Mobile VAS In India - Exec. Summary

Future of Mobile VAS in India Executive Summary December 2007 Mohit S. Gundecha Research Associate Stanford University Prof. Tom Kosnik Fenwick & West Consulting Professor STVP, Stanford University Kunal Bajaj Director – India BDA

Our special thanks to:

Eric Allen – Wireless Advisor

Veerchand Bothra – Author, MobilePundit

Nitin Brahmankar – Director, IDT

Girish Trivedi – Principal Manager

Deepshikha Garg

Rahul Gupta

Smita Sharma

BDA Team:

The team followed the below process in a very limited timeline, yet was able to gather extensive primary information from industry leaders Research Design Primary Data: Interviewed 23 leading VAS companies, each of the major telecom operators and other industry experts Secondary Data: BDA Database & Reports Why Mobile? Why India? Why Now? Mobile Momentum Sept 15 Sept 30 Oct 15 Oct 30 Nov 15 Nov 30 Stanford & BDA Team Synthesis & Analysis

Leading VAS players in India profiled during project

Table of Contents

Indian Telecom Overview

Introduction to VAS in India

VAS Value Chain

Key Challenges & Hurdles Today

VAS Outlook for India

Addressing Challenges & Hurdles

Assessment of Applications & Services

Projections

Source: TRAI, COAI, AUSPI, BDA Analysis

Despite the continued record growth over the last 12 months, only 23.07% of the country’s 1.1 bn population owns a telephone, which points to a situation where growth is expected to continue and even accelerate

The Big 4 continue to lead in market share, but BSNL is losing ground to the other 3 quickly

Interesting Market Facts Indian telecom overview Note: Mobile subs data includes fixed wireless customers Operator Market Share (Oct 2007) 2.67 million (Sept 2007) Broadband Subs 9.22 million (Jun 2007) Internet Subs 217.14 million (Oct 2007) Mobile Subs 39.41 million (Oct 2007 ) Fixed Subs 1.112 billion Population

Market continues to show a trend of over 7 million net subscriber additions in a month Million Micro Prepaid Takes off Launch of 999 scheme Penetration in B & C Circles Verification of subscribers Launch of INR 777 Handsets / Lifetime Prepaid Below INR 500 Record Additions in a month Source: TRAI, Morgan Stanley Research, Telecom Watch, BDA Analysis

Net new additions continued to be high but less than the last couple of months.

With aggressive rollout targets by operators such as Airtel who plan to expand coverage to rural areas, the trend of new subscribers additions will continue

Rules of the game Source: BDA Analysis Unprecedented Growth Declining Tariff Declining Handset Prices Innovative Pre-Paid Tariff Plans Improved Regulatory Structure

Over the recent years, most new subscribers being acquired have been low-end users, resulting in falling ARPU Source: Company Information, TRAI, BDA Interview and Analysis

ARPUs are dropping as volumes increase

With increased competition, tariffs of voice calls have gradually declined over the years

Most of the subscribers added are from the bottom of the pyramid with low usage resulting in reduced ARPU

Operators are focused on acquiring customers. The fall in ARPU will continue unless operators look at alternative revenue streams like VAS

It is unlikely tariffs will increase given aggressive competition between operators to add subs

Spectrum allocation based on subscriber linked criteria has pushed operators to focus more on acquiring subscribers

Mobile ARPUs are Declining Precipitously ARPU (INR) Subscriber (mn)

Operators and handset vendors must adapt their strategies to serve the Bottom of the Pyramid Growth is taking off in semi- urban and rural areas Growth is continuing in metros and urban USO will help continue to drive coverage gains Operators and vendors must adapt their strategies and distribution to meet this new growth Growth is fastest at the Bottom of the Pyramid Source: BDA Analysis

Table of Contents

VAS Value Chain

Projections

India’s VAS market estimates show aggressive growth and decreasing relative importance of text-based offerings Source: COAI, IAMAI, BDA Analysis

VAS services presently contribute 7% of the total telecom revenue for Indian operators

Non voice revenues have been increasing since 2000. The revenue growth is driven by SMS (including P2P, A2P, P2A), contributing over 55% of the total revenues in 2006

Over the last three years the % share of revenues coming from SMS is on a decline as other services, primarily CRBT / Ringtones gain

VAS Performance 2005 2006 Data and Voice Breakup 100% = USD 438 mn USD 678 mn Voice VAS Others E-mail Data Games Voice CRBT / Ringtones SMS (A2P P2A) SMS (P2P)

VAS today comprises of primarily SMS and content focuses on Bollywood & Cricket Source: BDA Analysis

SMS has been recently driven by voting based TV shows. Indian Idol alone received more than 5,400 SMSs per minute during the last 9 voting days

SMS has been reinvented and adopted for mobile data services used by enterprises as well

Bollywood/Cricket SMS Rural VAS IVR

Bollywood is the killer content and is being used for ring tones, CRBT, games and wallpapers

It is followed by cricket, around which most of the rest of content is built and marketed

Niche applications like IVR have just started to emerge and have been successfully used in some of TV shows, as well, for auditioning participants

Rural application initiatives have started primarily in pilots, but with innovative services like commodity pricing, their utility is potentially very high in less developed geographies

Table of Contents

VAS Value Chain

Projections

The VAS value chain consists of six entities primarily involved in the flow SI/NI Handset Vendor Aggregator Software Developer Technology Enabler Telco Consumer Content / Application Owner Source: BDA Interview and Analysis, Industry Feedback Internet Pipeline Content Flow Process Flow

Network operators dominate the revenue sharing arrangement in VAS today Source: BDA Interview and Analysis, Industry Feedback End User End user pays for the content Operator keeps 60 - 70% of revenue Aggregators get approx 20 - 25 % of revenue Content / Application owners get 10 - 15% of total revenue Network Operator Aggregator Content / Application Owner

Overall revenue share split of 70:30 between operators and VAS players applies for both GSM and CDMA operators

Table of Contents

VAS Value Chain

Projections

VAS challenges … Operator Challenge Device Challenge Content Localization Challenge

Operators focusing on subscriber acquisition with no incentives to push VAS in light of current spectrum allocation criteria

Spectrum constraints and delay in 3G roll-out has substantially limited high-end VAS take-off

Providing feature-rich handsets at low cost is a big challenge with GPRS enabled handsets still around INR 2,599 (USD 63)

Pre-loading of applications by handset OEMs has not really caught on yet

Operators haven’t done much to customize content according to consumer behaviour

Limited availability of local web content and WAP versions of whatever is available

Value Added Services Source: BDA Analysis User Challenge

Operators not driving user awareness to promote various VAS offerings

Ease of use, user interface and familiarity with medium of access such as GPRS, IVR etc are some of the challenges for the end user

Revenue Challenge

Ongoing tussle between operators and VAS companies for revenue share continues

Since alternative models haven't evolved yet, this has hampered VAS innovation

Revenue Challenge

Mobile advertising model is in nascent stage as agencies are yet to adopt this new channel and gain familiarity

Revenue Challenge

User Challenge

VAS challenges … Operator Challenge Device Challenge

Revenue Challenge

Content Localization Challenge

Operators haven’t done much to customize content according to consumer behavior

VAS challenges … Device Challenge

Revenue Challenge

Operator Challenge

VAS challenges … Value Added Services Source: BDA Analysis User Challenge

Revenue Challenge

Operator Challenge

Device Challenge

Providing feature-rich handsets at low cost is a big challenge with GPRS enabled handsets still costing around INR 2,599 (USD 63)

Device Challenge

Providing feature-rich handsets at low cost is a big challenge with GPRS enabled handsets still costing around INR 2,599 (USD 63)

Table of Contents

VAS Value Chain

Projections

VAS challenges – moving on … Value Added Services Source: BDA Analysis Challenge will be overcome Challenge will continue to exist Challenge may be overcome or could continue to exist Revenue Challenge

Advertisements will be a new revenue avenue for VAS players and could offer them the independence they need to succeed

Mobile advertising will benefit operators, advertisers, VAS players and consumers

User Challenge

Traditional VAS – SMS, CRBT and ringtones will continue to grow with increased awareness

Awareness will remain a problem for advanced VAS services unless marketing is done by VAS companies themselves to educate users

IVR will be a solution to local language support

Creating the locally relevant content will still require substantial investments

Operator Challenge

Regulatory uncertainty around spectrum is going to continue to hinder promotion of VAS

With 3G, operators will increase their focus on mobile internet VAS for high end users

Device Challenge

Devices are no more a challenge with more features getting added at lower price points

VAS players and handset vendors are forming partnerships to embed applications

VAS challenges – moving on … Operator Challenge User Challenge Device Challenge Content Localization Challenge

Value Added Services Source: BDA Analysis Challenge will be overcome Challenge will continue to exist Challenge may be overcome or could continue to exist Revenue Challenge

Revenue Challenge

VAS challenges – moving on … Operator Challenge Device Challenge Content Localization Challenge

User Challenge

VAS challenges – moving on … Operator Challenge Device Challenge

User Challenge

More content will be created for Bollywood and cricket as they are tried & tested

VAS challenges – moving on … Device Challenge

Value Added Services Source: BDA Analysis Content Localization Challenge

Challenge will be overcome Challenge will continue to exist Challenge may be overcome or could continue to exist Revenue Challenge

User Challenge

Operator Challenge

In India, with the introduction of 3G, high end 2G users can be immediately migrated for delivering better service experience and freeing capacity

With 3G operators will increase their focus on mobile internet VAS for high end users

VAS challenges – moving on … Value Added Services Source: BDA Analysis Content Localization Challenge

Challenge will be overcome Challenge will continue to exist Challenge may be overcome or could continue to exist Revenue Challenge

User Challenge

Operator Challenge

Device Challenge

GSM players have started adopting aggressive handset bundling thus reducing GSM cost of ownership, as well

Table of Contents

VAS Value Chain

Projections

Industry sentiment gives a clear indication where the revenues are likely to come from Source: BDA Interviews and Analysis, Industry Feedback SMS Mobile Commerce Mobile Music UGC/SNC IVR

Easy learning curve, regional language content

Capable of replicating info service from SMS or WAP

Platform for youth socializing

Online UGC/SNC gaining popularity in India

Full music download & streaming over 3G

Extension of current services

Micro payment for merchants on the move, mobile vouchers

Remittance and P2P transfers

Enhanced messaging experience for users

Contextual targeting of users

For

Pricing and network quality / speeds critical for the success

Bandwidth hampers content sharing

Handsets deliver poor user experience in viewing size & browser

Not affordable for the masses, due to premium charging on per min basis

Lack of refined digitized local language content

Convince advertisers about SMS ads

Contextual advertising could be intrusive in nature

As a cash & cheque country, will take time for mass market to adopt mCommerce

Against Industry Feedback Application

Industry sentiment about internet apps being ported to mobile are mixed, especially given low data enabled handset penetration Source: BDA Interviews and Analysis, Industry Feedback IM E-mail Search LBS

Useful for warehousing, field force resource tracking and fleet management for businesses

Access to quick, actionable information on the move

Across business segments will see increasing adoption of e-mail on the move

Access IM on the move & replicate internet experience

For

Lack of digitized locally relevant content (e.g. listings, maps) in India

Low level of business computerization

Lack of detailed mapping content

User demand not significant

Premium charging for messages

Text entry, especially for local language

Handset cost & overall investment in initial implementation is high deterrent

Against Industry Feedback Application

Table of Contents

VAS Value Chain

Projections

In the medium term most of the current challenges will be addresses by both operators and VAS players… Source: BDA Analysis 2008-09 Trends

Continued low ARPU subscriber growth, forming majority of net adds will ensure growth of traditional VAS

Operators focus shifts from customer acquisition to VAS promotion, but very slowly

Device challenge will start to decline

Primary focus on reinvention of traditional VAS & early adoption of high end services

Medium Term Growth Driver

Overcoming challenges will rely on shifts in industry direction caused by regulatory changes like

Mobile Number Portability

Allocation of 2G spectrum

Introduction of 3G

Non-regulatory changes like

Availability of payment systems other than the telco

Ad-supported VAS gaining ground, and thus consumers and VAS companies gain power

Promotion of bundling data plans with voice

Large numbers of users experiencing internet for first time on mobile devices

And continuation of ongoing trends

Product innovation and ease of use

Device improvements allowing more “on the go”

Shorter VAS adoption cycles

2006-07 Trends

Subscriber growth at the low end has led to declining per capita VAS usage

Declining prices induced volume growth

Cost of smart phones & features rich handsets continue to decline, increasing adoption

2006-07 Trends

In the medium term most of the current challenges will be addresses by both operators and VAS players… Source: BDA Analysis Medium Term Growth Driver

Introduction of 3G

2006-07 Trends

2008-09 Trends

In the medium term most of the current challenges will be addresses by both operators and VAS players… Source: BDA Analysis 2008-09 Trends

2006-07 Trends

Introduction of 3G

Introduction of 3G

How do the numbers stack up 2007 2010 W-VAS Services Performance Forecast 100%= USD 926.3 mn 100%= USD 2,744 mn VAS Revenues Forecast 2007-10 2004 2005 2009E 2008E 2007E 2006 2010E Revenues (USD mn) VAS as % of Total Rev Source: BDA Analysis 44% Overall CAGR 82% Others 138% E-mail 141% Data 63% Games 82% Voice 18% CRBT / Ringtones 20% SMS (A2P P2A) 26% SMS (P2P) CAGR%

2010 and beyond… 2010 and Beyond Source: BDA Analysis

Share of traditional VAS will decline to less than 50% in 2010 from nearly 80% today

Mobile Data / Internet, E-Mail, and IVR based services will achieve the highest growth rates

VAS companies will start seeing the environment favoring them

Operators will heighten focus towards VAS as a requirement to sustain revenue growth and monetize slowing user base expansion

Industry will witness much awaited hockey stick growth beyond 2010

Contact Details BDA Team Kunal Bajaj Director - India kunal.bajaj@bdaconnect.com Girish Trivedi - Principal Manager Deepshikha Garg, Rahul Gupta Smita Sharma India: +91 11 4700 3100 China: +86 10 8529 6164 [email_address] www.bdaconnect.com Stanford University Team Mohit S. Gundecha Research Associate Stanford Technology Ventures Program [email_address] [email_address] Prof. Tom Kosnik Consulting Professor Stanford Technology Ventures Program kosnik@stanford.edu Full Report Access www.bdaconnect.com/india