VASsup …in the wireless value chain?

03 Nov 2004


Carrier reform is essential for data services to become financially viable, writes Probir Roy

Wassup, The award-winning commercial for Budweiser Light in 1998 has become part of advertising and internet folklore. Not only did it launch its creator, Charles Stone III, into a lucrative career at Fox Television but put the brand back on the path to recovery.

As voice and simple text messaging continues its slow yet inevitable slide to the status of a 'commodity', its imminent salvation, in the form of the ad's phonetic cousin, 'value added services (VAS)' and mobile data could help propel spectrum players into a similar paradigm.

The overall global mobile data content market is expected to grow to US$126 billion by 2008 with mobile data constituting 27 per cent of all operator revenues (source: ARC Group, 2004). Even though voice transmission will remain the cornerstone of wireless business, the growth rate of `non voice' will outpace it five-fold during the same period (source: Booz, Allen & Hamilton, 2004).

In India, a US$1-billion market is possible. But what is mobile data? For simplicity lets classify mobile data (sound, picture, video and text) into three categories — information, communication and entertainment (ICE) — that fulfil consumer needs in areas like news, finance, sports, astrology, horoscopes, local city info, stock and event alerts, schedules, pull-centric direct marketing, traffic, weather, offline fulfilment services, banking, bill payment (via credit card), etc.

This is followed by applications, services and utilities built around benefits associated with communication and organisation (email, instant messenger, chat, directory services, dating, marriage bureau, voting poll, quizzes, ballot, sharing photos, etc). Finally, entertainment, which includes 2D Java games, various types of ring tones and 'ringbacks', wallpapers, logos, screen savers, picture messages / colour graphics, short video clips, m-cards, contests, vote-ins, jokes / pranks, lotteries, animations, karaoke, cartoons, gambling, betting, melody, radio, etc. This last category by itself is touted to have the potential to contribute 50 to 60 per cent of overall data revenues.

Where are we today? Data revenues constitute, at best, a small percentage of total revenues, maybe a few per cent. Today, the market for data content in India is estimated at around US$150 million.

It is a common complaint amongst telecom analysts that with a few exceptions like Orange, SK Telecom and Venizon, most spectrum owners tend to be terrible marketers (anyone can sell voice in a growth market). But the track record in non-voice segments is lamentable for reasons which, though universal, are often underplayed. Though stakeholders are painfully aware that this segment must contribute more to their revenues, the transition is easier said than done. A complex interplay of the following five key factors determine whether the desired benefits of VAS can be attained:

First, the shift from a market dominated by rapid 'commoditisation' of products ranging from voice-based SMS to specialised data services, (an uncharted zone with uneven demand) will not be simple. Wireless carriers will need to change their business models and mindset.

Currently revenues accrue from 'connectivity' (whether time- or volume-based fees), where companies charge consumers for accessing their networks. Revenues have, thus far, been derived from 'renting' their networks. As a result, carriers have been embroiled in brutal competition on pricing and network quality rather than forging third party collaborations with content partners to allow the networks to be used as a virtual distribution channels.

This implies closer integration as well as competition amongst spectrum owners, handset manufacturers, content providers, software vendors and application developers. For example, the Dutch mobile carrier KPN and NTT DoCoMo offers data services using the 'i-mode' platform and has revenue sharing contracts with content providers and works closely with them to ensure overall customer satisfaction.

Second, though Indian consumers are extremely price sensitive, they are discerning and are rapidly maturing as consumers of premium services. Spectrum owners have played to this 'insight' and priced their services accordingly. Volumes have been growing at triple digits, boosting annual topline growth.

On the flip side, price wars will not sustain capex-heavy businesses nor will they allow a write-off of accumulated losses without either new revenue streams or consolidations and exits. Therefore, they will be confronted with the challenge of milking VAS to drive earnings before interest, taxes and depreciation margins, and in the next few years, 20-30 per cent of their revenues could well come from mobile data.

Third, if indeed the 'killer application' in the mobile world remains elusive, it is staring everyone in the face right now. Operators need to focus on services and consumers, and less on what technology (WAP, GPRS, EDGE/1xRTT, EV-DO/UMTS, etc) drives those services. Paradoxically the move to a new paradigm will entail jettisoning the engineering network-centric philosophy which, arguably, has worked well so far. This approach, however, tends to subordinate customer needs in favour of technological prowess, the traditional supply centric view being 'build it and they will come'!

Fourth, for the critical mass of mobile subscribers (expected to be around 200 million by 2008) acceptability and penetration of branded retail products around concepts such as wireless payments (potential top revenue drivers for operators, banks, credit card companies and electronic payment infrastructure providers) will need to become key drivers.

Finally, respect for copyright and intellectual property rights is imperative, more so in the mobile space where ambiguity creates only commercial opportunism. The inability to partner is a manifestation of a cultural mindset - that third parties are 'lowly vendors' and not respected allies. This attitude makes negotiating with operators a 'zero sum game' and poses a serious challenge to industry development. Ultimately spectrum owners must learn to collaborate with multiple and diverse third parties, to help sell data as shelf products that can be downloaded and then bought like any other boxed products. Perhaps, 'digital rights' management at the operator end, coupled with royalties in the value chain would go a long way in ensuring a steady pipeline of original and localised mobile content coming to the operators.

The challenge is clear, in the long run there is a need to contain revenue decline per user (to-date, revenue per user has come down by more than half since 2001, and is expected to decline another 10 per cent by year end), reduce churn, and improve operating margins. And this can only be done if mobile data services play an increased role in operator portfolios and they reorient their business philosophy.

The author is founder-director of Coruscant Tec, a wireless solutions firm with offices in Palo Alto, Chennai and Mumbaiand is on the Indian Merchants Chamber's national technology committee and member, FICCI's 'e-entertainment alliance'. He has spent over 16 years in technology and business as COO, CIO and CTO.

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