B D A Mo Mo Exec Pres 2008 01 F I N A L

© 2008 Stanford University & BDA

January 2008

Mohit S. GundechaResearch Associate Stanford University

Prof. Tom KosnikFenwick & West Consulting Professor

STVP, Stanford University

Kunal BajajDirector – India

BDA

Future of Mobile VAS in

India


Our special thanks to:

• Eric Allen – Wireless Advisor

• Veerchand Bothra – Author, MobilePundit

• Nitin Brahmankar – Director, IDT

• Girish Trivedi – Principal Manager

• Deepshikha Garg• Rahul Gupta• Smita Sharma

BDA Team:

3

Table of Contents

•• Indian Telecom OverviewIndian Telecom Overview

•• Introduction to VAS in IndiaIntroduction to VAS in India

–– VAS Value ChainVAS Value Chain

–– Key Challenges & Hurdles TodayKey Challenges & Hurdles Today

•• VAS Outlook for IndiaVAS Outlook for India

–– Addressing Challenges & HurdlesAddressing Challenges & Hurdles

–– Assessment of Applications & Services Assessment of Applications & Services

•• ProjectionsProjections

4

Population 1.112 billion

Fixed Subs 39.31 million (Nov 2007)

Mobile Subs 225.46 million (Nov 2007)

Internet Subs 9.22 million (Jun 2007)

Broadband Subs 2.87 million (Nov 2007)

Source: TRAI, COAI, AUSPI, BDA Analysis

• Despite the continued record growth over the last 12 months, only 23.64% of the country’s 1.1 bn population owns a telephone, which points to a situation where growth is expected to continue and even accelerate

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

Interesting Market Facts

Indian telecom overview

Note: Mobile subs data includes fixed wireless customers

Operator Market Share (Nov 2007)

Airtel23.5%

Reliance17.5%BSNL

15.9%

Idea9.0%

Vodafone17.1%

Others7.7%

Tata Teleservices

9.3%

5

5.35.9 6.1

6.7 6.86.5

6.86.2

2.6

6.16.6

7.0

8.1 8.37.8 8.0

8.4

5.04.3

4.8

3.9

5.4

4.5

2.5

4.4

2.93.5

0

1

2

3

4

5

6

7

8

9

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Market continues to show a trend of 8 million net subscriber additions in a month

Mill

ion

Micro prepaid takes off

Launch of 999 scheme

Penetration in B & C Circles

Verification of subscribers

Launch of INR 777 handsets / Lifetime prepaid below INR 500

Record additions in a month

Source: TRAI, Morgan Stanley Research, Telecom Watch, BDA Analysis

• Net new additions in November are the highest up to now, averaging over 8 mn for the past 5 months

• With aggressive rollout targets by operators such as Bharti and BSNL who plan to expand coverage to rural areas, the trend of new subs additions will continue

6

Rules of the game

Source: BDA Analysis

Declining Tariff

Declining Handset Prices

Innovative Pre-Paid Tariff Plans

Unprecedented Growth

0100

200300

400500

2003

2004

2005

2006

2007

F

2008

F

2009

F

2010

F

Wir

eles

s Su

bs (

mn)

Improved Regulatory Structure

http://images.google.com/imgres?imgurl=http://gfii.india.nic.in/images/goi_logo.jpg&imgrefurl=http://gfii.india.nic.in/&h=346&w=258&sz=25&hl=en&start=2&um=1&tbnid=W6L-AnpSfn6gjM:&tbnh=120&tbnw=89&prev=

7

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

0

500

1,000

1,500

2000 2001 2002 2003 2004 2005 20060

50

100

150

200

Subscriber Base (mn) ARPU (INR/Month)

• ARPUs are dropping as volumes increase– With increased competition, tariffs of voice calls have gradually declined over the years– Most of the subscribers added are from the bottom of the pyramid with low usage resulting in

reduced ARPU

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

– It is unlikely tariffs will increase given aggressive competition between operators to add subs– Spectrum allocation based on subscriber linked criteria has pushed operators to focus more on

acquiring subscribers

Mobile ARPUs are Declining Precipitously

ARPU

(IN

R)

Subscriber (mn)

Source: Company Information, TRAI, BDA Interview and Analysis

8

Growth is taking off in semi- urban and rural areas

Growth is taking off in semi- urban and rural areas

Growth is continuing in metros and urban

Growth is continuing in metros and urban

USO will help continue to drive coverage gains

USO will help continue to drive coverage gains

Operators and handset vendors must adapt their strategies to serve the Bottom of the Pyramid

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

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

Growth is fastest at the Bottom of the Pyramid


9

Table of Contents









10

40.0%

0.5%

15.0%

3.0%

5.0%

0.5%1.0%

35.0%

India’s VAS market estimates show aggressive growth and decreasing relative importance of text-based offerings

70.0%

1.0%

9.6%

1.5%3.6%

0.5%0.6%

13.2%

Source: COAI, IAMAI, BDA Analysis

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

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

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

VAS Performance

2005 2006

Data and Voice Breakup

98% 96% 95% 95% 95% 94% 92% 93%

4% 5% 5% 5% 6% 8% 7%2%

2000 2001 2002 2003 2004 2005 2006 2007 F

Voice VAS

SMS (P2P)SMS (A2P P2A)CRBT / RingtonesVoiceGamesDataE-mailOthers

100% = USD 438 mn USD 678 mn

11

VAS today comprises of primarily SMS and content focuses on Bollywood & Cricket


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

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

Bollywood/ Cricket Bollywood/ Cricket

SMSSMS

Rural VASRural VAS

IVRIVR

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

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

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

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

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12

Table of Contents









13

The VAS value chain consists of six entities primarily involved in the flow

SI/NI

HandsetVendor

Aggregator

Software Developer

Technology Enabler

Telco

Consumer

Content /Application Owner

Source: BDA Interview and Analysis, Industry Feedback

Internet Pipeline

Content Flow

Process Flow

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http://images.google.co.in/imgres?imgurl=http://www.pakimobiles.com/index_files/ringtones.gif&imgrefurl=http://www.pakimobiles.com/&h=119&w=93&sz=8&hl=en&start=13&um=1&tbnid=LL1qRVa8E28CKM:&tbnh=88&tbnw=69&prev=/images%3Fq%3Dbollywood%2Bringtone%26svnum%3D10%26um%3D1%26hl%3Den

14

Network operators dominate the revenue sharing arrangement in VAS today

Source: BDA Interview and Analysis, Industry Feedback

End UserEnd User End user pays for the content

Operator keeps 60 - 70% of revenue

Aggregators get approx 20 - 25 % of revenue

Content / Application owners get 10 - 15% of total revenue

Network OperatorNetwork Operator

AggregatorAggregator

Content / Application Owner

Content / Application Owner

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

15

Table of Contents









16

Operator ChallengeOperator Challenge

Device ChallengeDevice Challenge

Content Localization ChallengeContent Localization Challenge

VAS challenges …

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

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

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

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

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

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

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

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

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

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

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

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

Value Added

Services


User ChallengeUser Challenge

• Operators not driving user awareness to promote various VAS offerings

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

• Operators not driving user awareness to promote various VAS offerings

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

Revenue ChallengeRevenue Challenge

• Ongoing tussle between operators and VAS companies for revenue share continues

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

• Ongoing tussle between operators and VAS companies for revenue share continues

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

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17

Table of Contents


•• Introduction to VAS in India Introduction to VAS in India



•• VAS Outlook for India VAS Outlook for India




18

VAS challenges – moving on …

Value Added

Services


Challenge will be overcome

Challenge will continue to exist

Challenge may be overcome or could continue to exist

Revenue ChallengeRevenue Challenge

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

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

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

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

User ChallengeUser Challenge

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

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

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

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

Content Localization ChallengeContent Localization Challenge

• IVR will be a solution to local language support

• Creating the locally relevant content will still require substantial investments

• IVR will be a solution to local language support

• Creating the locally relevant content will still require substantial investments

Operator ChallengeOperator Challenge

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

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

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

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

Device ChallengeDevice Challenge

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

• VAS players and handset vendors are forming partnerships to embed applications

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

• VAS players and handset vendors are forming partnerships to embed applications

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19

Table of Contents





•• VAS Outlook for India VAS Outlook for India


–– Assessment of Applications & ServicesAssessment of Applications & Services


20

Industry sentiment gives a clear indication where the revenues are likely to come from

Application For Against Industry Feedback

• Enhanced messaging experience for users

• Contextual targeting of users

• Convince advertisers about SMS ads• Contextual advertising could be

intrusive in nature

• Micro payment for merchants on the move, mobile vouchers

• Remittance and P2P transfers

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

• Full music download & streaming over 3G

• Extension of current services

• Pricing and network quality / speeds critical for the success

• Platform for youth socializing• Online UGC/SNC gaining

popularity in India

• Bandwidth hampers content sharing• Handsets deliver poor user

experience in viewing size & browser

• Easy learning curve, regional language content

• Capable of replicating info service from SMS or WAP

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

• Lack of refined digitized local language content

Source: BDA Interviews and Analysis, Industry Feedback

SMS SMS

Mobile Commerce Mobile Commerce

Mobile Music Mobile Music

UGC/SNCUGC/SNC

IVRIVR

21

Industry sentiment about internet apps being ported to mobile are mixed, especially given low data enabled handset penetration

Source: BDA Interviews and Analysis, Industry Feedback

Application For Against Industry Feedback

• Access IM on the move & replicate internet experience

• Premium charging for messages

• Text entry, especially for local language

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

• Handset cost & overall investment in initial implementation is high deterrent

• Access to quick, actionable information on the move

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

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

• Low level of business computerization

• Lack of detailed mapping content

• User demand not significant

IM IM

E-mailE-mail

SearchSearch

LBSLBS

22

Table of Contents









23

In the medium term most of the current challenges will be addresses by both operators and VAS players…


2008-09 Trends

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

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

• Device challenge will start to decline• Primary focus on reinvention of traditional VAS

& early adoption of high end services

Medium Term Growth Driver

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

– Mobile Number Portability

– Allocation of 2G spectrum

– Introduction of 3G

• Non-regulatory changes like– Availability of payment systems other than the

telco

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

– Promotion of bundling data plans with voice

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

• And continuation of ongoing trends– Product innovation and ease of use

– Device improvements allowing more “on the go”

– Shorter VAS adoption cycles

2006-07 Trends

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

• Declining prices induced volume growth

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

2006-07 Trends2006-07 Trends







24









telco







2006-07 Trends




2008-09 Trends





2008-09 Trends2008-09 Trends



• Device challenge will start to decline

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



• Device challenge will start to decline

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

25



2008-09 Trends





2006-07 Trends










telco







Medium Term Growth DriverMedium Term Growth Driver• Overcoming challenges will rely on shifts in industry direction caused by

regulatory changes like – Mobile Number Portability– Allocation of 2G spectrum– Introduction of 3G

• Non-regulatory changes like– Availability of payment systems other than the telco– Ad-supported VAS gaining ground, and thus consumers and VAS companies gain power– Promotion of bundling data plans with voice– Large numbers of users experiencing internet for first time on mobile devices

• And continuation of ongoing trends– Product innovation and ease of use– Device improvements allowing more “on the go”– Shorter VAS adoption cycles


– Mobile Number Portability– Allocation of 2G spectrum– Introduction of 3G

• Non-regulatory changes like– Availability of payment systems other than the telco– Ad-supported VAS gaining ground, and thus consumers and VAS companies gain power– Promotion of bundling data plans with voice– Large numbers of users experiencing internet for first time on mobile devices

• And continuation of ongoing trends– Product innovation and ease of use– Device improvements allowing more “on the go”– Shorter VAS adoption cycles

26

2,774.1

1,813.11,250.4

926.3678.6437.7237.8

6%8%

7%8%

9%12%

5%

0

1,000

2,000

3,000

4,000

0%

3%

6%

9%

12%

30.0%

3.0%

13.0%

5.0%

9.0%

2.0%3.0%

35.0%

2007 2010W-VAS Services Performance Forecast

100%= USD 926.3 mn 100%= USD 2,744 mn

How do the numbers stack up

VAS Revenues Forecast 2007-10

2004 2005 2009E2008E2007E2006 2010ERev

enue

s (U

SD m

n)VAS as %

of Total Rev


CAGR%

SMS (P2P) 26%SMS (A2P P2A) 20%CRBT / Ringtones 18%Voice 82%Games 63%Data 141%E-mail 138%Others 82%

Overall CAGR 44%

19.8%5.9%

7.9%

6.9%

17.8%

8.9%

13.9%

18.8%

27

2010 and beyond…

2010 and Beyond


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

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

• VAS companies will start seeing the environment favoring them

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

• Industry will witness much awaited hockey stick growth beyond 2010


Contact Details

BDA Team

Kunal BajajDirector - [email protected]

Girish Trivedi - Principal ManagerDeepshikha Garg, Rahul GuptaSmita Sharma

India: +91 11 4700 3100 China: +86 10 8529 6164 [email protected]

Stanford University Team

Mohit S. GundechaResearch AssociateStanford Technology Ventures [email protected]@gmail.com

Prof. Tom Kosnik Consulting ProfessorStanford Technology Ventures [email protected]