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Future of Mobile VAS
                                             in
                                           India
                                                                              December 2007




  Mohit S. Gundecha                           Prof. Tom Kosnik                       Kunal Bajaj
  Research Associate                    Fenwick & West Consulting Professor         Director – India
  Stanford University                        STVP, Stanford University                          BDA

© 2007 Stanford University & BDA
BDA Team:
   • Girish Trivedi – Principal Manager
   • Deepshikha Garg
   • Rahul Gupta
   • Smita Sharma


                                           Our special thanks to:
                                          • Eric Allen – Wireless Advisor
                                          • Veerchand Bothra – Author, MobilePundit
                                          • Nitin Brahmankar – Director, IDT



© 2007 Stanford University & BDA
Executive Summary (1/3)
                        India’s telecom market and VAS background


• India’s telecom market is experiencing explosive growth
    – Crossed 217 mn subs by Oct 07 with net adds of nearly 8 mn subs / month over last 4 months
    – Despite continued record growth over last 12 months, only 23% of 1.1 bn population owns a phone
    – There are 6-7 telcos operating in each of 23 license areas. Airtel, Reliance, Vodafone & BSNL, who are “the Big 4”
      have 74% market share
    – Growth is expected to continue and even accelerate, reaching a projected 496 mn mobile subs by 2010
• Near term outlook shows a continuing focus on acquiring new low end customers
    – Improved regulatory structure has lead to increased competition, and operators aggressively tailoring strategies to
      acquire customers across all segments by making mobile services more affordable and increasing coverage
    – Prepaid users comprise over 85% of total subs and over 95% of net new additions, further adding to the impact of
      tariffs on falling ARPU
    – Almost half of Indian mobile subs use low cost handsets and this is expected to increase further with new additions
    – Further innovation in entry-level handsets and call tariffs will continue to drive growth
    – Operators will need to look at alternative revenue streams like VAS as they mature
• Traditional VAS has been primarily SMS-based, with Bollywood and Cricket the largest content drivers
    – VAS services contribute approx 7% of total wireless telecom revenues for Indian operators
    – Total market size of VAS was USD 678 mn in 2006, projected to touch USD 926 mn at the end of 2007
    – Most VAS services are provided over SMS, IVR and WAP. Revenue growth has been driven by SMS (including P2P,
      A2P, P2A), contributing over 55% of total VAS revenues in 2006
    – Bollywood & cricket remain the killer content, whether for SMS alerts, ringtones / CRBT, games, wallpapers, etc.
    – Rural applications initiatives have launched in pilots, and are likely to grow quickly in less developed geographies
      because of the willingness to spend on services which enhance livelihood



                                                                                                                             3
Executive Summary (2/3)
                       Hurdles to growth of VAS & future direction


                        Current Challenges to Growth                                          Overcoming These Challenges

            •   Revenue share between telcos & content providers /               •   Advertisements can be a major new revenue avenue for VAS
                aggregators is 70:30, substantially more skewed in favor of          players compensating for low rev share from operators
                telco than in other countries
Revenue
            •   Lack of payment mechanisms increases reliance on telcos,
Challenge       though VAS players are looking at advertising to support
                service. This is at a nascent stage given the unfamiliarity of
                advertisers with mobile as a medium

            •   Awareness remains a major challenge as operators spend           •   Traditional VAS – SMS, CRBT & ringtones – will continue to
                more on subscriber acquisition than educating customers              grow with increased awareness and larger low end user base
User            about VAS                                                        •   Awareness will remain a problem for advanced VAS services
Challenge   •   Users are also confused about tariff structures for premium          unless marketing is done by VAS companies themselves
                SMS, IVR and data usage

            •   Supporting VAS requires an increase in feature set at lower      •   Low-cost, feature-rich devices are being introduced more
Device          price points                                                         widely as GSM players have started adopting handset bundling
Challenge   •   GPRS enabled low cost handsets are still in the making           •   Additionally, VAS players and handset vendors are forming
                                                                                     partnerships to provide embedded applications

            •   Bollywood and cricket works! Not much innovation is seen         •   IVR will be a quick solution to providing content / services in
Content         beyond these                                                         local language
Challenge   •   Given diversity and literacy rates in India, providing content   •   But, creating locally relevant content (e.g. for directory listing,
                in the many local languages is a requirement                         maps) will still require substantial investments

            •   Delay in spectrum policy has resulted in congested networks •        Regulatory uncertainty around spectrum will continue to
Operator        leaving no bandwidth for data efficient applications                 hinder promotion of VAS
Challenge                                                                        •   Higher end apps, including internet apps being ported to
                                                                                     mobile will have more traction once 3G is introduced


                                                                                                                                                       4
Executive Summary (3/3)
                        Applications & growth projections


• Offerings like next generation SMS, IVR and mobile music will become more widespread, while others will
  still face a number of hurdles to growth
    – SMS: The next generation of SMS will offer users an enhanced messaging experience
    – Mobile Music: growth will increase with better bandwidth enabling full music download / streaming
    – IVR: In areas of low literacy rate, IVR will see large scale adoption due to ease of use and local language support
    – Internet Applications: Internet apps ported to mobile may have slow take-up at first, but will draw higher end
      users. IM on mobile will be driven by the youth. Enterprises will be the key driver for the adoption of mobile e-mail
    – Search: SMS based search and search on WAP portals will be popular applications as users can access requisite
      information of the move, but lack of local information will still remain a challenge to be overcome
    – UGC/SNC: User generated content & social networking communities will see limited adoption due to user
      experience and format of interactivity
    – mCommerce: Mobile Commerce also is not promising for mass markets given low levels of electronic transactions
      and vendors’ and consumers’ resistance to adopt combined with unfamiliarity of this platform
• With overall CAGR of 44% (2007 – 2010), VAS revenues will reach USD 2,744 mn
    – In medium term most of the current challenges will be addressed by both operators and VAS players
    – But growth during near term will flatten as operators do not shift focus from customer acquisition to VAS promotion
      quickly enough, thus new low end users will drag down the per capita consumption
    – Growth can be impacted substantially in either direction depending on outcome of various major regulatory and non-
      regulatory factors, including MNP, 3G, advertiser uptake of mobile advertising
    – Growth acceleration will begin in 2009, as various challenges are overcome, size of mature user base increases, and
      telco focus on high end user VAS heightens
    – Share of traditional VAS declines to less than 50% in 2010. Mobile data / internet access, e-mail, and IVR based
      services will achieve the highest growth rates


                                                                                                                              5
Table of Contents


• Indian Telecom Overview
• Near Term Industry Outlook
• Introduction to VAS in India
   – Current State
   – Telco Strategies
• VAS Value Chain
• Key Challenges & Hurdles Today
• VAS Outlook for India
   – Addressing Challenges & Hurdles
   – Assessment of Applications & Services
• Projections
• Annexure – Key VAS Players
                                             6
Indian telecom overview


                                                                       Operator Market Share (Oct 2007)
Population               1.112 billion
                                                                                          Others
                                                                                  Idea    7.7%             Airtel
Fixed Subs               39.41 million (Oct 2007)                                 9.0%                    23.4%

                                                                           Tata
Mobile Subs              217.14 million (Oct 2007)                     Teleservices
                                                                          9.3%
Internet Subs            9.22 million (Jun 2007)
                                                                                                             Reliance
                                                                                BSNL                          17.4%
Broadband Subs           2.67 million (Sept 2007)                              16.1%

                                                                                             Vodafone
                                                                                              17.1%




                                              Interesting Market Facts


• 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

    Source: TRAI, COAI, AUSPI, BDA Analysis               Note: Mobile subs data includes fixed wireless customers      7
Market continues to show a trend of about 8
                                               million net subscriber additions in a month

                                                                                                                                            Launch of INR 777 Handsets /     Record Additions in a month
                Launch of 999 scheme                                                                                                       Lifetime Prepaid Below INR 500


          9                                                                                                                                                                       8.3
                                                                                                                                                                            8.1               8.0
                                                                                                          cle
                                                                                                             s                             Verification of                              7.8
          8                                                                                           Cir                                   subscribers
                                                                                                 &C                                                                 7.0
                                                                                            nB                     6.7   6.8         6.8
          7                                                                          io   ni                                   6.5                            6.6
                                        off                                  t   ra t                        6.1                           6.2          6.1
                                   es                                   ne                            5.9
                                 ak                                   Pe
          6               ai   dT                         5.4
                       rep
                                                                                            5.3
                  cr oP                       5.0                                  4.8
Million




          5    Mi                  4.4              4.5
                                                                      4.3
                                                                3.9
          4               3.5
                    2.9                                                                                                                          2.6
          3   2.5

          2

          1

          0
              Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct-
               05 05     05 05 06 06         06 06 06 06 06 06             06 06     06 06 07 07         07 07 07 07 07 07             07 07




• Net monthly additions of nearly 8 mn in the last 4 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

              Source: TRAI, Morgan Stanley Research, Telecom Watch, BDA Analysis                                                                                                                           8
Growth in August has been steady in the 3-5%
                                               range across all circles with A and B Circles*
                                               leading both percentage and actual net additions

                                Jammu Kashmir
                                                                                                                                      Circle Monthly Growth (Mar-Oct 07)
                                       Himachal Pradesh
                                Punjab                                                                                 Mns




                                                                                                                                                                             76.8




                                                                                                                                                                                               76.9
                                            Uttaranchal




                                                                                                                                                                                              74.0
                                                                                                                                                                  73.8
                                                                            Arunachal Pradesh




                                                                                                                                                                 70.9
                                                                                                                      85




                                                                                                                                                                                       71.1
                                 Haryana




                                                                                                                                                          57.7
                                           Delhi




                                                                                                                                                                                    57.6
                                                                        Sikkim
                       Rajasthan                   Uttar Pradesh                                 Assam                65




                                                                                                                                                   38.9
                                                                                         Meghalaya




                                                                                                                                            37.6
                                                                                                                                  36.4
                                                                       Bihar
                                                                                                            Manipur




                                                                                                                                31.6
             Gujarat               Madhya Pradesh
                                                                   Jharkhand
                                                                               West Bengal               Mizoram      45




                                                                                                                                                                                                                     19.2

                                                                                                                                                                                                                            20.6
                                                                                                                                                                                                                     19.9
                                                                                              Tripura




                                                                                                                                                                                                             15.6
                                                     Chhattisgarh                   Kolkata

                         Maharashtra
                                                                   Orissa                                             25
         Mumbai


                                           Andhra Pradesh
                                                                                                                       5
                                                                                         Metro                                         Metro                 Circle A                  Circle B                     Circle C
                           Karnataka
                                                                                         A Circle
                                                                                                                      -15
                                                                                         B Circle                                           Mar-07                 Aug-07                   Sep-07                    Oct-07
                                                                                         C Circle
                                    Tamil Nadu
                       Kerala                      Chennai




•   At the end of October the mobile teledensity                                                                                Circle Monthly % Growth (Mar-Oct 07)
                                                                                                                           %
                                                                                                                       8




                                                                                                                                                                                                                6.4
      Metros                                                                  74.09%
                                                                                                                       6




                                                                                                                                                                 4.8
      Circle A                                                                22.17%




                                                                                                                                                                                           4.5




                                                                                                                                                                                                                         4.2
                                                                                                                                                                              4.2




                                                                                                                                                                                                       4.0
                                                                                                                                                                       3.9




                                                                                                                                                                                                 3.9
                                                                                                                                      3.3
                                                                                                                                            3.3




                                                                                                                                                                                                                       3.6
                                                                                                                                                                                                                                   3.6
                                                                                                                                                   3.3
                                                                                                                       4




                                                                                                                                                                                     2.7
      Circle B                                                                10.91%




                                                                                                                                                          1.4
      Circle C                                                                 9.33%                                   2

                                                                                                                       0
•   The growth is distributed across the circles,                                                                                     Metro                      Circle A                  Circle B                   Circle C
    even though the net adds are the highest in
                                                                                                                               -0.8




                                                                                                                      -2
    Circle A and B                                                                                                                     Mar-07                    Aug-07                 Sep-07                      Oct-07*

    * A Circle is the operating area defined by a license & are categorized based on census and socio-economic data
     Source: TelecomWatch, TRAI, BDA Analysis                                                                                                                                                                                            9
Airtel, Vodafone and Reliance added the
                                   highest number of subscribers


          60
                         50.9
                       48.9
                      46.8




          50

                                                                                                                                Mar'07
                                         37.8




                                                         37.2
               37.1




                                        36.3



          40

                                                        35.7
                                                                                                                                Aug'07




                                                                    34.9
                                       34.8




                                                       34.1




                                                                   34.1
                                                                  33.5
                                                                31.0
                                                                                                                                Sept'07
Million




                                29.0




                                                                                                                                Oct’07
                                                26.3


          30




                                                                                20.2
                                                                               19.5




                                                                                                19.4
                                                                              18.9




                                                                                               18.7
                                                                                              17.9
          20




                                                                           16.1




                                                                                       14.0




                                                                                                          8.5
                                                                                                         8.0
                                                                                                         7.6
          10




                                                                                                       5.5




                                                                                                                       3.5
                                                                                                                       3.6
                                                                                                                       3.4




                                                                                                                                2.9
                                                                                                                                3.0
                                                                                                                                3.1
                                                                                                                 2.7




                                                                                                                               2.9
           0
                      Airtel       Reliance       Vodafone        BSNL      Indicom           Idea      Aircel         Spice   MTNL
                                                   Essar



• Vodafone is quickly closing the gap between itself and Reliance, having overtaken BSNL recently. With
  handset bundling being offered in Oct, high growth is expected to continue
• Airtel, Vodafone and Reliance added the highest number of subscribers with 2.03 mn, 1.57 mn & 1.51 mn
  new additions respectively

          Source: AUSPI, COAI, BDA Analysis                                                                                               10
Though GSM operators continue to see declining
                                      ARPU, CDMA operators have managed the
                                      opposite through creative tariff structuring

                                                          Trends in all India Monthly ARPU
                         394
                  400                 381         374
                                                              362               366
                                                                                             352
                                                                                                          337
                                                                                                                       316
                                                                                                                                    298          297
                  300
                                                                    256               256
                               241          240         244
INR per Month




                                                                                                   228
                                                                                                                215                                    206
                                                                                                                             196          202
                  200




                  100




                    0
                         Mar-05       Jun-05       Sep-05     Dec-05            Mar-06        Jun-06      Sep-06       Dec-06        Mar-07      Jun-07

                                                                          GSM               CDMA



•               GSM operators have nearly stabilized ARPUs declining only by INR 1 over the last quarter, mostly on higher MoUs and
                higher lifetime prepaid additions
•               CDMA operators have been able to increase their ARPUs as the all India average subscriber outgo per minute increased to
                INR 0.85 in June 2007 from INR 0.81 in March 2007, while for GSM operators it declined from INR 1.15 in Mar-07 to Rs.
                1.11 in June-07

                 Source: TRAI, BDA Analysis                                                 Average Subscriber outgo = Rental + call charges per minute      11
Table of Contents


• Indian Telecom Overview
• Near Term Industry Outlook
• Introduction to VAS in India
   – Current State
   – Telco Strategies
• VAS Value Chain
• Key Challenges & Hurdles Today
• VAS Outlook for India
   – Addressing Challenges & Hurdles
   – Assessment of Applications & Services
• Projections
• Annexure – Key VAS Players
                                             12
Rules of the game


                                         Declining Tariff


     Improved
Regulatory Structure


                                 Innovative Pre-Paid Tariff Plans


                                                                                          500




                                                                     Wireless Subs (mn)
                                                                                          400
                                                                                          300
                                                                                          200
                                                                                          100
                                                                                           0




                                                                                                 2003
                                                                                                 2004
                                                                                                 2005
                                                                                                 2006
                                                                                                2007F
                                                                                                2008F
                                                                                                2009F
                                                                                                2010F
                                      Declining Handset Prices
                                                                    Unprecedented Growth




   Source: BDA Analysis                                                                                 13
Over the recent years, most new subscribers being
                                   acquired have been low-end users, resulting in
                                   falling ARPU

• 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
             – Minute of Usage (MoU) in India is already the second highest in the world at 476 (Jun 07), behind
               only USA


                                                  Mobile ARPUs are Declining Precipitously
             1,500                                                                                                         200
                                                                   Subscriber Base (mn)   ARPU (INR/Month)




                                                                                                                                 Subscriber (mn)
                                                                                                                           150
ARPU (INR)




             1,000

                                                                                                                           100

              500
                                                                                                                           50


                0                                                                                                          0
                         2000              2001             2002               2003          2004            2005   2006


              Source: Company Information, TRAI, BDA Interview and Analysis                                                      14
Operators and handset vendors must adapt
                       their strategies to serve the Bottom of the
                       Pyramid




                                     Growth is fastest at the
                                     Bottom of the Pyramid



   Growth is continuing in
   Growth is continuing in            Growth is taking off in semi-
                                      Growth is taking off in semi-   USO will help continue to
                                                                      USO will help continue to
     metros and urban
      metros and urban                   urban and rural areas
                                          urban and rural areas         drive coverage gains
                                                                         drive coverage gains




                               Operators and vendors must adapt their
                               Operators and vendors must adapt their
                         strategies and distribution to meet this new growth
                         strategies and distribution to meet this new growth

Source: BDA Analysis                                                                              15
Operators are tailoring service packages for
                         low-end users making mobile service more
                         affordable

                  Micro Prepaid Cards                                       Life Time Validity
                                                               All operators offer a
                                   Recharge options as       “lifetime prepaid” plan
                                                           which maintains the phone
                                   low as INR 10 (USD        number for life for free
                                          0.25)            incoming calls if recharged
                                                              every 3 or 6 months


                  Full Value Recharge                                    Free In-Network Calls


                                                                                         Some operators have
Talktime of value equal
                                                                                         started free unlimited
to the recharge amount
                                                                                         local in-network calls



                       Group Calls                                            Bulk SMS Pack


                                       Unlimited calls     Plans customized for
                                     among a limited set    bulk SMS within a
                                       of people at a       specified area at a
                                       particular cost       much lower cost


    Source: BDA Interviews and Analysis                                                                      16
Prepaid in India comprises of over 85% of
                         total subscriber base and over 95% of net
                         new additions

• Unlike more developed countries, prepaid                    Prepaid/Postpaid Subs Breakup (July 07)
  comprises 85% of GSM subs & 87% of                      100%
                                                                        4.9                  1.8            4.6          3.4      1.9
                                                                                    5.5
  CDMA subs                                                   80%

   – As recently as 2005, prepaid only                        60%
                                                                        37.8       26.6      14.3          26.1          25.0     17.1
     accounted for 76% of subs                                40%
                                                              20%
   – This shift s driven by the nearly 95% of
     net new subs being prepaid                                   0%
                                                                       Bharti    Relaince BSNL          Hutch    Idea             Tata
• With the focus of telco expansion moving                                              Prepaid              Postpaid

  to tier II & II cities, A & B Circles are
  now contributing the highest prepaid net                        Prepaid as % of Net New Adds (July 07)
  new additions




                                                                                                                                         % of Prepaid Subscribers
                                                                  60                                                              100%
                                                                                                                                  80%
                                                      Subs (mn)        37.8
                                                                  40
                                                                                 26.6               26.1                          60%
                                                                                                              25.0
                                                                                                                           17.1   40%
• Given prepaid will continue to increase to                      20                      14.3
                                                                                                                                  20%
  above 90% of total subs, telcos and VAS                          0                                                              0%
  providers need to be aware of how to                                 Bharti Reliance BSNL         Hutch         Idea     Tata

  provide solutions for this market                                           Prepaid      Net new prepaid subscribers


    Source: Company Information, TRAI, BDA Analysis                                                                                      17
High level of competition has lead to price
                                                reduction and increased affordability

                                                                                  Fall in Tariff

                                                   • Operator focus on growing the pie versus eating each other's share
Low penetration &
Low penetration &                                    has resulted in better tariffs for consumers
6 – 7 operators per
6 – 7 operators per
circle
                                                      – Innovative tariff plans
circle
                                                      – Lower cost per call with more users in the network


                                                                               Decline in Tariff
                                18.00                                                                                                                     180
                                                                                                                          Lowering of            166.00
                                16.00               NTP-99                                                                                                160
                                                                                                                           ADC from
                                                                Telecom




                                                                                                                                                                Mobile subscriber base (mn)
                                14.00                                                                         CPP         30% to 10%                      140
   Effective tariff (Rs./min)




                                                                 Tariff                                   introduced        of sector
                                12.00                            Order        3rd & 4th                                     revenue                       120
                                                                               cellular         WLL
                                10.00                                                                                                                     100
                                                                              operator      introduced                              90.00
                                 8.00                                                                                                                     80

                                 6.00                                                                                  52.17                              60

                                 4.00                                                                                                                     40
                                                                                                                  33.60
                                 2.00                                                                                                                     20
                                        0.88    1.20     1.88     3.58                               13.00
                                                                                          6.50
                                 0.00                                                                                                                   0
                                    Mar-98     Mar-99    Mar-00      Mar-01      Mar-02          Mar-03      Mar-04        Mar-05       Mar-06      Mar-07

                                                             Fixed Tariff                  Cellular Tariff                  Mobile Subs


  Source: Company Information, TRAI, BDA Analysis                                                                                                                                             18
New regulations allowing new players, dual
                          technology and MNP are likely to further
                          increase competition


 1                    New Players                     2             Dual Technology

• TRAI recommended no cap on number of               • CDMA players being
  operators in each circle                             allowed to provide GSM
• Combined with a leniency in M&A, this has lead       operations and vice
  to over 500 license applications (equivalent to      versa is equivalent to
  22 PAN India operators), including from              having new players
  companies with no telecom experience but             entering the market,
  wanting to capitalize on the boom                    again increasing
                                                       competition
• Even if 2 – 3 new players are allowed in each
  circle, this will increase competition which
  would significantly effect operator strategy and
  potentially pricing, as well                        3    Mobile Number Portability (MNP)

                                                     • In a cost conscious market

                                            ?
                                         Cheetah       with high number of prepaid
                                            S Tel      users and no commitment with
                                                       the operator, it is likely that
                                                       the operators would reduce
                                                       price to keep their customers
                                                       and lure others


     Source: TRAI, DOT, BDA Analysis                                                         19
Almost half of Indian mobile subscribers use ULCH
                            and as mobile rural penetration is increasing, the
                            sale of ULCH will increase further

• Within one month of its launch in June 2007, Reliance Classic series ranging from INR 777 (USD 19) –
  INR 2,049 (USD 51) sold over 1 mn handsets
• Nokia and Motorola have launched several low-cost models with functions and features specifically
  designed for the India market like Motofone and Nokia 1110



 Users in Different Handset Price Brackets (June 2006)
      %
 50                 45.5

 40

 30
                                22
 20
                                             9       10.5
 10         6                                                   4.5
                                                                          2.5
  0
          <2,000   2,001-     4,001-       7,001-   10,001-   15,001-   >20,000
                   4,000      7,000        10,000   15,000    20,000
                                            INR

Note: USD = INR 40 today, but was 45 in 2006


      Source: BIS Shrapnel, BDA Analysis                                                                 20
Increasing affordability levels from innovation
                           in entry-level handsets and call tariffs will
                           continue to drive growth

• With the decline in tariff and handset               Wireless Subs Projections and Distribution
  price, affordability will increase                                   by Circle
                                                                      500
  substantially, independent of increasing                                                                                              14% Circle C
  incomes                                                             400




                                                   Subscribers (mn)
• By the end of 2010, we estimate that the                                                                                              40% Circle B
                                                                      300
  mobile teledensity will be almost 44%
                                                                      200
  with 497 mn subscribers
                                                                                                                                        34% Circle A
• Majority of subscribers will come from                              100

  semi-urban and rural areas, fuelled by                               0
                                                                                                                                        12% Metros
  operator expansion on their own and




                                                                            2003

                                                                                   2004

                                                                                          2005

                                                                                                 2006

                                                                                                        2007F

                                                                                                                2008F

                                                                                                                        2009F

                                                                                                                                2010F
  with support from government




    Source: BDA Analysis                                                                                                                          21
Table of Contents


• Indian Telecom Overview
• Near Term Industry Outlook
• Introduction to VAS in India
   – Current State
   – Telco Strategies
• VAS Value Chain
• Key Challenges & Hurdles Today
• VAS Outlook for India
   – Addressing Challenges & Hurdles
   – Assessment of Applications & Services
• Projections
• Annexure – Key VAS Players
                                             22
India’s VAS market estimates show aggressive
                               growth and decreasing relative importance of text-
                               based offerings

                               VAS Performance                                             Data and Voice Breakup
            2005                            2006                                   2%     4%     5%       5%     5%     6%     8%      7%


       0.6%      0.5%                  1.0% 0.5%     0.5%       SMS (P2P)
   1.5%                 1.0%
                                   3.0%                         SMS (A2P P2A)
  3.6%
                                                                CRBT / Ringtones   98%
13.2%                             5.0%                  40.0%                             96%    95%      95%    95%    94%    92%    93%
                                                                Voice
9.6%
                                                                Games
                                35.0%
                                                                Data
                          70.0%
                                                                E-mail
                                             15.0%              Others             2000   2001   2002     2003   2004   2005   2006   2007 F
    100% = USD 438 mn                    USD 678 mn
                                                                                                        Voice           VAS




• VAS services presently contribute about 7% of the total telecom revenue for Indian operators
• The mobile VAS industry in India is estimated at USD 679 mn at the end of 2006 and is estimated to
  grow to touch USD 926 mn at the end of 2007
• 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 gain
• SMS, Ringtones/CRBT, Voice VAS will continue to be the highest revenue generating services

        Source: COAI, IAMAI, BDA Analysis                                                                                                   23
The vast offerings across VAS services are still
                              delivered predominantly using 3 platforms of SMS,
                              IVR’s and WAP portals

Delivery
               Entertainment          Alerts and News                  Commerce                 Social VAS                 Enterprise VAS
Platforms
SMS            •   SMS                •   Cricket / Match Alerts       •   Mobile banking       •   Location,              •   Pull on Short Code for
               •   Ringtones / CBRT   •   News                         •   Ticketing                infotainment               contests, voting,
                                                                                                    Search **                  information
               •   Customized         •   Astrology, Vaastu,         •     Travel and Holiday
                                                                                                •   Advertising            •   Push for Advertising
                   Wallpapers             Fengshui, Personality test       bookings
                                                                                                                           •   LBS systems
               •   Animations         •   Banking Info /Alerts
                                                                                                                           •   Enterprise IM
               •   Quiz               •   Travel alerts details like
                                          Train, Flight details etc                                                        •   Group messaging
               •   Jokes

IVRs           •   Religious chants   •   Astrology                    •   Mobile banking       •   Astrology services     •   IVR based Contact Centers
               •   Music on Demand    •   Vaastu                       •   Ticketing            •   Voice SMS              •   Self Help centers
                                      •   Fengshui                                                                         •   Voice Portals
                                      •   Personality test

WAP Portals    •   Video Clips        •   Movies related info          •   Mobile banking       •   Mail                   •   Location based information
               •   Mobile Games       •   Stock Portfolio Managers     •   Ticketing            •   Mobile-Greetings       •   Internet Mobile e-mail
               •   Mobile Themes      •   News tickers / alerts        •   Travel and Holiday   •   Dating, Chatting,      •   Mobile calendar
                                                                           bookings                 Blogging etc
               •   Mobile Radio                                                                                            •   Access to Intranet and Core
                                                                                                •   Infotainment               Business Applications
                                                                                                •   SNC / UGC              •   Mobile VPN
                                                                                                •   Internet Search   **   •   Push E-mail over handheld
                                                                                                    Advertising                devices (e.g. BlackBerry) /
                                                                                                                               Wireless e-mail
                                                                                                •   Messenger

                                                                                                                                                 ** NEW

       Source: BDA Analysis                                                                                                                               24
While total volumes will continue to be driven
                           by P2P usage, per capita SMS will continue to
                           decline

•   Growth                                                                                 Trends in all India Outgoing SMS per
     –   SMS growth was direct result of high outgoing tariff                                             Subscriber
         during non-CPP (calling party pays) days
                                                                                                   46        48              48             48
     –   SMS were priced substantially below call tariffs                                  50
                                                                                                                                                         39
     –   Even after voice tariffs have fallen and in some cases                                                                                                      35




                                                                           INR per Month
                                                                                           40
         local calls have become cheaper than an SMS, growth
                                                                                           30                                                                 24
         trend has continued                                                                                      20              20              19                      20
                                                                                           20
•   Volume                                                                                              11
     –   Large number of first time mobile users lead to                                   10
         decline in per capita SMS consumption                                                 0
                                                                                                   Mar-06     Jun-06         Sep-06         Dec-06       Mar-07      Jun-07
     –   TRAI recommendation (implementation in May 07) to
                                                                                                                       GSM              CDMA
         move from 4 digit to 5 digit short code has lead to 15
         – 20% revenue decline in SMS VAS over 2 quarters
     –   Volumes will however continue to grow as P2P drives
         volumes on account of discounted SMS bundles                                                   Volume and Price of SMS
         offered by all operators in the mid term
•   Pricings                                                                                                                                                   74
                                                                                       80                                   R:                                                3
     –   SMS price range for postpaid has always been lower                                         2.0                C AG
                                                                                                                            %
                                                                   SMS Volume (bn)                                     55.4




                                                                                                                                                                                  Price/SMS (INR)
         than prepaid. Rates are INR 1-2 for local, INR 2-4 for
                                                                                                                                             45
         domestic, INR 5-10 for International and INR 3-6 for                                                          1.0            1.0
         premium SMSs                                                                  40                                                                                     1
                                                                                                                       24
     –   On an average prices will continue to remain stable in                                      13                                                        0.5
         short term, but innovation and pull services with
         various utility applications and new services (like SMS                           0                                                                                  1
         2.0 from Affle or SMS gupshup from Webaroo) will                                          2004            2005                     2006              2007F
         drive future volumes and revenues
                                                                                                             SMS Volumes                               Price per SMS


     Source: TRAI, BDA Interview & Analysis                                                                                                                                       25
SMS has offered a new lease of life to TV by
                           making one way broadcasts an interactive
                           medium through contests and voting

                          SMS Based Contests
• FY '06-07 saw SMS marketing and contests reaching new heights.
  P2A (person to application) and A2P (application to person) SMS
  services gained popularity, driven by voting based TV shows
• The SMS based contests have been targeting varied age groups
  through a variety of products
    –   Indian Idol                          Youth
    –   Kelloggs                             Housewives and Children
    –   Cricket Predict & Win                Mass Market
• Two finalists of Indian Idol 3 drew a combined tally of 70 mn SMS
  votes in the final 9 days of Sept 14 – 23. At an avg cost of INR 3,
  the revenue generated reached around INR 21 crore (USD 5.25
  mn). The volume averages to
    –   320,000 SMS per hour
    –   5,400 SMS per minute
    –   90 SMS per second
• Kelloggs India tied up with Mobile2Win to promote its Chocos
  brand targeted at kids in the age group 4-11 years. The contest,
  called quot;Rescue chocos from Crafty Croc“, was available by solving a
  crossword puzzle on the back of Kellogg's Chocos packs, and then
  SMS’ing the correct answer to 8558
• With more niche TV programming being introduced this segment of
  VAS is bound to have positive impact on the SMS volumes


     Source: BDA Interview and Analysis, Mobile Pundit                    26
While SMS continues to remains the most
                            popular application, it is also being effectively
                            reinvented to suit varied enterprise needs

                            SMS Based Services

• Reasons for enterprises to use SMS
    –   Instantaneous delivery & does not rely on recipient to retrieve from a server
    –   Reliable means of getting time-sensitive messages to recipients, including
        automated delivery acknowledgement
    –   Compatible across all users and handsets

• SMS-based mobile data services are being used by several
  forward-looking enterprises for the following applications
    –   Asset / Automatic vehicle tracking when integrated with GPS
    –   Fleet dispatch
    –   Inventory management
    –   Utility services (metering by electricity boards)

• Interactions on SMS are typically of the following types
    –   Request: Authorized users can request internal company information, i.e.,
        company phone list, stock/ warehouse, latest prices, internal news, customer
        facts. Services are used by internal customers (employees), extended customers
        (vendors, partners) and end-customers
    –   Group transmission: Users can send messages to a group of people at the same
        time (i.e., employees, customers, etc). Messages can be identical for everyone
        in the group (a broadcast) or individualized (a narrowcast with each person
        getting a different message)
    –   Push/Notification Services: Users can create automated event or scheduled
        alerts, e.g., generate a request every morning at 8 am for revenue of the
        previous day or stock status


     Source: BDA Interviews and Analysis                                                 27
Beyond SMS, any VAS built around Bollywood*
                           remains the killer content, whether for ringtones,
                           CRBT, games, wallpapers, alerts etc

                                                                              •   Indian film industry produces more than 1,000 movies a
                                                                                  year and attracts nearly 1.6 bn viewers
                                                                              •   Approximately 5+ bn tickets, 12,900 cinema halls and the
                                                                                  reach has moved beyond India’s boundaries to Non resident
                                                                                  Indians across US, UK, South Asia, Middle-East, Africa and
                                                                                  Europe
                                                                              •   Satellite television, radio, internet, and mobile has helped
                                                                                  cinema reach out to a larger audience
                                                                              •   Industry revenues form Box-office declined to 84% of the
                                                                                  total revenues in 2006 (from 90% in 2005) due to the
                                                                                  emergence of new channels and increasing touch points to
                                                                                  access film content, penetration of home video, Internet
                                                                                  media and mobile




• Nokia & Om Shanti Om (OSO), the season’s largest movie release, partnered for exclusive offerings including
    – OSO movie clips, behind the scenes videos, ringtones and wallpapers
    – A special ‘OSO Crazy mobisode’ with animated characters of ‘OM’ (played by Shah Rukh Khan) accessible on all Nokia
      GPRS enabled handsets through a special site created for the partnership
• Sony Pictures in association with Sony Ericsson followed similar strategy to promote another mega release for the
  season Saawariya and other film content on mobile
• Today, approx 60% of mobile content downloaded in South India is in local languages

    * We have used “Bollywood” to represent the entire Indian film & music industry including the regional components of the industry
    Source: BDA Interview and Analysis, CII, Company Information                                                                                 28
After movies, cricket is the theme around which
                           most of the rest of content is built and marketed,
                           as these remain the top two priorities for
                           entertainment in India

• Almost all operators with content service provider offer cricket
  news, views and promotions
• Companies like Reliance, Airtel and Vodafone continue to build
  their communication strategy around being the lead sponsor of
  major cricketing events


• Reliance was one of the primary sponsors of the recently
  conducted T20 World Championship, the only Indian company
  amongst the group
• Airtel is one of the key sponsors of the much hyped India –
  Pakistan cricket series
• Most of the telecom companies use media space during matches to
  promote their products and services including content like match
  scores on mobile and ball by ball updates
• Contests like predict and win, make your own team and similar
  promotions are run using Pull SMS services by media companies
  and advertisers
• All game developers have specific downloadable mobile cricket
  games and games using cricket stars as the hero
• Airtel has also been sponsoring cricket reality shows searching for
  budding talent e.g. Cricket Star

     Source: Airtel, Hutch, BDA Interview and Analysis, IAMAI                   29
Mobile music in the form of ringtones & CRBT
                         is the next largest revenue generator after
                         SMS, and a key driver for the VAS market

• Music claims one of the largest share of India’s mobile
  VAS market size, estimated to be worth about USD 324
  mn (35%) including CRBT and ringtones as the major
  applications
• Operators are aggressively building their mobile music
  brands by promoting nationwide uniform mobile music
  portals and launching marketing campaigns
    – Airtel’s music portfolio is over 50,000 complete tracks,
      ring tones, ring-back tones and corporate jingles
    – Introduction of music discovery services like Airtel's Song
      Catcher created further ease of use, packaging, and
      flexible pricing for effective product differentiation
    – Hutch (Now Vodafone) introduced “Full Song Download”
      and announced the music premier of “Krissh” through this
      service
    – Hutch (Now Vodafone) & Idea introduced ease of use for
      CRBT by allowing users to copy another user’s CRBT by
      pressing * while listening to it

    Source: BDA Interview and Analysis, Company Information             30
Application categories include IVR and niche
                           applications are just starting to emerge

                                        IVR
• One of the most popular TV reality shows in India, “Kaun Banega
  Crorepati” (Indian adoption of “Who Wants to be a Millionaire”)
  required aspirants to audition using an IVR system
     –   More than 1,000 call center lines were deployed across four metros to
         handle huge call traffic
     –   The multilingual call center was able to respond to the caller’s preference
     –   The system also handled inquiries on marketing information, recording
         complaints and claim inquiries
     –   Call Volumes & Charges



                            Niche Applications
•   Stock market alerts
•   SMS based instant messengers
•   Social networking on mobile
•   Group SMSing
•   Commodity pricing on SMS
• Examination results over SMS (NCERT and other state education
  boards offer these services)
• SMS based movie ticketing (e.g. Fame Cinemas, PVR Cinemas)


     Source: Airtel, Hutch, BDA Interview and Analysis, IAMAI                          31
Rural applications development initiatives have
                              started on a small scale, but are likely to offer
                              some innovation for day to day use in less
                              developed geographies
                                      Fisher Friend
•   Fisher Friend is a mobile application being piloted in South India
     –   Vital real-time information to fishing communities when and where they need it the most
         – at mid-sea
     –   Information includes when and where to sell the fish through access to market prices,
         weather (e.g. sea wave heights, satellite scan data about fish shoals), government
         schemes, etc.
     –   Access to this data could drastically improve market transparency and thus earning
         capabilities for smaller fishermen
•   A joint initiative of Qualcomm India, TATA Indicom, Astute and MSSRF


                        Reliance Developer Programme
•   Reliance Developer Programme of Reliance Communications has launched the
    Rural Mobile Application Contest, 2007-08 to encourage mobile application
    development in the country
     –   Focus will be on rural applications for transportation, mCommerce, health care services,
         governance, education, information and location based services
     –   Applications can be submitted for WAP, Java, Reliance Java, Brew, Brew Lite, VoxML and
         Symbian environments on both GSM and CDMA technology
     –   Contest is open to all Software professionals, Software Developers, Companies, Students,
         self employed professionals and Content Vendors/ Aggregators
     –   Cash prizes & an opportunity to commercially launch applications is available


                             Other Rural Applications
•   IVR applications in regional dialects for rural market
•   Mandi bhav – commodity pricing information on mobile
•   Thematic packaging of regional content
•   Regional mobile radio

      Source: BDA Interview and Analysis, IAMAI, company websites, Qualcomm                         32
User segments for VAS services can be
                     viewed along 6 groups

                CXO Level Users             Young Professionals     SME/ SOHO Users

           • Senior executives in           • Mostly mid level     • Shop Owners
             an organization with             executives           • Traders
             a paucity of time
                                                                   • Self Employed
           • High net-worth
             individuals                                           • Extended enterprise
                                                                     users (mostly
                                                                     distributors, suppliers
                                                                     etc.)




                                                  Youth/
             Mobile Workforce                                              Family
                                            Young Professionals
           • Sales / Customer               • Youth from 15 – 25   • Mostly dependants
             facing workforce                 years                • More than one user
                                            • Users entering the     in a family
                                              workforce            • Housewives
                                                                   • Elder members of
                                                                     family




Source: BDA Analysis, Company Information                                                33
However the needs and buying behavior
                     varies based on whether services and
                     devices are company or self paid
                CXO Level Users             Young Professionals        SME/ SOHO Users

           • Need devices and               • Mostly mid level        • A smaller section is very
             applications that can            executives                tech savvy and a large
             reduce decision making         • Highly tech savvy and     proportion is still
             time                             ready to spend on         technology challenged
           • Need to be connected             gizmos and new          • Demand good price
             always                           devices                   value combination
           • Not highly tech savvy                                    • Need low cost of entry
                                            • Mostly early adopters     as mostly pay
             and hence might
             require ease of use and                                    themselves
             high level of uptimes                                    • Need single devices for
             for the device                                             both voice and data
                                                                        services as they don’t
           • Need less complex                                          want to duplicate
             devices                                                    investments


                                                  Youth/
             Mobile Workforce                                                 Family
                                            Young Professionals
           • Always on the move,            • Early Adopters          • Basic communications
             hence need to access           • Heavier users of          needs
             core enterprise                  technology              • Entertainment focused
             applications on
             handhelds                      • Entertainment focus     • Socializing within family
                                            • Affinity for social       and friends
           • Typically these users
             are “forced” users               networking and peer     • Need education /
             under directive from             communication             support for new service
             management initially,          • Individual content        adoption
             but realize value as it          creators
             improves productivity


Source: BDA Analysis, Company Information                                                     34
Investment firms are focusing on VAS companies
                              attracted by the growing subscriber base and need
                              for applications

                              Key Drivers
•   The growing telecom subscribers in India and the
    continuous record additions of >7 mn per month
•   Access to VAS services are becoming cheaper with plethora
    of compatible handsets available in the market
•   Subscribers are using their handsets to
      –   Play games              –   Services such as access
                                      information from banks,
      –   Download ring tones         railways and airlines
      –   Read news headlines     –   Check exam results
      –   Surf the Internet       –   Participate in contests, etc.
•   Mobile VAS is offered on multiple platforms like SMS, voice
    and Wireless Application Protocol (WAP) enabled services etc
    which increases its reach substantially
•   Market size of VAS industry has been estimated at about
    USD 993 mn (INR 3,990 cr) at EOY 07
•   VAS market is poised to grow by more than 35% & generate
    sales of more than USD 1,250 mn (INR 5,001 cr) by EOY 08
•   Investment in VAS companies have been typically USD 10 –
    15 mn in the most recent rounds, and less than USD 5 mn
    for start-ups, which is considerably lower than what would
    be required in other telecom segments such as networks,
    towers, etc.

      Source: IndusView, BDA Interviews & Analysis                                35
The volume of investments across all VAS sectors
                           with amounts as high as USD 15 mn demonstrates
                           the untapped opportunities (1/3)

                                                                       Investment
Date       Company           Round              Investors                                                  Comments
                                                                        (USD mn)
                                                                                    •   Provides mobile advertising services
                                        Draper Fisher Jurvetson and
Nov-07                           1                                         2        •   Use funds to grow business, ramp up technology stack,
                                        NEA-IndoUS Ventures
                                                                                        marketing & sales force
                                                                                    •   Enables users to manage credit/debit cards with mobile
                                                                                        phones for over-the-counter, Internet & person-to-
                                                                                        person payments
                                                                          N/A       •   Raised funds from Draper Fisher Jurvetson & Rajesh
Nov-07                           2      N/A
                                                                                        Jain in 1st round; Planning to raise USD 5-15 mn in
                                                                                        total for 2nd
                                                                                    •   Targeting four verticals - Bill payment, Internet
                                                                                        shopping, Merchant Transactions & P2P payments
                                                                                    •   Plans to become a value added services player for
                                        Ike Lee (venture partner at        1            telecom and media companies
Oct-07                           1      Ignition Partners), Ruderman
                                        Capital                                     •   Plans to raise a total of USD 3 mn to fund its expansion
                                                                                        activities
                                                                                    •   Voice SMS company; planning to raise USD 5-15 mn
                                        Qualcomm Ventures, Eastven        N/A
Oct-07                           4                                                  •   Initially raised USD 10 mn in its 3rd round of funding
                                        & Erasmic Venture Fund
                                                                                        from Helion and Nexus India Capital
                                                                                    •   Obopay India yet to launch services
                                        Promethean Investments -                    •   Obopay US is a mobile payment service that lets users
Oct-07                           1                                         10
                                        USD 5 mn                                        send & receive money from any of the 200+ million
                                                                                        mobile phones in the US
                                                                                    •   Recent application MeOnGo enables push email on
                                                                                        internet supporting mobile devices
Sep-07                           2      N/A                                2
                                                                                    •   Subs base of 20,000+ individual & enterprise users in
                                                                                        100+ countries

     Source: IndiaPe, VC Circle, BDA Analysis                                                                                                36
The volume of investments across all VAS sectors
                           with amounts as high as USD 15 mn demonstrates
                           the untapped opportunities (2/3)

                                                                         Investment
Date       Company           Round              Investors                                                   Comments
                                                                          (USD mn)
                                                                                      •   Powers Yahoo Maps, and has also tied up with
                                                                                          Wayfinder and Airtel for GPS
Aug-07                           2      Nexus India Capital                 2.5
                                                                                      •   Provides business solutions like storelocator and GPS
                                                                                          based tracking


                                        MIH India (Unit of South                      •   20% stake in ACL Wireless
Jul-07                           2      African media conglomerate          12.3      •   Focus on developing mobile applications such as mobile
                                        Naspers)                                          community services


                                                                                      •   Founded in Nov 2004
                                        iSherpa Ventures, EDF                         •   Rocketalk combines video, pics, voice and SMS into one
Jul-07                           1      Ventures and Mission                7.1           client, and can be used to send messages to any other
                                        Ventures                                          phone (with the same client) or online (and uploaded to
                                                                                          sites like YouTube).

                                                                                      •   Exclusively licenses well known brands like Sachin
                                                                                          Tendulkar, Sehwag, Dhoni & Archie Comics, etc. &
Apr-07                           2      N/A                                  7-8          develops mobile content based on these brands
                                                                                      •   Had earlier raised USD 1.5 mn from Sequoia Capital
                                                                                          India


                                                                                      •   Provides telecom VAS to enterprises & consumers, and
                                                                                          also powers IVR services of corporates
                                        SAIF Partners & Silicon Valley
Apr-07                           1                                          8-10      •   Probably one of the two VAS companies (the other
                                        Bank
                                                                                          being OnMobile) that owns servers at the telco’s
                                                                                          premises


     Source: IndiaPe, VC Circle, BDA Analysis                                                                                                  37
The volume of investments across all VAS sectors
                           with amounts as high as USD 15 mn demonstrates
                           the untapped opportunities (3/3)

                                                                        Investment
Date       Company           Round              Investors                                                   Comments
                                                                         (USD mn)
                                        Emergic Ventures, Ingram                     •   Founded in 2005
Mar-07                           1      Digital, Global Asia Partners      3.1       •   Mobifusion has a wide variety of mobile content and
                                        & an unnamed Indian telco                        applications suitable for the global market

                                                                                     •   Deployed m-CRM and m-coupons initiatives, and plans
                                                                                         to enable money transfer from ATM to mobile and video
Mar-07                           2      N/A                                 1            streaming
                                                                                     •   Received USD 1 mn in seed funding last year from
                                                                                         General Electric, IBM, FeatherLite

                                                                                     •   Product called reQall allows users to instantly record
                                                                                         voice notes using mobile devices. The software then
                                        California and Hong Kong–
Jan-07                           1                                         2.5           recognizes the speech and organizes the recording
                                        based venture groups
                                                                                         which are searchable using keywords, and reminders
                                                                                         can be the set (and uploaded to sites like YouTube).


                                        Cambrian Fund of California,       7.5
                                        Lloyd George Asian Plus Fund                 •   Webaroo is a technology startup company with offices
Dec-06                           2
                                        of Hong Kong and HTSG of                         in the U.S. and India
                                        Mauritius


                                                                                     •   Offers mobile content like ring tones, games and other
                                                                                         content applications, besides enterprise telecom
Dec-06                           1      Lehman Brothers                     15           solutions
                                                                                     •   Looking at acquiring companies in the content space,
                                                                                         especially mobile gaming companies


     Source: IndiaPe, VC Circle, BDA Analysis                                                                                                  38
Table of Contents


• Indian Telecom Overview
• Near Term Industry Outlook
• Introduction to VAS in India
   – Current State
   – Telco Strategies
• VAS Value Chain
• Key Challenges & Hurdles Today
• VAS Outlook for India
   – Addressing Challenges & Hurdles
   – Assessment of Applications & Services
• Projections
• Annexure – Key VAS Players
                                             39
Data services revenues are declining as
                     operators focus on expansion and new
                     subscriber acquisition
                                                                    ARPU Comparison (INR)
                                  450
                                                                                                                                                   1H FY 07-08
                                                                                                                                                     Average

                                                                                                                                               366         378
                                  350
                                                                                                                                         361
                                                                                                                                                           368
                                                                                                                                         288
                                                                                                                                                           304

                                  250
                                              Mar-06       Jun-06         Sep-06          Dec-06          Mar-07       Jun-07          Sep-07




                                        %                           Non Voice as % of Total Revenue
                                   12       10.8
                                                           10.3            10.4             10.1
                                                                    9.6                                        9.9               9.8                 9.6
                                                     9.2                            9.2                  9.0
                                                                                                                           8.4               8.3                 8.4
                                    8
                                               6.2            6.3             6.3                  6.3                                                     6.2
                                                                                                                     5.7               5.7

                                    4



                                    0
                                              Mar-06         Jun-06          Sep-06           Dec-06               Mar-07         Jun-07              Sep-07


Source: Company Reports, BDA Analysis                                                                                                                                  40
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Future of Mobile VAS in India
Future of Mobile VAS in India

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Future of Mobile VAS in India

  • 1. Future of Mobile VAS in India December 2007 Mohit S. Gundecha Prof. Tom Kosnik Kunal Bajaj Research Associate Fenwick & West Consulting Professor Director – India Stanford University STVP, Stanford University BDA © 2007 Stanford University & BDA
  • 2. BDA Team: • Girish Trivedi – Principal Manager • Deepshikha Garg • Rahul Gupta • Smita Sharma Our special thanks to: • Eric Allen – Wireless Advisor • Veerchand Bothra – Author, MobilePundit • Nitin Brahmankar – Director, IDT © 2007 Stanford University & BDA
  • 3. Executive Summary (1/3) India’s telecom market and VAS background • India’s telecom market is experiencing explosive growth – Crossed 217 mn subs by Oct 07 with net adds of nearly 8 mn subs / month over last 4 months – Despite continued record growth over last 12 months, only 23% of 1.1 bn population owns a phone – There are 6-7 telcos operating in each of 23 license areas. Airtel, Reliance, Vodafone & BSNL, who are “the Big 4” have 74% market share – Growth is expected to continue and even accelerate, reaching a projected 496 mn mobile subs by 2010 • Near term outlook shows a continuing focus on acquiring new low end customers – Improved regulatory structure has lead to increased competition, and operators aggressively tailoring strategies to acquire customers across all segments by making mobile services more affordable and increasing coverage – Prepaid users comprise over 85% of total subs and over 95% of net new additions, further adding to the impact of tariffs on falling ARPU – Almost half of Indian mobile subs use low cost handsets and this is expected to increase further with new additions – Further innovation in entry-level handsets and call tariffs will continue to drive growth – Operators will need to look at alternative revenue streams like VAS as they mature • Traditional VAS has been primarily SMS-based, with Bollywood and Cricket the largest content drivers – VAS services contribute approx 7% of total wireless telecom revenues for Indian operators – Total market size of VAS was USD 678 mn in 2006, projected to touch USD 926 mn at the end of 2007 – Most VAS services are provided over SMS, IVR and WAP. Revenue growth has been driven by SMS (including P2P, A2P, P2A), contributing over 55% of total VAS revenues in 2006 – Bollywood & cricket remain the killer content, whether for SMS alerts, ringtones / CRBT, games, wallpapers, etc. – Rural applications initiatives have launched in pilots, and are likely to grow quickly in less developed geographies because of the willingness to spend on services which enhance livelihood 3
  • 4. Executive Summary (2/3) Hurdles to growth of VAS & future direction Current Challenges to Growth Overcoming These Challenges • Revenue share between telcos & content providers / • Advertisements can be a major new revenue avenue for VAS aggregators is 70:30, substantially more skewed in favor of players compensating for low rev share from operators telco than in other countries Revenue • Lack of payment mechanisms increases reliance on telcos, Challenge though VAS players are looking at advertising to support service. This is at a nascent stage given the unfamiliarity of advertisers with mobile as a medium • Awareness remains a major challenge as operators spend • Traditional VAS – SMS, CRBT & ringtones – will continue to more on subscriber acquisition than educating customers grow with increased awareness and larger low end user base User about VAS • Awareness will remain a problem for advanced VAS services Challenge • Users are also confused about tariff structures for premium unless marketing is done by VAS companies themselves SMS, IVR and data usage • Supporting VAS requires an increase in feature set at lower • Low-cost, feature-rich devices are being introduced more Device price points widely as GSM players have started adopting handset bundling Challenge • GPRS enabled low cost handsets are still in the making • Additionally, VAS players and handset vendors are forming partnerships to provide embedded applications • Bollywood and cricket works! Not much innovation is seen • IVR will be a quick solution to providing content / services in Content beyond these local language Challenge • Given diversity and literacy rates in India, providing content • But, creating locally relevant content (e.g. for directory listing, in the many local languages is a requirement maps) will still require substantial investments • Delay in spectrum policy has resulted in congested networks • Regulatory uncertainty around spectrum will continue to Operator leaving no bandwidth for data efficient applications hinder promotion of VAS Challenge • Higher end apps, including internet apps being ported to mobile will have more traction once 3G is introduced 4
  • 5. Executive Summary (3/3) Applications & growth projections • Offerings like next generation SMS, IVR and mobile music will become more widespread, while others will still face a number of hurdles to growth – SMS: The next generation of SMS will offer users an enhanced messaging experience – Mobile Music: growth will increase with better bandwidth enabling full music download / streaming – IVR: In areas of low literacy rate, IVR will see large scale adoption due to ease of use and local language support – Internet Applications: Internet apps ported to mobile may have slow take-up at first, but will draw higher end users. IM on mobile will be driven by the youth. Enterprises will be the key driver for the adoption of mobile e-mail – Search: SMS based search and search on WAP portals will be popular applications as users can access requisite information of the move, but lack of local information will still remain a challenge to be overcome – UGC/SNC: User generated content & social networking communities will see limited adoption due to user experience and format of interactivity – mCommerce: Mobile Commerce also is not promising for mass markets given low levels of electronic transactions and vendors’ and consumers’ resistance to adopt combined with unfamiliarity of this platform • With overall CAGR of 44% (2007 – 2010), VAS revenues will reach USD 2,744 mn – In medium term most of the current challenges will be addressed by both operators and VAS players – But growth during near term will flatten as operators do not shift focus from customer acquisition to VAS promotion quickly enough, thus new low end users will drag down the per capita consumption – Growth can be impacted substantially in either direction depending on outcome of various major regulatory and non- regulatory factors, including MNP, 3G, advertiser uptake of mobile advertising – Growth acceleration will begin in 2009, as various challenges are overcome, size of mature user base increases, and telco focus on high end user VAS heightens – Share of traditional VAS declines to less than 50% in 2010. Mobile data / internet access, e-mail, and IVR based services will achieve the highest growth rates 5
  • 6. Table of Contents • Indian Telecom Overview • Near Term Industry Outlook • Introduction to VAS in India – Current State – Telco Strategies • VAS Value Chain • Key Challenges & Hurdles Today • VAS Outlook for India – Addressing Challenges & Hurdles – Assessment of Applications & Services • Projections • Annexure – Key VAS Players 6
  • 7. Indian telecom overview Operator Market Share (Oct 2007) Population 1.112 billion Others Idea 7.7% Airtel Fixed Subs 39.41 million (Oct 2007) 9.0% 23.4% Tata Mobile Subs 217.14 million (Oct 2007) Teleservices 9.3% Internet Subs 9.22 million (Jun 2007) Reliance BSNL 17.4% Broadband Subs 2.67 million (Sept 2007) 16.1% Vodafone 17.1% Interesting Market Facts • 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 Source: TRAI, COAI, AUSPI, BDA Analysis Note: Mobile subs data includes fixed wireless customers 7
  • 8. Market continues to show a trend of about 8 million net subscriber additions in a month Launch of INR 777 Handsets / Record Additions in a month Launch of 999 scheme Lifetime Prepaid Below INR 500 9 8.3 8.1 8.0 cle s Verification of 7.8 8 Cir subscribers &C 7.0 nB 6.7 6.8 6.8 7 io ni 6.5 6.6 off t ra t 6.1 6.2 6.1 es ne 5.9 ak Pe 6 ai dT 5.4 rep 5.3 cr oP 5.0 4.8 Million 5 Mi 4.4 4.5 4.3 3.9 4 3.5 2.9 2.6 3 2.5 2 1 0 Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- 05 05 05 05 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07 07 07 07 07 07 07 07 • Net monthly additions of nearly 8 mn in the last 4 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 Source: TRAI, Morgan Stanley Research, Telecom Watch, BDA Analysis 8
  • 9. Growth in August has been steady in the 3-5% range across all circles with A and B Circles* leading both percentage and actual net additions Jammu Kashmir Circle Monthly Growth (Mar-Oct 07) Himachal Pradesh Punjab Mns 76.8 76.9 Uttaranchal 74.0 73.8 Arunachal Pradesh 70.9 85 71.1 Haryana 57.7 Delhi 57.6 Sikkim Rajasthan Uttar Pradesh Assam 65 38.9 Meghalaya 37.6 36.4 Bihar Manipur 31.6 Gujarat Madhya Pradesh Jharkhand West Bengal Mizoram 45 19.2 20.6 19.9 Tripura 15.6 Chhattisgarh Kolkata Maharashtra Orissa 25 Mumbai Andhra Pradesh 5 Metro Metro Circle A Circle B Circle C Karnataka A Circle -15 B Circle Mar-07 Aug-07 Sep-07 Oct-07 C Circle Tamil Nadu Kerala Chennai • At the end of October the mobile teledensity Circle Monthly % Growth (Mar-Oct 07) % 8 6.4 Metros 74.09% 6 4.8 Circle A 22.17% 4.5 4.2 4.2 4.0 3.9 3.9 3.3 3.3 3.6 3.6 3.3 4 2.7 Circle B 10.91% 1.4 Circle C 9.33% 2 0 • The growth is distributed across the circles, Metro Circle A Circle B Circle C even though the net adds are the highest in -0.8 -2 Circle A and B Mar-07 Aug-07 Sep-07 Oct-07* * A Circle is the operating area defined by a license & are categorized based on census and socio-economic data Source: TelecomWatch, TRAI, BDA Analysis 9
  • 10. Airtel, Vodafone and Reliance added the highest number of subscribers 60 50.9 48.9 46.8 50 Mar'07 37.8 37.2 37.1 36.3 40 35.7 Aug'07 34.9 34.8 34.1 34.1 33.5 31.0 Sept'07 Million 29.0 Oct’07 26.3 30 20.2 19.5 19.4 18.9 18.7 17.9 20 16.1 14.0 8.5 8.0 7.6 10 5.5 3.5 3.6 3.4 2.9 3.0 3.1 2.7 2.9 0 Airtel Reliance Vodafone BSNL Indicom Idea Aircel Spice MTNL Essar • Vodafone is quickly closing the gap between itself and Reliance, having overtaken BSNL recently. With handset bundling being offered in Oct, high growth is expected to continue • Airtel, Vodafone and Reliance added the highest number of subscribers with 2.03 mn, 1.57 mn & 1.51 mn new additions respectively Source: AUSPI, COAI, BDA Analysis 10
  • 11. Though GSM operators continue to see declining ARPU, CDMA operators have managed the opposite through creative tariff structuring Trends in all India Monthly ARPU 394 400 381 374 362 366 352 337 316 298 297 300 256 256 241 240 244 INR per Month 228 215 206 196 202 200 100 0 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 GSM CDMA • GSM operators have nearly stabilized ARPUs declining only by INR 1 over the last quarter, mostly on higher MoUs and higher lifetime prepaid additions • CDMA operators have been able to increase their ARPUs as the all India average subscriber outgo per minute increased to INR 0.85 in June 2007 from INR 0.81 in March 2007, while for GSM operators it declined from INR 1.15 in Mar-07 to Rs. 1.11 in June-07 Source: TRAI, BDA Analysis Average Subscriber outgo = Rental + call charges per minute 11
  • 12. Table of Contents • Indian Telecom Overview • Near Term Industry Outlook • Introduction to VAS in India – Current State – Telco Strategies • VAS Value Chain • Key Challenges & Hurdles Today • VAS Outlook for India – Addressing Challenges & Hurdles – Assessment of Applications & Services • Projections • Annexure – Key VAS Players 12
  • 13. Rules of the game Declining Tariff Improved Regulatory Structure Innovative Pre-Paid Tariff Plans 500 Wireless Subs (mn) 400 300 200 100 0 2003 2004 2005 2006 2007F 2008F 2009F 2010F Declining Handset Prices Unprecedented Growth Source: BDA Analysis 13
  • 14. Over the recent years, most new subscribers being acquired have been low-end users, resulting in falling ARPU • 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 – Minute of Usage (MoU) in India is already the second highest in the world at 476 (Jun 07), behind only USA Mobile ARPUs are Declining Precipitously 1,500 200 Subscriber Base (mn) ARPU (INR/Month) Subscriber (mn) 150 ARPU (INR) 1,000 100 500 50 0 0 2000 2001 2002 2003 2004 2005 2006 Source: Company Information, TRAI, BDA Interview and Analysis 14
  • 15. Operators and handset vendors must adapt their strategies to serve the Bottom of the Pyramid Growth is fastest at the Bottom of the Pyramid Growth is continuing in Growth is continuing in Growth is taking off in semi- Growth is taking off in semi- USO will help continue to USO will help continue to metros and urban metros and urban urban and rural areas urban and rural areas drive coverage gains drive coverage gains Operators and vendors must adapt their Operators and vendors must adapt their strategies and distribution to meet this new growth strategies and distribution to meet this new growth Source: BDA Analysis 15
  • 16. Operators are tailoring service packages for low-end users making mobile service more affordable Micro Prepaid Cards Life Time Validity All operators offer a Recharge options as “lifetime prepaid” plan which maintains the phone low as INR 10 (USD number for life for free 0.25) incoming calls if recharged every 3 or 6 months Full Value Recharge Free In-Network Calls Some operators have Talktime of value equal started free unlimited to the recharge amount local in-network calls Group Calls Bulk SMS Pack Unlimited calls Plans customized for among a limited set bulk SMS within a of people at a specified area at a particular cost much lower cost Source: BDA Interviews and Analysis 16
  • 17. Prepaid in India comprises of over 85% of total subscriber base and over 95% of net new additions • Unlike more developed countries, prepaid Prepaid/Postpaid Subs Breakup (July 07) comprises 85% of GSM subs & 87% of 100% 4.9 1.8 4.6 3.4 1.9 5.5 CDMA subs 80% – As recently as 2005, prepaid only 60% 37.8 26.6 14.3 26.1 25.0 17.1 accounted for 76% of subs 40% 20% – This shift s driven by the nearly 95% of net new subs being prepaid 0% Bharti Relaince BSNL Hutch Idea Tata • With the focus of telco expansion moving Prepaid Postpaid to tier II & II cities, A & B Circles are now contributing the highest prepaid net Prepaid as % of Net New Adds (July 07) new additions % of Prepaid Subscribers 60 100% 80% Subs (mn) 37.8 40 26.6 26.1 60% 25.0 17.1 40% • Given prepaid will continue to increase to 20 14.3 20% above 90% of total subs, telcos and VAS 0 0% providers need to be aware of how to Bharti Reliance BSNL Hutch Idea Tata provide solutions for this market Prepaid Net new prepaid subscribers Source: Company Information, TRAI, BDA Analysis 17
  • 18. High level of competition has lead to price reduction and increased affordability Fall in Tariff • Operator focus on growing the pie versus eating each other's share Low penetration & Low penetration & has resulted in better tariffs for consumers 6 – 7 operators per 6 – 7 operators per circle – Innovative tariff plans circle – Lower cost per call with more users in the network Decline in Tariff 18.00 180 Lowering of 166.00 16.00 NTP-99 160 ADC from Telecom Mobile subscriber base (mn) 14.00 CPP 30% to 10% 140 Effective tariff (Rs./min) Tariff introduced of sector 12.00 Order 3rd & 4th revenue 120 cellular WLL 10.00 100 operator introduced 90.00 8.00 80 6.00 52.17 60 4.00 40 33.60 2.00 20 0.88 1.20 1.88 3.58 13.00 6.50 0.00 0 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Fixed Tariff Cellular Tariff Mobile Subs Source: Company Information, TRAI, BDA Analysis 18
  • 19. New regulations allowing new players, dual technology and MNP are likely to further increase competition 1 New Players 2 Dual Technology • TRAI recommended no cap on number of • CDMA players being operators in each circle allowed to provide GSM • Combined with a leniency in M&A, this has lead operations and vice to over 500 license applications (equivalent to versa is equivalent to 22 PAN India operators), including from having new players companies with no telecom experience but entering the market, wanting to capitalize on the boom again increasing competition • Even if 2 – 3 new players are allowed in each circle, this will increase competition which would significantly effect operator strategy and potentially pricing, as well 3 Mobile Number Portability (MNP) • In a cost conscious market ? Cheetah with high number of prepaid S Tel users and no commitment with the operator, it is likely that the operators would reduce price to keep their customers and lure others Source: TRAI, DOT, BDA Analysis 19
  • 20. Almost half of Indian mobile subscribers use ULCH and as mobile rural penetration is increasing, the sale of ULCH will increase further • Within one month of its launch in June 2007, Reliance Classic series ranging from INR 777 (USD 19) – INR 2,049 (USD 51) sold over 1 mn handsets • Nokia and Motorola have launched several low-cost models with functions and features specifically designed for the India market like Motofone and Nokia 1110 Users in Different Handset Price Brackets (June 2006) % 50 45.5 40 30 22 20 9 10.5 10 6 4.5 2.5 0 <2,000 2,001- 4,001- 7,001- 10,001- 15,001- >20,000 4,000 7,000 10,000 15,000 20,000 INR Note: USD = INR 40 today, but was 45 in 2006 Source: BIS Shrapnel, BDA Analysis 20
  • 21. Increasing affordability levels from innovation in entry-level handsets and call tariffs will continue to drive growth • With the decline in tariff and handset Wireless Subs Projections and Distribution price, affordability will increase by Circle 500 substantially, independent of increasing 14% Circle C incomes 400 Subscribers (mn) • By the end of 2010, we estimate that the 40% Circle B 300 mobile teledensity will be almost 44% 200 with 497 mn subscribers 34% Circle A • Majority of subscribers will come from 100 semi-urban and rural areas, fuelled by 0 12% Metros operator expansion on their own and 2003 2004 2005 2006 2007F 2008F 2009F 2010F with support from government Source: BDA Analysis 21
  • 22. Table of Contents • Indian Telecom Overview • Near Term Industry Outlook • Introduction to VAS in India – Current State – Telco Strategies • VAS Value Chain • Key Challenges & Hurdles Today • VAS Outlook for India – Addressing Challenges & Hurdles – Assessment of Applications & Services • Projections • Annexure – Key VAS Players 22
  • 23. India’s VAS market estimates show aggressive growth and decreasing relative importance of text- based offerings VAS Performance Data and Voice Breakup 2005 2006 2% 4% 5% 5% 5% 6% 8% 7% 0.6% 0.5% 1.0% 0.5% 0.5% SMS (P2P) 1.5% 1.0% 3.0% SMS (A2P P2A) 3.6% CRBT / Ringtones 98% 13.2% 5.0% 40.0% 96% 95% 95% 95% 94% 92% 93% Voice 9.6% Games 35.0% Data 70.0% E-mail 15.0% Others 2000 2001 2002 2003 2004 2005 2006 2007 F 100% = USD 438 mn USD 678 mn Voice VAS • VAS services presently contribute about 7% of the total telecom revenue for Indian operators • The mobile VAS industry in India is estimated at USD 679 mn at the end of 2006 and is estimated to grow to touch USD 926 mn at the end of 2007 • 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 gain • SMS, Ringtones/CRBT, Voice VAS will continue to be the highest revenue generating services Source: COAI, IAMAI, BDA Analysis 23
  • 24. The vast offerings across VAS services are still delivered predominantly using 3 platforms of SMS, IVR’s and WAP portals Delivery Entertainment Alerts and News Commerce Social VAS Enterprise VAS Platforms SMS • SMS • Cricket / Match Alerts • Mobile banking • Location, • Pull on Short Code for • Ringtones / CBRT • News • Ticketing infotainment contests, voting, Search ** information • Customized • Astrology, Vaastu, • Travel and Holiday • Advertising • Push for Advertising Wallpapers Fengshui, Personality test bookings • LBS systems • Animations • Banking Info /Alerts • Enterprise IM • Quiz • Travel alerts details like Train, Flight details etc • Group messaging • Jokes IVRs • Religious chants • Astrology • Mobile banking • Astrology services • IVR based Contact Centers • Music on Demand • Vaastu • Ticketing • Voice SMS • Self Help centers • Fengshui • Voice Portals • Personality test WAP Portals • Video Clips • Movies related info • Mobile banking • Mail • Location based information • Mobile Games • Stock Portfolio Managers • Ticketing • Mobile-Greetings • Internet Mobile e-mail • Mobile Themes • News tickers / alerts • Travel and Holiday • Dating, Chatting, • Mobile calendar bookings Blogging etc • Mobile Radio • Access to Intranet and Core • Infotainment Business Applications • SNC / UGC • Mobile VPN • Internet Search ** • Push E-mail over handheld Advertising devices (e.g. BlackBerry) / Wireless e-mail • Messenger ** NEW Source: BDA Analysis 24
  • 25. While total volumes will continue to be driven by P2P usage, per capita SMS will continue to decline • Growth Trends in all India Outgoing SMS per – SMS growth was direct result of high outgoing tariff Subscriber during non-CPP (calling party pays) days 46 48 48 48 – SMS were priced substantially below call tariffs 50 39 – Even after voice tariffs have fallen and in some cases 35 INR per Month 40 local calls have become cheaper than an SMS, growth 30 24 trend has continued 20 20 19 20 20 • Volume 11 – Large number of first time mobile users lead to 10 decline in per capita SMS consumption 0 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 – TRAI recommendation (implementation in May 07) to GSM CDMA move from 4 digit to 5 digit short code has lead to 15 – 20% revenue decline in SMS VAS over 2 quarters – Volumes will however continue to grow as P2P drives volumes on account of discounted SMS bundles Volume and Price of SMS offered by all operators in the mid term • Pricings 74 80 R: 3 – SMS price range for postpaid has always been lower 2.0 C AG % SMS Volume (bn) 55.4 Price/SMS (INR) than prepaid. Rates are INR 1-2 for local, INR 2-4 for 45 domestic, INR 5-10 for International and INR 3-6 for 1.0 1.0 premium SMSs 40 1 24 – On an average prices will continue to remain stable in 13 0.5 short term, but innovation and pull services with various utility applications and new services (like SMS 0 1 2.0 from Affle or SMS gupshup from Webaroo) will 2004 2005 2006 2007F drive future volumes and revenues SMS Volumes Price per SMS Source: TRAI, BDA Interview & Analysis 25
  • 26. SMS has offered a new lease of life to TV by making one way broadcasts an interactive medium through contests and voting SMS Based Contests • FY '06-07 saw SMS marketing and contests reaching new heights. P2A (person to application) and A2P (application to person) SMS services gained popularity, driven by voting based TV shows • The SMS based contests have been targeting varied age groups through a variety of products – Indian Idol Youth – Kelloggs Housewives and Children – Cricket Predict & Win Mass Market • Two finalists of Indian Idol 3 drew a combined tally of 70 mn SMS votes in the final 9 days of Sept 14 – 23. At an avg cost of INR 3, the revenue generated reached around INR 21 crore (USD 5.25 mn). The volume averages to – 320,000 SMS per hour – 5,400 SMS per minute – 90 SMS per second • Kelloggs India tied up with Mobile2Win to promote its Chocos brand targeted at kids in the age group 4-11 years. The contest, called quot;Rescue chocos from Crafty Croc“, was available by solving a crossword puzzle on the back of Kellogg's Chocos packs, and then SMS’ing the correct answer to 8558 • With more niche TV programming being introduced this segment of VAS is bound to have positive impact on the SMS volumes Source: BDA Interview and Analysis, Mobile Pundit 26
  • 27. While SMS continues to remains the most popular application, it is also being effectively reinvented to suit varied enterprise needs SMS Based Services • Reasons for enterprises to use SMS – Instantaneous delivery & does not rely on recipient to retrieve from a server – Reliable means of getting time-sensitive messages to recipients, including automated delivery acknowledgement – Compatible across all users and handsets • SMS-based mobile data services are being used by several forward-looking enterprises for the following applications – Asset / Automatic vehicle tracking when integrated with GPS – Fleet dispatch – Inventory management – Utility services (metering by electricity boards) • Interactions on SMS are typically of the following types – Request: Authorized users can request internal company information, i.e., company phone list, stock/ warehouse, latest prices, internal news, customer facts. Services are used by internal customers (employees), extended customers (vendors, partners) and end-customers – Group transmission: Users can send messages to a group of people at the same time (i.e., employees, customers, etc). Messages can be identical for everyone in the group (a broadcast) or individualized (a narrowcast with each person getting a different message) – Push/Notification Services: Users can create automated event or scheduled alerts, e.g., generate a request every morning at 8 am for revenue of the previous day or stock status Source: BDA Interviews and Analysis 27
  • 28. Beyond SMS, any VAS built around Bollywood* remains the killer content, whether for ringtones, CRBT, games, wallpapers, alerts etc • Indian film industry produces more than 1,000 movies a year and attracts nearly 1.6 bn viewers • Approximately 5+ bn tickets, 12,900 cinema halls and the reach has moved beyond India’s boundaries to Non resident Indians across US, UK, South Asia, Middle-East, Africa and Europe • Satellite television, radio, internet, and mobile has helped cinema reach out to a larger audience • Industry revenues form Box-office declined to 84% of the total revenues in 2006 (from 90% in 2005) due to the emergence of new channels and increasing touch points to access film content, penetration of home video, Internet media and mobile • Nokia & Om Shanti Om (OSO), the season’s largest movie release, partnered for exclusive offerings including – OSO movie clips, behind the scenes videos, ringtones and wallpapers – A special ‘OSO Crazy mobisode’ with animated characters of ‘OM’ (played by Shah Rukh Khan) accessible on all Nokia GPRS enabled handsets through a special site created for the partnership • Sony Pictures in association with Sony Ericsson followed similar strategy to promote another mega release for the season Saawariya and other film content on mobile • Today, approx 60% of mobile content downloaded in South India is in local languages * We have used “Bollywood” to represent the entire Indian film & music industry including the regional components of the industry Source: BDA Interview and Analysis, CII, Company Information 28
  • 29. After movies, cricket is the theme around which most of the rest of content is built and marketed, as these remain the top two priorities for entertainment in India • Almost all operators with content service provider offer cricket news, views and promotions • Companies like Reliance, Airtel and Vodafone continue to build their communication strategy around being the lead sponsor of major cricketing events • Reliance was one of the primary sponsors of the recently conducted T20 World Championship, the only Indian company amongst the group • Airtel is one of the key sponsors of the much hyped India – Pakistan cricket series • Most of the telecom companies use media space during matches to promote their products and services including content like match scores on mobile and ball by ball updates • Contests like predict and win, make your own team and similar promotions are run using Pull SMS services by media companies and advertisers • All game developers have specific downloadable mobile cricket games and games using cricket stars as the hero • Airtel has also been sponsoring cricket reality shows searching for budding talent e.g. Cricket Star Source: Airtel, Hutch, BDA Interview and Analysis, IAMAI 29
  • 30. Mobile music in the form of ringtones & CRBT is the next largest revenue generator after SMS, and a key driver for the VAS market • Music claims one of the largest share of India’s mobile VAS market size, estimated to be worth about USD 324 mn (35%) including CRBT and ringtones as the major applications • Operators are aggressively building their mobile music brands by promoting nationwide uniform mobile music portals and launching marketing campaigns – Airtel’s music portfolio is over 50,000 complete tracks, ring tones, ring-back tones and corporate jingles – Introduction of music discovery services like Airtel's Song Catcher created further ease of use, packaging, and flexible pricing for effective product differentiation – Hutch (Now Vodafone) introduced “Full Song Download” and announced the music premier of “Krissh” through this service – Hutch (Now Vodafone) & Idea introduced ease of use for CRBT by allowing users to copy another user’s CRBT by pressing * while listening to it Source: BDA Interview and Analysis, Company Information 30
  • 31. Application categories include IVR and niche applications are just starting to emerge IVR • One of the most popular TV reality shows in India, “Kaun Banega Crorepati” (Indian adoption of “Who Wants to be a Millionaire”) required aspirants to audition using an IVR system – More than 1,000 call center lines were deployed across four metros to handle huge call traffic – The multilingual call center was able to respond to the caller’s preference – The system also handled inquiries on marketing information, recording complaints and claim inquiries – Call Volumes & Charges Niche Applications • Stock market alerts • SMS based instant messengers • Social networking on mobile • Group SMSing • Commodity pricing on SMS • Examination results over SMS (NCERT and other state education boards offer these services) • SMS based movie ticketing (e.g. Fame Cinemas, PVR Cinemas) Source: Airtel, Hutch, BDA Interview and Analysis, IAMAI 31
  • 32. Rural applications development initiatives have started on a small scale, but are likely to offer some innovation for day to day use in less developed geographies Fisher Friend • Fisher Friend is a mobile application being piloted in South India – Vital real-time information to fishing communities when and where they need it the most – at mid-sea – Information includes when and where to sell the fish through access to market prices, weather (e.g. sea wave heights, satellite scan data about fish shoals), government schemes, etc. – Access to this data could drastically improve market transparency and thus earning capabilities for smaller fishermen • A joint initiative of Qualcomm India, TATA Indicom, Astute and MSSRF Reliance Developer Programme • Reliance Developer Programme of Reliance Communications has launched the Rural Mobile Application Contest, 2007-08 to encourage mobile application development in the country – Focus will be on rural applications for transportation, mCommerce, health care services, governance, education, information and location based services – Applications can be submitted for WAP, Java, Reliance Java, Brew, Brew Lite, VoxML and Symbian environments on both GSM and CDMA technology – Contest is open to all Software professionals, Software Developers, Companies, Students, self employed professionals and Content Vendors/ Aggregators – Cash prizes & an opportunity to commercially launch applications is available Other Rural Applications • IVR applications in regional dialects for rural market • Mandi bhav – commodity pricing information on mobile • Thematic packaging of regional content • Regional mobile radio Source: BDA Interview and Analysis, IAMAI, company websites, Qualcomm 32
  • 33. User segments for VAS services can be viewed along 6 groups CXO Level Users Young Professionals SME/ SOHO Users • Senior executives in • Mostly mid level • Shop Owners an organization with executives • Traders a paucity of time • Self Employed • High net-worth individuals • Extended enterprise users (mostly distributors, suppliers etc.) Youth/ Mobile Workforce Family Young Professionals • Sales / Customer • Youth from 15 – 25 • Mostly dependants facing workforce years • More than one user • Users entering the in a family workforce • Housewives • Elder members of family Source: BDA Analysis, Company Information 33
  • 34. However the needs and buying behavior varies based on whether services and devices are company or self paid CXO Level Users Young Professionals SME/ SOHO Users • Need devices and • Mostly mid level • A smaller section is very applications that can executives tech savvy and a large reduce decision making • Highly tech savvy and proportion is still time ready to spend on technology challenged • Need to be connected gizmos and new • Demand good price always devices value combination • Not highly tech savvy • Need low cost of entry • Mostly early adopters as mostly pay and hence might require ease of use and themselves high level of uptimes • Need single devices for for the device both voice and data services as they don’t • Need less complex want to duplicate devices investments Youth/ Mobile Workforce Family Young Professionals • Always on the move, • Early Adopters • Basic communications hence need to access • Heavier users of needs core enterprise technology • Entertainment focused applications on handhelds • Entertainment focus • Socializing within family • Affinity for social and friends • Typically these users are “forced” users networking and peer • Need education / under directive from communication support for new service management initially, • Individual content adoption but realize value as it creators improves productivity Source: BDA Analysis, Company Information 34
  • 35. Investment firms are focusing on VAS companies attracted by the growing subscriber base and need for applications Key Drivers • The growing telecom subscribers in India and the continuous record additions of >7 mn per month • Access to VAS services are becoming cheaper with plethora of compatible handsets available in the market • Subscribers are using their handsets to – Play games – Services such as access information from banks, – Download ring tones railways and airlines – Read news headlines – Check exam results – Surf the Internet – Participate in contests, etc. • Mobile VAS is offered on multiple platforms like SMS, voice and Wireless Application Protocol (WAP) enabled services etc which increases its reach substantially • Market size of VAS industry has been estimated at about USD 993 mn (INR 3,990 cr) at EOY 07 • VAS market is poised to grow by more than 35% & generate sales of more than USD 1,250 mn (INR 5,001 cr) by EOY 08 • Investment in VAS companies have been typically USD 10 – 15 mn in the most recent rounds, and less than USD 5 mn for start-ups, which is considerably lower than what would be required in other telecom segments such as networks, towers, etc. Source: IndusView, BDA Interviews & Analysis 35
  • 36. The volume of investments across all VAS sectors with amounts as high as USD 15 mn demonstrates the untapped opportunities (1/3) Investment Date Company Round Investors Comments (USD mn) • Provides mobile advertising services Draper Fisher Jurvetson and Nov-07 1 2 • Use funds to grow business, ramp up technology stack, NEA-IndoUS Ventures marketing & sales force • Enables users to manage credit/debit cards with mobile phones for over-the-counter, Internet & person-to- person payments N/A • Raised funds from Draper Fisher Jurvetson & Rajesh Nov-07 2 N/A Jain in 1st round; Planning to raise USD 5-15 mn in total for 2nd • Targeting four verticals - Bill payment, Internet shopping, Merchant Transactions & P2P payments • Plans to become a value added services player for Ike Lee (venture partner at 1 telecom and media companies Oct-07 1 Ignition Partners), Ruderman Capital • Plans to raise a total of USD 3 mn to fund its expansion activities • Voice SMS company; planning to raise USD 5-15 mn Qualcomm Ventures, Eastven N/A Oct-07 4 • Initially raised USD 10 mn in its 3rd round of funding & Erasmic Venture Fund from Helion and Nexus India Capital • Obopay India yet to launch services Promethean Investments - • Obopay US is a mobile payment service that lets users Oct-07 1 10 USD 5 mn send & receive money from any of the 200+ million mobile phones in the US • Recent application MeOnGo enables push email on internet supporting mobile devices Sep-07 2 N/A 2 • Subs base of 20,000+ individual & enterprise users in 100+ countries Source: IndiaPe, VC Circle, BDA Analysis 36
  • 37. The volume of investments across all VAS sectors with amounts as high as USD 15 mn demonstrates the untapped opportunities (2/3) Investment Date Company Round Investors Comments (USD mn) • Powers Yahoo Maps, and has also tied up with Wayfinder and Airtel for GPS Aug-07 2 Nexus India Capital 2.5 • Provides business solutions like storelocator and GPS based tracking MIH India (Unit of South • 20% stake in ACL Wireless Jul-07 2 African media conglomerate 12.3 • Focus on developing mobile applications such as mobile Naspers) community services • Founded in Nov 2004 iSherpa Ventures, EDF • Rocketalk combines video, pics, voice and SMS into one Jul-07 1 Ventures and Mission 7.1 client, and can be used to send messages to any other Ventures phone (with the same client) or online (and uploaded to sites like YouTube). • Exclusively licenses well known brands like Sachin Tendulkar, Sehwag, Dhoni & Archie Comics, etc. & Apr-07 2 N/A 7-8 develops mobile content based on these brands • Had earlier raised USD 1.5 mn from Sequoia Capital India • Provides telecom VAS to enterprises & consumers, and also powers IVR services of corporates SAIF Partners & Silicon Valley Apr-07 1 8-10 • Probably one of the two VAS companies (the other Bank being OnMobile) that owns servers at the telco’s premises Source: IndiaPe, VC Circle, BDA Analysis 37
  • 38. The volume of investments across all VAS sectors with amounts as high as USD 15 mn demonstrates the untapped opportunities (3/3) Investment Date Company Round Investors Comments (USD mn) Emergic Ventures, Ingram • Founded in 2005 Mar-07 1 Digital, Global Asia Partners 3.1 • Mobifusion has a wide variety of mobile content and & an unnamed Indian telco applications suitable for the global market • Deployed m-CRM and m-coupons initiatives, and plans to enable money transfer from ATM to mobile and video Mar-07 2 N/A 1 streaming • Received USD 1 mn in seed funding last year from General Electric, IBM, FeatherLite • Product called reQall allows users to instantly record voice notes using mobile devices. The software then California and Hong Kong– Jan-07 1 2.5 recognizes the speech and organizes the recording based venture groups which are searchable using keywords, and reminders can be the set (and uploaded to sites like YouTube). Cambrian Fund of California, 7.5 Lloyd George Asian Plus Fund • Webaroo is a technology startup company with offices Dec-06 2 of Hong Kong and HTSG of in the U.S. and India Mauritius • Offers mobile content like ring tones, games and other content applications, besides enterprise telecom Dec-06 1 Lehman Brothers 15 solutions • Looking at acquiring companies in the content space, especially mobile gaming companies Source: IndiaPe, VC Circle, BDA Analysis 38
  • 39. Table of Contents • Indian Telecom Overview • Near Term Industry Outlook • Introduction to VAS in India – Current State – Telco Strategies • VAS Value Chain • Key Challenges & Hurdles Today • VAS Outlook for India – Addressing Challenges & Hurdles – Assessment of Applications & Services • Projections • Annexure – Key VAS Players 39
  • 40. Data services revenues are declining as operators focus on expansion and new subscriber acquisition ARPU Comparison (INR) 450 1H FY 07-08 Average 366 378 350 361 368 288 304 250 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 % Non Voice as % of Total Revenue 12 10.8 10.3 10.4 10.1 9.6 9.9 9.8 9.6 9.2 9.2 9.0 8.4 8.3 8.4 8 6.2 6.3 6.3 6.3 6.2 5.7 5.7 4 0 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Source: Company Reports, BDA Analysis 40