voice ARPU. As a result, overall ARPU will stabilize and decline by only 4.5% between 2011 and 2015.
• Mobile data will emerge as the next ‘killer application’, accounting for 32% of total incremental wireless revenue – primarily driven by the latent demand for connectivity, which wireline broadband has been unable to address because of availability issues.
• Mobile commerce will represent an INR20 billion revenue opportunity by 2015.
• Utility services that can provide a scalable, technology-enabled solution to issues around access to information, opportunity and infrastructure (for example, healthcare, education and agricultural/husbandry advice) can add significant value and, as a result, enhance the value proposition for users – particularly those in rural areas.
• Mobile video has been promoted as the key differentiator on 3G networks, but the limited amount of allocated spectrum (5MHz) and associated capacity constraints will limit video-based services in specific segments and geographies.

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AML - IAMAI Report on Evolution of Mobile VAS in India 2011-07

  1. 1. FOREWORDDear Reader, The present version of the report contextualizes the primary question: “What should be done in order forWe are delighted to present to you this comprehensive the industry to move ahead?” in the light of “what hasreport on the past, present and future of that enigma been in the past and what can be in the future”. So thewhich is known as the mobile value added services focus essentially is on urging stakeholders to collaborateindustry in India. In the enclosed pages, we have in charting the path forward for the industry. And, inattempted to lay bare before you the story of the genesis attempting to do so, we have suggested “a particular” wayand evolution of this industry, the roadblocks that it faces, that we believe will be acceptable to all stakeholders. Theand the opportunities that it presents to all stakeholders. larger appeal here, obviously, is a call for collective andMore importantly, we have taken much pain to suggest a effective action since this industry cannot flower with anpractical way to put this industry on a virtuous cycle to attitude of “more of the same” any longer.ensure sustainable progress and to identify the areas thatwill truly see tremendous growth. With this report we have set our best foot forward with the best interests of the industry and users, and weYou will appreciate that such a “first of its kind” report sincerely hope you will appreciate the direction that hascannot be the work of a single group. It is collective been outlined.effort, and we have benefitted from detailed conversationswith and feedback from more than 50 stakeholder Thank You.organizations including telecom operators, governmentagencies, mobile value added services companies, handsetOEMs, applications developers and, last but not the least,users. We would like to acknowledge our gratitude to allof them.We should also clarify that what you see before you is Dr. Subho Raya “distilled” version of the much larger report that PresidentAnalysys Mason and IAMAI have been working on Internet and Mobile Association of Indiafor more than six months. The larger and much moredetailed report is prepared almost as a step by step guideto each of the specific sub-segments within the mobilevalue added services ecosystem. In case you are seriousabout harnessing the data and services opportunity that Kunal Bajajthe telecom industry presents today, the larger report can Partner and Director Indiabe suggested as “essential reading”. Analysys Mason Evolution of Mobile VAS in India iii
  2. 2. List of Sponsors to be provided by IAMAI]Letter [NBED Platinum Sponsor Gold Sponsors iv Evolution of Mobile VAS in India
  3. 3. Peer Review Steering CommitteeWe would like to thank the peer review steering committee for dedicating their time to this initiative and helping toidentify the key issues to focus on. Producing this report would not have been possible without their inputs and feedback. • Parag Kar VP, Government Affairs, Qualcomm (India & South Asia) • PG Ponnapa Chief Executive Officer- India/Asia Pac, MPortal • Sanjay K Goyal Founder & CEO, ACL Wireless • Dr. Subho Ray President, IAMAI • Vijay Shekhar Sharma Chairman & MD, One97AcknowledgementsWe would like to acknowledge the following people for their extraordinary contributions • Anand Virani Business Development Lead, Services Ecosystem, Qualcomm (India & South Asia) • Chirag Jain Vice President - Marketing & Business Development, Webaroo • Mohit Narain Business Director, ACL Wireless • Rakesh Mahajan Independent Consultant Evolution of Mobile VAS in India v
  4. 4. Executive Summary1. The Indian non-voice market is at an inflexion point, the inability of carriers to drop prices significantlyand the growth opportunity remains significant combined with the limited purchasing power of incremental users.We believe that access to relatively higher speed dataon HSPA, EVDO and LTE networks, and a renewed 3. However, various market and policy enablers arefocus of carriers on the mobile data opportunity will required in on-deck VAS, off-deck VAS and SMS channelshelp drive growth in the Indian non-voice market in the to realize this growth opportunityimmediate future. We see the foundational elements As in any rapidly growing ecosystem, there existfor such an inflexion point falling in place with operational issues which limit market efficiency andimproving data access speed, increasing penetration of consumer welfare. For the on-deck MVAS deliverysmartphones and feature-phones as well as increasing model, the issues are centered around the absencematurity of the content ecosystem. The opportunity of a governing body to address operational issuesfor growth of non-voice revenues in India remains such as MIS reconciliation and dispute resolution.significant, as has been witnessed in multiple other The issues affecting the off-deck VAS delivery modelemerging markets, especially after the introduction of are structural in nature, with the low penetration of3G. However, unlike most other markets, India will financial instruments such as credit & debit cardsbe a mobile-first market with the latent demand for resulting in the carrier being the predominant meansmobile data being fulfilled by internet access through of reaching and billing mobile subscribers. In addition,mobile handsets, tablets and other forms of CCDs there are operational issues around interoperability,(connected computing devices). with D2C providers required to negotiate bilateral2. Similar to other mobile-first markets, mobile agreements and system integration with individualinternet (handset plus dongles / CCDs) will drive growth carriers. Similarly, for the SMS channel, absence ofin non-voice revenues while traditional services stabilize handsets with a common local language standard limits the penetration of SMS, which in turn limits theAs in other mobile-first markets with no legacy reach of mobile enabled services to the mass market,infrastructure for internet access, the growth in including for services like education and health. Fornon-voice revenues in India will be primarily driven the rapid growth of the mobile VAS ecosystem inby mobile data access. The mix of devices (handsets, India, these issues need resolution, either throughdongles and other connected computing devices) market mechanisms or by regulatory intervention.driving this market growth will depend on theeconomics and maturity of the underlying technologies 4. From a market perspective, a self-regulating body(HSPA, EVDO and LTE). In contrast to growth in the for settling issues between market participants can be andata market, we believe that the share of traditional effective way to address on-deck challengesservices will begin to stabilize or decline due to multiple For commercial agreements between carriers, whodemand and supply side constraints. We believe that are licensed entities, and mobile VAS providers, whoSMS penetration will begin to stabilize unless issues are non-licensed entities, regulatory interventionaround local language on handsets is resolved, while for monitoring MIS reconciliation and similar suchCRBT penetration will stagnate primarily due to vi Evolution of Mobile VAS in India
  5. 5. operational issues is not feasible. In such a market issues and facilitate the allocation and management of aconstruct, self-regulation involving all ecosystem central short code registry systemparticipants has been an effective means of addressing In the current market structure for short codes andcontractual issues and commitments, as can be seen premium numbers, a D2C provider needs to negotiatefor the advertising market in India through the commercial terms with individual carriers and thenestablishment of a body such as the ASCI (Advertising follow that with system integration before being ableStandards Council of India). We propose that such to offer a uniformly accessible service by consumersan industry council should have members from across carriers. In addition, in a majority of the cases,the carrier industry associations such as COAI and the carrier has a strong influence in determiningAUSPI, mobile VAS provider organizations and other the end user pricing of the D2C service to preemptstakeholders as representatives on a governing board. cannibalization of its own offerings. Such a modelThe members of this council will include carriers, inherently limits consumer choice, and also creates ahandset OEMs, technology platform providers as well significant barrier to the growth of the D2C MVAS providers. This board can draft guidelinesfor MIS reconciliation between mobile VAS providers We recommend that TRAI should establish a Centraland carriers to protect the interests of all parties, and Short Code (CSC) agency as a licensed entity to becan also act as a forum for grievance redressal, and governed by them. Licensing of the CSC agencycould issue directives for action. will allow it to enter into agreements with other licensed entities (cellular service providers). The CSC5. From a policy perspective, we believe that following a agency will issue the short code to an MVASP (at amodel of market determined revenue share with no specialVAS license is the best route predetermined price), and will communicate the same to all UASL licensees. The carriers will thenMultiple models for potentially regulating mobile VAS have to process the activation of these short codesproviders, including bringing them under a licensing in a pre-defined timeframe, across all circles. Thisframework were evaluated. In the scenario of a licensed framework can potentially dictate the pricing ofmobile VAS provider, the regulator can potentially off-deck enablers (access, hosting and billing) usingregulate revenue shares and other interconnection a modular approach to the different componentsagreements between the carrier and MVAS providers. involved, allowing VAS providers to choose the accessHowever, an evaluation of the pros and cons of the services that they need. The formulation of a “ratelicensing model suggests that it will result in significant card” for the services provided by the carriers canoperational and financial overheads on MVASPs, be done by TRAI under the interconnection regimewithout the equivalent upside. We also note that in consultation with carriers through an acceptableeven in other emerging markets that have witnessed methodology (e.g. on a cost plus basis).growth in non-voice revenues, there is no precedent oflicensing of MVASPs. Additionally, if revenue shares 7. It is also recommended that a common standardare regulated through setting a floor, the incentive for for local language characters should be mandated on all handsets sold in India to facilitate growth in SMSMVASPs to innovate to target higher revenue sharesgets significantly impacted. We therefore propose Since incremental mobile subscribers are comingthat the MVASPs may be kept outside the licensing from semi urban and rural areas, there is a demandframework and revenue shares should remain market for Indian language support on handsets. Variousdetermined and competitive. encoding schemes and other mechanisms are currently in use for sharing local language content, but there6. We recommend establishing an agency under the are interoperability issues across devices. We proposedirection of TRAI to help address off-deck adoption Executive Summary vii
  6. 6. mandating a standard like the one developed by services, the most valuable will be services providing aCeWIT for local language support on device, as well replacement to infrastructure, such as mobile-health,as mandating the incorporation of this standard on all mobile-education and mobile-banking. We believehandsets sold in India. that carriers are well positioned to make a substantial social impact by leveraging their retail distribution8. Resolution of above issues also becomes imperative reach and offering banking, payments and domesticfor maintaining market efficiency and balance of power in remittance services for the urban and rural poor. Thethe evolving VAS value chain only limiting factor in driving the adoption of utilityThe VAS value chain has become significantly complex as well as financial inclusion services is the multipleover the last few years, with the emergence of new stakeholder partnerships required by carriers inservice providers such as handset OEMs, new revenue developing the market ecosystem, which necessitatesmodels such as ad-support as well as a shift in the level significant effort and time, and sometime reducesof control by various participants. With increasing speed-to-market for some of these services.adoption of mobile internet, handset OEMs have beenexploring opportunities to offer D2C services and 10. Finally, we believe that mobile internet adoption will result in a proliferation of data enabled servicesapplications through application stores as well as retail and applications around video, advertising, community,channels (mobile banking). In parallel, faced with entertainment and enterprise mobilityincreasing competition in the voice market, carriershave been exerting their control over the mobile VAS Video has long been hailed as the potential ‘killervalue chain to reduce operating expenses. Some of application’ on 3G networks, with global 3G carriersthese initiatives include integrating VAS platforms offering a portfolio of video based services. However,into the core network, and significantly diluting the with limited spectrum allocation in India, we believerole of technology platform providers. This is in turn that data intensive video applications will remainputting pressure on technology providers to introduce muted. On the other hand, we believe that penetrationnew variants of traditional services such as CRBT, as of mobile data access in conjunction with risingwell as integrate backward to increase their share of the sales of smartphones and feature-phones will enablecarrier spend on VAS. Initiatives to foster growth of the the growth of a vibrant applications ecosystem. ThisD2C ecosystem will help maintain market efficiency will also include social networking and communityby introducing further competition and incentivizing applications, either as an extension of their onlineinnovation. avatars or customized for a mobile-first user base. Some of the business applications will allow enterprises9. Among the emerging services, we believe that mobile to m-enable their field force and harness the benefitscommerce and utility services will have a significant social of faster turn-around time and reduced workingimpact capital. Finally, data and smartphone adoption willThere have been multiple pilots and stakeholder also substantially improve users’ gaming experienceinitiatives for driving adoption of utility services which and hence adoption, and also foster new business andcan provide a scalable, technology enabled solution monetization models for mobile existing issues around access to information,opportunity and infrastructure. With the increasingavailability of quality data access and better devices,there is an opportunity for service providers to enhancethe quality and deepen the penetration of theseservices in urban as well as rural areas. Among these viii Executive Summary
  7. 7. Executive Summary ix
  8. 8. Table of Contents 1. The Indian Mobile VAS Opportunity 2 2. Policy Enablers Required for Growth of the Mobile VAS Ecosystem 8 3. Trends in the Mobile VAS Industry 18 4. Key Growth Areas: Services and Applications 28 5. Forecasts 46 Annexure: Sponsors’ Profiles 54 Evolution of Mobile VAS in India xi
  9. 9. 1. The Indian Mobile VAS Opportunity
  10. 10. 1. The Indian Mobile VAS OpportunityGlobal experience suggests that India has a latent demand for connectivity that can empower it as a‘mobile first’ data market. While historically, VAS in India lags behind other markets, enablers acrossthe ecosystem (devices, content and access) are now coming together to support a growing demandfor mobile data and applications. Supported by these structural enablers, we believe that the mobileVAS industry will hit an inflexion point in the next couple of years. With the right market and policyimperatives, the mobile VAS1 market can grow to an INR 671 bn industry and contribute 31% tooverall wireless revenues in 2015Globally, carriers have witnessed significant growth Until now, the introduction of 3G has been one ofin mobile non-voice revenues, with a clear dominance the inflexion points for adoption of mobile non-voiceof mobile data, especially in markets that have a services, with the exception of markets such aslatent demand for internet connectivity China. A study of seven emerging markets illustrates that after introduction of 3G, the yearly growth inWith voice becoming a commodity across global share of non-voice revenues has been dependentmarkets and with carriers focus on non-voice services on underlying structural parameters such as PCgrowing, facilitated by availability of 3G & 4G access penetration, fixed line base and internet penetration.technologies, rising penetration of smartphones and The share of non-voice revenues is the highest fora vibrant applications and services ecosystem, the countries where internet and PC penetration is highcontribution of VAS revenues is increasing across – indicating that users have easily translated theiremerging as well as developed markets. Leading fixed online experience onto the mobile. For thesecarriers in developed and emerging markets have illustrative markets, the contribution of non-voicemobile non-voice services contributing to as much revenues has increased by ~4% per annum fromas 50% and 35-40% of their total wireless revenues, the year of launch of 3G, which is double that forrespectively. While a comparison of India with the ‘mobile-first’ markets where the PC and internetdeveloped markets might not be fair, we believe that penetration has been lower at the time of 3G launch,an understanding of the key trends and drivers of as seen in Figure VAS in emerging markets can help betterinform the future of the mobile non-voice market India is similar to the ‘mobile-first’ markets ofin India. Indonesia and South Africa that have witnessed 1. In the context of this report, “VAS” and “MVAS” both refer to all services other than voice, and are used interchangeably with the term “non-voice” Evolution of Mobile VAS in India 2
  11. 11. growth in mobile data (within VAS) to address a markets have mobile internet access as the primarylatent demand for connectivity that was present due driver for growth of non-voice revenues, as canto lack of infrastructure and affordability issues. be seen in Figure 1.2 for carriers across variousAlthough the share of non-voice revenues in these emerging increases at a relatively lower pace, these Figure 1.1: Share of Non-Voice Revenuesa by Carrier for Global Carriers2 60% 1 Messaging Driven Market • Messaging dominant markets with high base of non-voice revenues • Philippines 45% High Growth post 3G 2 30% • Markets that have witnessed an China: ~4.8%, average changec of ~4% per year 28.2% since 3G • Malaysia, Brazil Malaysia: 21.8%, 15% 64.1% Moderate Growth post 3G Brazil: ~16%, 3 • Markets that have witnessed an S Africa: 8.2%, 45.0% 8.7% average changec of ~2.5% per 0% year since 3G Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 • S Africa, Indonesia, Thailand & China China Unicom d Vivo, Brazil Globe, Philippines Smart, Philippines e Maxis, Malaysia AIS, Thailand Telkomsel, Indonesia MTN, South Africa Vodacom, South Africa f Launch of 3G Services Legendb: Country: PC Penetration, Internet Penetration Source: Analysys Mason, © Wireless Intelligence 2011 Figure 1.2: Trend of Non-Voice Revenue and Mix (Messaging vs. Data and Others)3 % of Non – Voice 30.4% 33.6% 12.1% 19.4% 28.0% 30.0% 14.2% 23.4% Revenue 11% 12% 44% 37% 62% 56% 35% 52% 76% 91% 63% 53% 56% 38% 44% 37% 24% 9% Q1 2009 Q3 2009 Q1 2009 Q2 2010 Q1 2009 Q1 2010 Q1 2009 Q2 2010 Maxis Vivo Telekomsela Vodacom Data Messaging Others Source: © Wireless Intelligence 2011 2 . a. Non-voice revenues includes revenue from messaging, data usage and other non-voice related activities; b. PC penetration figures are for 2005 and Internet Penetration figures are as of 2006; c. Average yearly change in share of non-voice revenues (within total revenues); d. China Unicom was considered rather than China Mobile, because the latter launched 3G with TD-SCDMA while the former did so with W-CDMA / HSPA; e. Smart launched 3G services in Q1’06; f. Vodacom launched 3G services in Q4’04 3 . a. For Telekomsel – some share of other VAS included within data 3 The Indian Mobile VAS Opportunity
  12. 12. The mobile data and VAS market in India has been Overall consumer experience was one of the primelagging other markets, but is expected to hit an inhibitors for adoption of mobile VAS in India,inflexion point in the near future which in turn has a number of contributing factors in the form of device feature set, speed of dataUnlike the wireless voice market, the growth of access, availability of relevant content, and the rightnon-voice has been slower in India in comparison to end user pricing structure. If we review the trendsother emerging markets, as can be seen from Figure in these areas in the recent past, it appears that a1.3 for some leading carriers. majority of these constraints will be addressed in the Figure 1.3: Share of Non-Voice Revenues for Select Carriers in Emerging Markets4 60% Globe, Philippines 50% 40% Maxis, Malaysia 30% Telekomsel, Indonesia China Mobile, China 20% Vodacom, South Africa Idea, India 10% Airtel, India Vodafone, India 0% Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Source: © Wireless Intelligence 2011, Company Reports Figure 1.4: Demand and Supply Side Trends5 Share of GPRS Enabled Handsets in Total The Indian Music Industry Revenues by Handset Sales Component (2010) 65% Others 10% Digital Music 51% 41% Physical Music 2009 2010 49% 1 Data (2.5G) Plan Tariffs (INR)a Active Mobile Data (GPRS) Users in India 450 75 30 90 2008 2010 CY2008 CY2010 Source: Analysys Mason, Industry Inputs, FICCI Frames 2010 . Non-voice revenues includes revenue from messaging, data usage and other non-voice related activities 4 . a. Estimated price for entry level plan with unlimited monthly data usage 5 The Indian Mobile VAS Opportunity 4
  13. 13. next couple of years, and result in a seamless content • Content: Increasing availability of content foraccess and consumption experience for mobile users consumers across the board is further helpingin India, as seen in Figure 1.4. enrich end user experience. This content includes access to carrier run application stores as well • Devices: The emergence of the feature-phone as application stores available on handsets (such category, which allows a smartphone like as Android, iTunes and Nokia app stores) and experience at affordable prices for mass market independent application stores (such as GetJar). consumers, has had a significant impact on The wide variety of popular applications in the adoption of mobile internet. The feature-phone area of entertainment and communication (e.g. category is being driven by the entry of local music and SNC apps), as well as models which Indian handset OEMs, with a data enabled phone allow for free, ‘freemium’ and paid downloads available at below INR 2,000. An estimated 65% have helped enhance the utility of mobile devices of devices sold last year were GPRS enabled, up and quality of engagement with end users. A study from 51% in 2009, and data enabled devices (both conducted by one of the leading handset vendors GPRS and 3G) now constitute ~70-80% of the in India suggests that the most popular apps to installed handset base. In addition, many of these download are music (41%), social networking devices have a QWERTY keyboard, embedded (41%), business (27%), photo / personalization applications, embedded browsers and multimedia (22%) and games (22%)7. In the non-app segment, capabilities, which as a whole offers a good online music based services (full song download, music experience for mobile first users at an affordable streaming and mobile radio among others) have price point. witnessed reasonable adoption, with Indian carriers such as Airtel claiming to be the largest • Access: The availability of affordable digital music distributor in India8. feature-phones is also aided in a significant manner by the introduction of sachet pricing • Carrier focus: With the penetration of CRBT plans for mobile internet, as well as the availability stabilizing at about 18% levels, and no significant of these services in more than 150,000 villages growth in any other mobile VAS category, mobile across India. There are an estimated 100 mn active internet has emerged as a clear focus area of Indian data users in India as of today, and mobile internet carriers. In some cases, mobile internet access contributes to as much as CRBT revenues for some and tariffs have been leveraged as a differentiator carriers. Carrier price plans for data are available to ramp up subscriber acquisition. With India for as low as INR 48 for a 2GB monthly plan and being a mobile-first market (a recent survey INR 10 per MB for pay-as-you-go plans 6. suggests that for over 40% Indians, a mobile is the only means of internet access9), carrier focus Additionally, while network capacity was and the availability of affordable devices, access constrained earlier, the launch of 3G networks and content, the non-voice ecosystem is poised is expected to relieve some congestion and to grow considerably in the coming few years. offer additional bandwidth for richer mobile This is reflected in the fact that mobile data page applications and services, at least for customers in views have grown an estimated 218% over the last tier 1 cities and CBDs (Central Business Districts). year alone10. However, current 3G data pricing is at a premium to 2.5G data pricing and is expected to remain so In parallel to the above market enablers, policy in the near future, which can limit uptake in the enablers will be required to help realize the full initial years. potential of mobile VAS in India 6 . Carrier Tariffs 7 . Nokia App Store data, February 2011 8 . As disclosed by Airtel Deputy CEO, May 2009 9 . Survey by Opera, March 2011 10 . Opera Mobile Web report, May 2011 5 The Indian Mobile VAS Opportunity
  14. 14. Figure 1.5: Mobile VAS Market Potential (INR bn) 31% 31% 27% 22% 18% 16% 671 603 480 368 291 213 2010 2011 2012 2013 2014 2015 VAS Revenue (INR bn) MVAS Share of Total Revenue Source: Analysys Mason, Industry InputsMobile VAS has the potential to be an INR 671 for the market to resolve while others would benefitbn business by 2015, contributing to 31% of total from policy intervention. On-deck VAS providerswireless telecom revenues in India, as can be seen in at times face hurdles in MIS reconciliation andFigure 1.5. dispute resolution in addition to skewed revenue shares. Off-deck VAS providers are challenged by This growth will largely be driven by India emerging a lack of alternate billing mechanisms along withas a ‘mobile first’ market for internet access, with carrier control over pricing and revenue, and delaysthe mobile becoming the primary means of access in premium number integration. Challenges in SMSto the internet for a large section of the population. adoption are mainly due to the lack of a standardThus the contribution from mobile data is expected encoding scheme for local language SMS and theto reach 54% of total MVAS revenues by 2015 consequent interoperability issues between handsets.(inclusive of data access revenues from donglesand CCDs – connected computing devices), and We believe that there are potential areas ofemerge as the single largest piece. As an INR 671 market intervention through self-governance andbn industry, MVAS also has the potential to have appropriate policy frameworks which will allow themultiple second order impact on areas such as entre- Indian market to achieve parity with other emergingpreneurship and employment. markets for non-voice services adoption.However, this growth is to a certain extent constrainedby market inefficiencies, which can be addressedthrough initiatives by the market participants andthe regulator. VAS providers face different types ofchallenges with on-deck services, off-deck servicesand local language SMS, some of which are best left The Indian Mobile VAS Opportunity 6
  15. 15. 2 Policy Enablers Required for Growth of the Mobile VAS Ecosystem
  16. 16. 2 Policy Enablers Required for Growth of the Mobile VAS EcosystemGrowth constraints in the MVAS industry differ between on-deck and off-deck models, and includedispute redressal and data reconciliation, absence of direct consumer billing mechanisms, and lackof pricing control. Further, some services such as SMS face challenges in driving penetration fromthe lack of regulatory standards on enablers such as local language text. We believe that a policyframework without the requirement for licensing and with market determined revenue shares can helpdrive the overall growth of the mobile VAS ecosystem2.1. Key issues impeding the growth of MVAS 2.2. On-Deck VAS Providersindustry in India Given the high level of market inefficiency andThe growth constraints in the on-deck (carrier billed, carrier control, there is a significant amount ofcarrier delivered) and off-deck (D2C delivered, uncertainty in business models for TPEscarrier or D2C billed) ecosystems are different andthus need independent resolutions The primary issue in the on-deck MVAS space is the absence of a formal dispute redressal mechanism toThe on-deck ecosystem works with mobile VAS address potential conflicts such as MIS reconciliationproviders providing platforms and solutions to carriers between carriers and mobile VAS providers, whichthrough a mutually discussed commercial agreement results in payment delays and consequent workingwhich is not governed by any policy framework. capital requirements from smaller mobile VASGiven the carrier ownership of mobile users and providers. This becomes especially important astheir scale, there always remains a possibility in such VAS providers rarely have the negotiating power totransactions for market inefficiencies, which in turn deal with carriers, and the commercial arrangementsmay impact innovation and market development. between a carrier and a VAS provider remains outsideFor off-deck service providers, the bilateral mode of the purview of TRAI regulation. In addition to thisdealing with one carrier at a time for basic services working capital constraint, there is also an elementsuch as short code setup results in significant delay of uncertainty in mobile VAS providers’ revenueand coordination needs, in addition to separate due to the carrier-VAS provider collaboration modelsystem integration costs with multiple carriers. For being based on a revenue share agreement.both on-deck and off-deck mobile VAS offerings,we evaluated the potential resolution frameworks to Carriers take over 60% of revenue share for most ofmaximize market efficiency and consumer welfare. the mobile VAS offerings. The reason behind suchIn addition, there are structural issues such as the a high revenue share is the cost of their branding,lack of local language support across devices which marketing and promotional support for on-deckimpact the adoption of SMS and related services. mobile VAS offerings, in addition to the customer Evolution of Mobile VAS in India 8
  17. 17. care and other such operational costs involved in higher level of end user pricing of VAS services.delivering the services to the end user. In addition, These mobile VAS providers have adopted anas the primary revenue stream of such mobile VAS organic as well as inorganic expansion route to enterproviders (TPEs) is dependent on carriers, in cases some of the international markets, and for someof a decline in carrier revenue due to increasing of the TPEs, more than 30% of their subscriberscompetition or the changing nature of demand, the through carrier and OEM partnerships are fromrevenues of mobile VAS providers is at risk. More international markets.importantly, there have been instances when thecarriers have had to reduce revenue shares when The second issue is that many carriers have athey have been under pressure to optimize their relatively higher focus on services which offeroperational expenditure, further putting pressure on immediate revenues and are reluctant to go formobile VAS provider revenues. We understand that ‘capability investing’ models which are innovativethis is a business model issue and the risk taken by but have only a long term monetization potential.a mobile VAS provider in a market place, yet this This results in limited innovation, with significantinduces a high level of uncertainty in the timing focus of carriers on increasing penetration of basicand amount of expected revenues for a mobile VAS services & restricted investments. This is alsoprovider working with a carrier. leading mobile VAS providers to focus on mass market services as they do not have sufficient fundsThis unpredictability of overall revenue and limited and incentive to experiment with new offerings forprofitability potential has led to limited innovation specific niche consumer segments.and platform providers investing in internationalmarkets Finally, given the high level of control of carriers and the relatively smaller overall marketDue to the unpredictability of their overall revenues, for platform providers, larger internationalmany TPEs are expanding to international markets VAS providers have stayed away from thewhich offer better revenue shares and also have a Indian market Figure 2.1: Revenue Share Range Estimates by Type of MVAS and their Level of Content / Service Differentiation 60% 50% • Very popular service, albeit stabilizing now • Network integrated service – harder to 40% switch providers • Content is important • Innovative service with high 30% value proposition • Celebrities are procured by VASP 20% • Very generic service • No clear differentiator between providers 10% 0% News Alerts CRBT Celebrity Talk Source: Analysys Mason, Industry Inputs 9 Policy Enablers Required for Growth of the Mobile VAS Ecosystem
  18. 18. But there have been positive signs from carriers pricing and revenue shares, and delay in access torecently as they begin to focus more on non-voice premium numbers are the core issues hampering theservices. This remains true even in the current growth of the off-deck / D2C ecosystem in scenario with VAS providers offering services/ content with differentiation are rewarded with From a technological perspective, WAP / GPRS ishigher revenue shares than VAS providers offering the only channel on which services can be offeredgeneric services. Figure 2.1 compares the revenue directly to consumers. TRAI recommendationsshares in the industry today across generic and have protected the open mobile internet model,differentiated services. which does not allow the carrier to block any particular portal.Given this direct impact of revenue shares oninnovation, we believe that revenue shares should However, the lack of alternate billing mechanismsbe left to market forces. There is also no precedent results in a carrier controlled off-deck MVASof revenue share regulation in other global markets. industry where the off-deck VAS provider has noSetting a floor for minimum revenue shares will control over the pricing of his offerings. This hasonly disincentivize VAS providers from striving for resulted in the price of VAS services being controlledinnovation in their offerings. by carriers for on-deck as well as off-deck services, resulting in the price point of these services being2.3. Off-Deck VAS Providers fairly constant over the years, as can be seen in Figure 2.2.The lack of alternate billing / payment channels hasbeen a significant factor in restricting the growth of The lack of alternate billing / payment channelsoff-deck VAS in India has resulted in restricted growth of off-deck VAS in India. The absence of mass penetration of alternateLack of a direct billing channel, carrier control on payment channels such as credit cards / wallets Figure 2.2: Carrier Control over Pricing11 End user Price for Voice and Non-Voice Offerings ARPU vs. Price of Popular Game in Different in India (2007 & 2010)a Countries (INR)b INR INR 30 30 30 2500 (2%) 2171.7 2000 (3%) 20 1507.5 1500 15 15 1000 (17%) 10 10 10 10 10 10 722.3 (10%) 444.6 500 (33%) 3 3 3 161.6 119.7 54.0 44.6 42.8 44.6 0 0 Voice Premium Mono Tone Poly Tone Wallpaper CRBT India USA UK China Malaysia (10 mins call)a SMS Download Subscription ARPU Game Price 2007 2010 Source: Analysys Mason11 . a. For a 10 minute call; 2007 rate assumed at INR 1 per minute, 2009 rate at INR 0.5 paisa per second, Cost of per transaction for SMS, monotone, polytone & wallpaper, monthly subscription for CRBT; b. India (Paid game on Indiatimes), USA, UK, China (Paid game on Apple Apps Store), Malaysia (GamesUnlimited; Maxis games site); Most games in China are cracked & available for free. Number in parenthesis indicates the cost of game as a % of ARPU Number in parenthesis indicates the cost of game as a % of ARPU Policy Enablers Required for Growth of the Mobile VAS Ecosystem 10
  19. 19. restricts the ability of off-deck VAS providers to deployment and management. Delays in requestdirectly bill consumers. processing and allotment of short codes are common within the industry. In addition, since short codesMost VAS providers go through carrier billing are controlled by the carriers, situations arise whereto increase their reach, and end up sharing a high some carriers have allotted short codes, while othersshare (~60-70%) of their revenues with the carrier have not. In such a situation, services get delayedfor use of only the billing channel. This is in sharp and sometimes don’t get launched ever.contrast to global markets where an off-deck VASindustry thrives in the absence of billing constraints. Even once allotted and deployed, short code servicesGlobal markets such as China, Japan and Korea face issues such as arbitrary pricing and blocking ofhave a robust D2C ecosystem and the market has services that are deemed ‘competitive’ by the carrier.benefitted from an early opening of carrier walledgardens to offer easy access to D2C services. 2.4. SMS AdoptionIn addition, mobile VAS providers face significant Penetration of SMS users in India is low as comparedhurdles in activating short codes across multiple to other developing markets such as China andcarriers, in addition to the high integration cost Philippines. While very low pricing has been an important factor in such high usage in ChinaFor SMS and voice, short code services face several and Philippines, another important reason is theissues from allotment of short code to deployment availability of standards-based and efficient encodingof services. Individual carrier controlled and schemes. In India, less than 10% of the installed basemaintained short codes make national rollouts a of handsets supports non-Roman characters, whichlengthy and complicated process. means a large portion of the population is unable to use SMS. Also different handset OEMs use theirShort code services face multiple issues, right from own proprietary standards for local language text,the first step of short code allocation to service creating interoperability issues across devices. Figure 2.3: SMS Penetration, 2010 100% 100% 80% 75% 47% 50% 25% 0% Philippines China India Source: Analysys Mason 11 Policy Enablers Required for Growth of the Mobile VAS Ecosystem
  20. 20. Absence of standards based solutions for local a license. In addition, this position also suggestslanguage SMS is another challenge to be addressed that revenue shares should not be regulated asfor growth in SMS users and usage. Complexity it directly impacts innovation by guaranteeingof Indic scripts results in relatively high number a minimum level or constraining services to aof characters per word on an average while the maximum, and are therefore best left to marketinherent efficiency of the Chinese language forces. Recent deals and market movements(average word-length less than 2) overcame the demonstrate that innovation is being rewarded.limitations imposed by Unicode (UCS-2) in terms of70-character size limit. In the case of Philippines, the Proposed Solution: Includes formation of alocal languages are written using the Roman script self-regulated industry forum, similar to thewhich means that the default 7-bit GSM alphabet Advertising Standards Council of India, ASCIcan be used (as in the case of English). to govern the mobile VAS sector. Such a body can provide industry representation and a formalVariation in keypad layouts and standards for Indic dispute redressal mechanism for supporting thelanguage support across vendors / devices results in on-deck ecosystem in addressing the challengesloss of content. This difference creates incompatibility of MIS reconciliation and dispute redressal.between handsets. Some OEMs are using the coded This will also be supported by the formation ofpicture messaging technology for Indian language a premium number policy which will governSMS, which gets limited to specific handsets. These the operation of short codes and rates of inter-issues have constrained the growth of SMS usage connection to help in promoting the off-deckin India. As the number of subscribers from rural ecosystem.areas is growing at a faster rate than in urban areas,the demand for SMS in Indian language is likely to 2. Licensing with Market Determined Revenuecontinue to grow. Shares: This position supports a broad licensing framework for the VAS industry, but allows2.5. Recommendation revenue shares to be determined by market forces. The basic premise is that licensing willThere are multiple view points on the potential ensure that the VAS industry gets support onsolutions to these issues, specifically with respect critical issues such as MIS reconciliation andto revenue share regulation. Opinions vary across dispute resolution, although business termsindustry stakeholders on the preferred solutions such as revenue shares would remain part of theto address the current issues with the mobile VAS commercial agreements between entities andindustry. Broadly, there are three positions proposed therefore left to market different stakeholders: Proposed Solution: Development of a mobile1. Policy Framework With Market Determined VAS licensing framework that will regulate MIS Revenue Shares: The basic premise of this reconciliation, address dispute resolution and position is that no separate VAS license is required, other issues, but will leave revenue shares to as it may increase the cost for VAS providers, and market participants. All VAS providers would be negatively impact innovation as smaller VAS required to acquire a license. providers will have to bear the attendant costs of Policy Enablers Required for Growth of the Mobile VAS Ecosystem 12
  21. 21. 3. Licensing with Policy Determined Revenue Govt approvals would be required. Shares: This position supports a focused licensing • Innovation will be hindered as launching a new regime for VAS providers, including regulation VASP will require acquiring a license. Given the of minimum revenue shares. The basic premise nature of work in development of VAS services, is that revenue share remains a critical issue in it is important that small entrepreneurs get the the ecosystem and with the regulation of revenue flexibility and encouragement that is necessary to shares other operational issues such as MIS drive innovation. reconciliation will also get addressed. • Increased overheads resulting from reporting requirements can inhibit the growth of smaller Proposed Solution: Development of a VAS companies and increase costs for the ecosystem. licensing framework that will specify a minimum revenue share, in addition to regulating MIS The absence of any licensing framework in other reconciliation, dispute resolution and other emerging markets which have witnessed a high aspects. All VAS providers would be required to adoption of VAS supports the first option of not acquire a license. having a license. However, these markets had the benefit of legacy structure and infrastructuralWhile licensing is potentially an option to address enablers such as alternate billing mechanismsthese issues, licensing by itself does not guarantee (high penetration of credit and debit cards), higha solution. Based on carrier and service provider smartphone penetration, higher internet penetrationsubmissions, the pros of licensing can be enumerated and established 3G networks. If policy interventionas follows12: can help put these structural enablers in place, then the Indian mobile VAS ecosystem can also prosper • Licensing will ensure that the VAS industry without a licensing and regulatory framework. gets support on critical issues such as MIS reconciliation and dispute redressal. Our recommendations to the regulatory approach • Licensing would allow the sector to become more are as follows: organized and formalised. 1. We believe that revenue shares are best left to • It would also allow VASPs to come under inter- connection regulation and thus access carrier market forces, given their direct impact on services in a timely fashion with guaranteed QOS, innovation and without the threat of being blocked. Revenue shares are a business discussion • It would also rate players in the VAS space for their between two commercial entities and should be compliance with best practices and standards set by TRAI and others. Coupled with information determined by the value placed by the carrier disclosure measures, this would help in improving on the differentiated nature and monetization market functioning and dispute redressal. potential of the service offered by a mobile VASP. Such a commercial model should help reward newHowever, licensing may not be the best solution for and innovative offerings, while commoditizedthese issues as it comes with additional administrative services are compensated differently.and financial requirements, as listed below: 2. The formation of an industry self-governing • Licensing will result in high costs, including license fee payments, and delays in processes as board that can act as a formal forum for 12 . Response to the TRAI VAS consultation paper 2011 13 Policy Enablers Required for Growth of the Mobile VAS Ecosystem
  22. 22. participants in the on-deck ecosystem can This board can draft guidelines for MISaddress some of these growth constraints reconciliation between VAS providers and carriers to protect the interests of all players,We propose the formation of an industry forum especially the smaller providers. This forum canfor on-deck mobile VAS providers. Such a forum also act as a forum for grievance redressal andwill focus on industry self-regulation and can be can issue directives for action.structured in a manner similar to the AdvertisingStandards Council of India (ADCI). The ASCI 3. A policy framework that will introduce acouncil is a body with representatives from across premium number policy can potentiallythe advertising ecosystem. While the council provide an alternate payment mechanismdoes not have any legal powers, it provides by allowing D2C providers the flexibility torepresentation of the overall industry and also control the end user pricing of their servicesoffers a consumer grievance redressal committee. and be aware of their share of the end user revenueThe proposed forum for mobile VAS providerscan have a structure as illustrated in Figure 2.4. As of now, an off-deck VAS provider needs toThe forum board will have representatives from integrate with multiple carriers to be able to usethe carrier and MVASP industry associations. the same premium number / short code numberThe members of such a council will include to provide services to all subscribers. In additionparticipants from the carriers, handset OEMs, to the cost of integration, the time involved intechnology platform providers as well as MVAS such a process is extremely long. Also, the carrierproviders. has an influence on deciding the end user priceFigure 2.4: Proposed Industry Association for Mobile VAS Providers in India IAMAI COAI / AUSPI Formation of an MVAS Authority MVAS Industry Governing Board Members From MVAS Services Handset Stakeholders Across Providers the Value Chain Manufacturers Technology Platform Carriers ProvidersSource: Analysys Mason, Industry Inputs Policy Enablers Required for Growth of the Mobile VAS Ecosystem 14
  23. 23. as well as the potential revenue share expected multiple carriers. This also allows the MVASP toby the MVASP, since the carrier effectively has decide the end user pricing of the service, whicha monopoly over their user base – if the MVASP can bring the benefits of competitive marketwants to access that carrier’s customers, they have prices to consumers. In addition, market drivenno other way to do it using a premium number. commercial negotiation between an MVASP and host carriers will ensure availability of multipleA Central Short Code (CSC) agency could competitive options based on the nature ofbe established as a licensed agency, similar to service as well as scale / expected adoption.the MNP agencies, and will be governed byTRAI. Licensing of the CSC agency will allow TRAI can then, using IUC regulations, createit to enter into agreements with other licensed a set of norms for premium number intercon-entities (cellular service providers). The CSC nection. The TRAI mandated rate card foragency will issue a short code to an MVASP (at originating carriers will include price points fora predetermined price), and will communicate service such as billing, origination / terminationthe same to all UASL licensees. These carriers charges of voice and SMS services, based on thewill then have to process the activation of these cost of providing such services. For terminatingshort codes in a pre-defined timeframe, across all carriers, the rate card can include termination ofcircles. premium voice and SMS services.We believe that such a framework can help save This framework can potentially dictate thecost and time of integration for MVASPs with pricing of off-deck enablers (access, hostingFigure 2.5: Proposed Framework for Premium Number Policy Central Short Code (CSC) Agency Created & Mandated by TRAI • Short codes allocated and maintained by this Short Code Operational Across Carriers central agency • Pan India access across all carriers Carrier Carrier ……. Carrier • Mandated turnaround 1 2 n time of activation across carriers User Billed Host carrier pays VASP; by carrier Keeps share to cover for service interconnection and other costs VAS Provider • VAS Provider Offers Services to Users Service Flow Revenue Flow Across CarriersSource: Analysys Mason15 Policy Enablers Required for Growth of the Mobile VAS Ecosystem
  24. 24. and billing) using a modular approach to the (UCS-2), ISCII and picture messaging are different components involved, allowing the VAS currently in use for sharing local language providers to choose the access services that they content, but these solutions are not interoperable need. The formulation of this “rate card” for the across devices. In 2008, 3GPP, the body for services provided by the carriers can be done by global mobile telephony standards, amended the TRAI in consultation with the carriers through SMS standards to accommodate a request from an acceptable methodology (e.g. on a cost plus Turkey to support the full Turkish alphabet. basis). Identifying a standardized set of characters of local language fonts in partnership with the4. Standardization of character set and industry will provide the key inputs for deciding incorporation of local language support on the Indic 7-bit encoding format, simplified Indic device can be a potential enabler to drive SMS keypad design (to make user adoption easy) penetration and memory efficient font libraries (critical for distribution and field support). We propose mandating a standard like the CeWIT developed standardized solutions for In addition to the standard solution for local local language support on device, which has language encoding schemes, we propose been approved by GSMA. As incremental mobile mandating the incorporation of local language subscribers are coming from semi urban and text on all handsets sold in India. This enforcement rural areas, there is a demand for handsets with on handset vendors will provide better reach and Indian language support. Various encoding awareness as devices are replaced over time. schemes and other mechanisms such as Unicode Figure 2.6: Proposed Transaction Model for Premium Number Policy Central Short Code (CSC) Agency Created & Mandated by TRAI • Short codes allocated and maintained by this central agency • Short code will be Keeps price as per INR a-b-c accessible Pan India the rate card for: Carrier Carrier across all carriers • Origination / 1 2 • Mandated turnaround Termination INR b time of activation charges across carriers (INR b) As per • Billing – includes commercial customer care cost negotiations (INR c) End user price (INR a) VAS Provider Carrier 1 Subscriber • Selects a carrier for hosting Originating Flow Sends SMS to the premium based on the best rate offered for Termination Flow code of VAS provider A hosting and commercial deal Source: Analysys Mason Policy Enablers Required for Growth of the Mobile VAS Ecosystem 16
  25. 25. 3 Trends in the Mobile VAS Industry
  26. 26. 3 Trends in the Mobile VAS IndustryThe past couple of years have witnessed structural changes in the mobile VAS value chain withthe uptake of mobile data facilitating the entry of handset OEMs and OTT service providers foroffering D2C services to end users. We expect this trend to continue and mobile data to emerge as apre-dominant driver for non-voice services, counterbalancing the stabilizing penetration of traditionalservices such as CRBT and P2P SMS. In addition, emerging services such as mobile commerce andmobile advertising are also offering an opportunity to carriers to generate revenues from brands,government and other ecosystem participants. As the D2C ecosystem grows, we expect carriers tofocus more on traditional network dependent services3.1. Mobile Data utility applications to differentiate and position their offerings. Community applications whichA majority of the incremental growth in Mobile are proprietary to handset OEMs (e.g. BlackBerryVAS revenues is expected to come from mobile data, Messenger), as well as aggregation of multiple onlineincluding mobile handset and dongle / CCD usage. community applications on devices (e.g. Facebook,The contribution of mobile data to total MVAS Twitter and Orkut) by local as well as global handsetrevenues is expected to increase from 34% in 2010 OEMs have provided a strong use case for end users,to 54% by 2015 especially the youth population, to opt for a mobile internet connection. Such data enabled handsets areThe adoption of mobile handset data has been increasingly becoming the norm, and accounted fortraditionally constrained due to well-known reasons about 65% of handset sales in 2010. Data enabledof 2.5G network capacity and handset capabilities feature phones can also drive mid-level users to useresulting in a sub-optimal user experience. With mobile data. Figure 3.1 illustrates a case study wheresome of the new entrants using mobile handset a carrier has been able to drive their mobile datadata as a differentiator to acquire users as well as usage among low end users through effective usageavailability of GPRS/EDGE enabled feature-phones and implementation of widgets.and basic phones at reasonable price points (< INR2,000), the mobile handset user base has been Also, the price points at which these data plans areincreasing. Carriers are reported to have provisioned available today are also decreasing significantly,or enhanced GPRS capacity in more than 150,000 with some carriers offering 6GB data for INR 100.villages in India, which can provide mobile data Although it’s a perceived value pricing model givenaccess to a large share of the Indian population. that a user generally consumes 100 to 300 MB of data per month (depending on the type of device),In addition to network, handset OEMs are also still the overall price per MB for handset data hasusing mobile internet based community and Evolution of Mobile VAS in India 18